finance outlook ─ economic and sectorby sector...

Structured Finance

15 January 2008

www.fitchratings.com

Contents Executive Summary.................................1 Introduction and Background...................3 Ratings Performance to Nov 2007............5 US ABS (NonReal Estate) ......................8 US Consumer ABS..................................8 US Commercial ABS.............................14 US RMBS.............................................18 US CMBS.............................................24 European Structured Finance .................29 European ABS.......................................29 European RMBS ...................................33 European CMBS ...................................36 Global CDOs.........................................39 Global Investment Grade (“IG”) Corporate CDOs 41 Global HY Bond CDOs/CBOs...............42 Global Leveraged Loan CDOs/CLOs..........................................42 Global MV CDOs..................................43 US CDOs..............................................44 SF CDOs...............................................44 CRE CDOs............................................45 Middle Market CLOs.............................46 TruPS CDOs .........................................46 European CDOs ....................................47 SME CDOs .......................................47 SF CDOs...............................................48 CDOs of CDOs .....................................48 AsiaPacific Structured Credit................49 Asia Pacific Structured Finance..............51 New Zealand Structured Finance............52 Japan Structured Finance .......................52 NonJapan Asia Structured Finance........53 Emerging Market Structured Finance .....56 Appendix 1 Historical Ratings Performance – Update ...........................59 Appendix 2 Ratings Performance Ratios ...................................................61 Appendix 3 Distressed Recovery Ratings..................................................62 Appendix 4............................................63 Contributors ..........................................64

Amended This report, originally published on 19 December 2007, is being republished to reflect minor grammatical corrections and changes to article references on pages 5 and 13 and clarification of the CDO asset class in the table on page 39.

n Executive Summary The financial market dislocation stemming from the problems in the US subprime housing sector and the subsequent liquidity disruption is unprecedented in breadth. There are both direct and indirect consequences to collateral and ratings performance across all sectors of the global structured finance markets, and potentially the global economy.

High actual mortgage delinquencies and prospective losses in the subprime mortgage sector have directly affected the performance of residential mortgagebacked securities (RMBS) and of financing vehicles such as structured finance (SF) collateralised debt obligations (CDOs), certain assetbacked commercial paper (ABCP) programmes and select structured investment vehicles (SIVs) that were heavily exposed to these credits. Nonmortgage related sectors have not yet experienced material credit deterioration due to the turmoil in the subprime housing markets.

Fitch Ratings is concerned about the following risks heading into 2008:

• Continued decline in home prices in the US and the impact on all US RMBS sectors. While credit and underwriting standards have been tightened, Fitch expects the poor collateral performance to continue in subprime, and has growing concerns in the AlternativeA (AltA) sector. The subprime sector will be affected by the wave of adjustable rate mortgage (ARM) interest rate resets and the resultant default risk, which will be somewhat mitigated by an expanded US government refinancing programme and an expected increase in the number of loan modifications, including the recently announced streamlined modification plan. The AltA sector is under pressure due to the high concentrations of high risk loan attributes. Prime borrowers are largely insulated from these risks but will face increased defaults as home price declines continue.

• In Europe, residential mortgage performance concerns are most acute for the UK, Spain and Ireland, all of which have seen strong growth over a number of years. In the UK specifically, the only European country with a significant subprime sector, the combined effect of potential house price declines, higher interest rates on reset and limited alternative refinance opportunities for subprime borrowers mean there will be performance deterioration. In December, Fitch placed 43 tranches of UK nonconforming RMBS transactions on Outlook Negative, reflecting these concerns.

Special Report 2008 Global Structured Finance Outlook Economic and SectorbySector Analysis

Structured Finance

2008 Global Structured Finance Outlook Economic and SectorbySector Analysis: January 2008

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• Continued direct credit impacts if RMBS continues to decline. Many vehicles, including assetbacked securities (ABS) CDOs, SIVs and some ABCP programmes that were invested in RMBS securities as collateral face both diminished credit ratings of their collateral as well as dramatically reduced market values for their collateral. If the problems in RMBS continue there will be continued pressure on the same investment sectors that suffered in 2007.

• Indirect impacts on nonmortgage sectors. With recordhigh ratios of debttoincome in both the US and UK, households are under increased financial strain. House price declines in the US have left consumers with limited options available to extract cash from their homes. In Fitch’s view, this, along with high energy costs, will lead to a continued rise in credit card and auto delinquencies and losses in 2008. Current liquidity issues and tight credit place additional pressure on both households and businesses. These could lead to increased delinquencies in any area of structured finance globally, possibly causing material declines in value and thereby collateral and bond losses. The agency has looked carefully throughout the global structured finance markets with major emphasis on all mortgage and consumerrelated markets. Although Fitch is carefully tracking several sectors, no sector is poised for as dramatic a downturn.

Asset/sector specific concerns are as follows:

• US ABS – Within US consumer ABS, credit cards and autos have seen higher delinquencies in both prime and subprime segments on a year onyear basis. This increase is off of historical lows experienced last year. While federally guaranteed student loan performance has been relatively stable, private student loans have shown deterioration in delinquency rates of late. Increasing economic pressures will likely cause modest deterioration in performance over time leading Fitch to change its asset performance outlooks for prime auto, credit card ABS and private student loan ABS to Declining for 2008. In the US commercial ABS sectors, performance is generally expected to be more stable as these areas have benefited from strong corporate profits, new job creation and growth in real private fixed investment. Fitch expects generally stable asset and ratings performance in the aircraft, equipment lease, utility tariff and tobacco settlement bond sectors. Other commercial ABS sectors, including rental fleet and autorelated dealer floorplan segments,

remain vulnerable to a cyclical downturn in investment, industryspecific factors and external shocks.

• US RMBS – Subprime RMBS issued in 2006 and 2007 substantially underperformed Fitch’s initial expectations. The agency has adjusted its ratings to bring them in line with its new performance expectations. Fitch will be paying particular attention to the trend in defaults among 2006 resetting ARMs, especially in light of the recently adopted industry rules regarding servicer actions. Prime jumbo mortgage performance is showing only mild deterioration. However, in the AltA sector, delinquencies in recent vintages, particularly in the 2007 vintage, are significantly higher than past vintages.

• US CMBS – Fitch expects 2008 commercial real estate fundamentals to remain strong. The major risk facing the CMBS market is the lack of liquidity, as most major lenders who accessed the capital markets have largely stopped originating new loans. The resulting area of concern is the ability of maturing loans to obtain new financing. Although Fitch does not anticipate significant rating actions in US CMBS transactions, a sustained lack of liquidity would cause problems for currently rated securities. In general, the agency expects the ratings to be stable.

• EU Consumer ABS – Continental European consumer assets, with the possible exceptions of the UK and Spain, are generally expected to show continued stability. In the UK, borrowers are typically more leveraged than in the rest of Europe while Spain is starting to see some impact from interest rate rises, which may filter through to negative performance in both mortgage and consumer ABS assets. The sub prime RMBS and credit card sectors are areas to watch for declining asset performance in 2008. UK subprime RMBS faces potentially high interest rate increases on resetting from low ”teaser” or fixed rates and reduced opportunities to refinance elsewhere. In the UK credit card market, chargeoffs, which rose sharply in 2006, now appear to be stabilising but this may be illusory in light of the increasing use of debt management programmes, which may simply be deferring chargeoffs to later periods.

• European Corporate ABS and Whole Business Securitisation ratings generally have stable outlooks for 2008 as do the outlooks for asset performance, with the perennial exception of aircraft finance which, although the sector has

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enjoyed a benign 2007, remains vulnerable to event risk and rising high fuel costs. European CMBS is showing stability across the board, again with the exception of the UK, which is undergoing a correction that may last for some time yet.

• Global CDOs faced difficult challenges in 2007. Many SF CDOs with varying levels of exposures to US subprime residential mortgages experienced a significant amount of stress and a precipitous decline in their ratings performance. These credit problems also created a ripple effect in other CDO sectors. For instance, the housing market woes spread to residential and commercial real estate investment trusts (REITs), which in turn negatively affected some CDOs of US trust preferred securities (TruPS) issued by these REITs. US commercial real estate (CRE) CDOs, CDOs of CDOs and some European and Asia Pacific SF CDOs also suffered to the extent they had US subprime RMBS exposures, while liquidity issues affected collateralised loan obligations (CLOs) and market value (MV) CDO structures. These market worries have resulted in a significant slowdown in issuance in many CDO types as investors retreated to the sidelines. CDO asset managers, especially those whose businesses were heavily dependent on SF CDOs, were also not spared from the credit downturn. Fitch started undertaking a wholesale review of its CDO ratings methodology and modelling assumptions in 2007 in an attempt to promote more stable ratings in 2008.

• Although Asia Pacific has a generally stable rating outlook for 2008, there are a few areas of concern: Australia/New Zealand (continuing trend of increasing delinquency rates in RMBS, now combined with a negative trend in home prices, but both markets are dominated by mortgage insurance); Japan (consumer credit default rates have continued to rise but existing deals are expected to be resilient due to conservative structures and amortisation); Non Japan Asia: Most countries have both stable asset performance and rating outlooks for 2008, the exceptions being India and Thailand (increased delinquencies are expected to affect consumer asset performance, but not the ratings of transactions).

• Emerging markets (EMs) in Latin America and EMEA is another segment of the structured finance markets that have thus far been largely immune to subprime contagion. Ample liquidity and the relative health of sovereigns have

provided a solid backdrop for SF transactions in these regions. However, the outlooks for Latin America and the EMEA countries are in marked contrast. Latin America is expected to continue to improve while the EMEA EMs are vulnerable to political and systemic (i.e. banking system) risk, which could have an effect on asset performance.

n Introduction and Background In this special report, Fitch’s structured finance (SF) teams examine the 2008 ratings and asset performance outlooks in global SF on a sectorby sector basis. The agency’s analysis of global structured finance ratings performance is through the first 11 months of 2007. In addition, providing the basis and context to the agency’s SF ratings and asset performance outlooks, this report includes commentary on current global and US macroeconomic conditions and Fitch’s outlook for 2008.

Both the agency’s economic and individual structured finance market sector outlooks have been heavily influenced by recent developments in the US housing and the global credit markets. Initially, distress in the financial markets was caused by concerns about the slowdown in the US housing market and rising delinquencies and losses on mortgages, particularly subprime mortgages with adjustable interest rates originated in late 2005 and 2006. Mounting delinquencies and losses in these recentvintage mortgages primarily reflect a slowdown in the US housing markets and decline in underwriting standards as mortgage lenders underwrote loans with “affordability” product features. But the exposure of other sectors, notably CDOs, ABCP and SIVs, to subprime mortgages, led to severe marktomarket losses and forced liquidation of a number of portfolios resulting in realised losses. As the “contagion” spread, even assets with no connection with subprime were affected with loss of investor appetite for structured products driving spread widening across the board, little of it directly credit related.

A summary of the sectorbysector outlooks for asset performance globally shows three sectors improving against 31 sectors declining with 36 stable. This balance is driven by the US, Europe and global CDOs while Emerging Markets and AsiaPacific combined have three improving sector outlooks against two declining. The global ratings outlook expects ratings to remain more stable with 48 sectors assigned stable outlooks, 11 positive and 10 negative. The fault lines are drawn accordingly to those sectors with closest proximity to exposure to the US subprime mortgages. Overall, US assets have the

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most negative outlooks with 15 negative, nine stable and no positive. Globally, there are no broad sectors with more positive than negative outlooks.

The global economic outlook has darkened considerably since the summer. The turmoil in global credit markets and increasing likelihood that the US slowdown will broaden beyond housing has raised prospects of a sizeable easing in growth in the advanced countries. Fitch’s central projections are for a slowdown in advanced economy growth to 1.9% next year, down from 2.8% in 2006 and the weakest since 2003 when the world’s leading economies were just starting to recover from the bursting of the global technology bubble. EM growth is likely to slow in response to weaker activity in the advanced economies through trade linkages, which have become stronger over time. But at this stage it looks as if EMs overall will be less affected by tighter credit conditions and that GDP growth will remain relatively robust at around 6.25%. This would imply world GDP growth of around 3%, just below its average over the past 10 years. But the balance of risks surrounding these projections is skewed to the downside.

Global Forecast Summary 2006 2007f 2008f 2009f

GDP growth US 2.9 2.2 1.7 2.8 Euro area 2.9 2.6 2.1 2.4 Japan 2.2 2.0 1.8 2.3 UK 2.8 3.0 1.9 2.6 Average a 2.8 2.3 1.9 2.6 Inflation US 3.2 2.4 2.0 2.0 Euro area 2.2 1.9 2.0 2.0 Japan 0.2 0.1 0.7 1.2 UK 2.3 2.3 2.1 2.0 Average a 2.3 1.9 1.8 1.9 Interest rates US 4.96 5.06 4.06 4.00 Euro area 2.76 3.84 4.00 4.00 Japan 0.12 0.47 0.88 1.25 UK 4.64 5.51 5.28 5.25 Average a 3.43 3.96 3.63 3.67 Assumptions Oil USD/barrel 65.4 68.0 70.0 60.0 JPY/USD 116.3 117.6 112.5 112.5 EUR/USD 0.80 0.73 0.69 0.69 GBP/USD 0.54 0.50 0.48 0.48 a Weighted by 2005 GDP at market exchange rates Source: Fitch

The tighter global credit environment is likely to have its biggest impact on those economies where growth had previously been supported to the greatest extent by rapid credit expansion. With property very much the asset of choice in the latest credit boom, this points to countries where housing markets have been particularly buoyant. In addition to the US, the UK, Spain, Ireland, New Zealand and some Nordic

countries have seen rapid growth in house prices accompanied by sharp increases in household leverage. As discussed in a Fitch Special Report in July, these countries are among those vulnerable to the combination of higher funding costs and slower increases or declines in house prices 1 . House prices are indeed currently falling on a sequential basis in the US, UK and Ireland and the rate of price growth has fallen sharply in Denmark and Spain. Weakening housing markets will reduce growth both through lower residential investment and wealth effects on consumer spending and notable slowdowns are expected in Spain, Ireland and the UK.

In the US economy, housing market adjustment has been deeper than anticipated with residential investment down by 16.3% in the year to 07Q3 and house prices falling on a yearonyear basis for two of the three most widely used measures. While GDP excluding residential investment has so far continued to grow robustly, the broader economy has avoided a sharp slowdown on only one out of six occasions since the mid 1960s when housing investment declined significantly. This time round Fitch expects the wider economy will slow as consumer spending growth falls and credit availability declines. In the context of record high household debt and debt service ratios, financial pressures on consumers are likely to increase as many borrowers face higher mortgage rate resets, energy costs absorb a higher share of income and house prices fall. Consumer confidence has already started to decline and Fitch expects the labour market to soften, raising income uncertainty. Healthier corporate finances should support nonresidential investment although prospects for an acceleration in capital expenditure seem limited. A bigger support to growth will come from net trade reflecting lower imports. GDP is forecast to grow by 1.7% in 2008, down from 2.2% in 2007 with domestic demand expanding by just 1.2%, its lowest rate since 2001.

Despite having enjoyed its strongest growth rates since 2000 in 2006 and 2007 the Euro Area economy will not be immune to the global credit squeeze and weaker growth in the US. Germany's economic revival in the last two years has been fuelled by strong export and investment growth on the back of impressive corporate restructuring, but consumer spending has yet to gain significant momentum despite very sharp improvements in the labour market in 2007. With consumer and business sentiment having weakened since the summer and the strong euro and external slowdown likely to place a drag on export performance, GDP growth is

1 “House Prices and Household Debt – Where are the Risks?”, Fitch July 2007

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expected to slow to 2% next year from 3.1% in 2006 and 2.5% in 2007. This will have knockon effects elsewhere in the euro area while Spain and Ireland will see a sizeable slowdown as housing markets weaken and residential investment growth falls. Euro area growth is set to decline to 2.1% in 2008 from 2.9% in 2006 and 2.6% this year.

Housing market adjustment and tighter credit conditions are also likely to take their toll on consumer spending in the UK, where GDP growth is forecast to fall to 1.9% in 2008 from recent rates closer to 3%. While the UK housing market does not suffer from the overbuilding risks in Spain and Ireland, a growing share of mortgage demand has been from buytolet investors who could be particularly sensitive to weaker house prices and tighter credit conditions.

In Asia, growth momentum remains strong in China and India but there are questions in both countries about whether recent rates are sustainable given inflationary concerns and monetary policy settings continue to tighten. Emerging Asian growth as a whole is expected to remain robust at 7.7% in 2008 albeit down by 1% compared to this year, but the region's trade linkages with the US and advanced economies are strong, leaving its growth

performance vulnerable to downside scenarios. Meanwhile, domestic demand has remained weak in Japan in the light of lacklustre consumption and household income growth and a recent collapse in housing starts following new planning laws. With GDP growth driven by net exports there is little prospect of the world’s secondlargest economy taking up the mantle of global growth leadership as the US slows.

More details on the global economic outlook are contained in the “Global Economic Outlook”, dated 5 October 2007 and the “Sovereign Review – December 2007”, dated 19 December 2007, both available on the agency’s public website at http://www.fitchratings.com.

n Ratings Performance to November 2007

Upgrades and Downgrades The total number of global structured finance downgrades exceeded the number of upgrades to November 2007. Negative rating activity reflects current credit issues in the US subprime sector, the associated disruption to liquidity and the spillover of credit concerns to other structured finance sectors. For the 11 months to November 2007, the number of downgrades globally is more than double the number of upgrades, whereas in 2006 there were 4.5 upgrades for every downgrade. However, there has been great disparity between sectors and regions. Not surprisingly, rating performance deteriorated most in those products that are closely aligned to the US housing and residential mortgage sectors. Driving the overall negative performance has been the number of downgrades in the US RMBS (mainly subprime RMBS) and US CDO (mainly structured finance CDOs) sectors, where downgrades outnumbered upgrades 7.0 to 1 and 4.7 to 1, respectively. Conversely, the US ABS and US CMBS sectors have continued to see more upgrades than downgrades. Rating performance in Europe has also been positive with the upgrades outpacing downgrades 2.2 to 1 in ABS, 37.8 to 1 in RMBS and 5.9 to 1 in CMBS. Ratings performance for emerging markets, including Latin America and EMEA, remained stable compared with 2006.

Distressed Recovery Ratings Distressed Recovery (DR) Ratings are designed to estimate recoveries on a forwardlooking basis while taking into account the time value of money. As of 30 November 2007, there were 1,780 structured finance classes with DR Ratings. So far in 2007, 845 SF classes have been assigned DR Ratings (748 RMBS, 48 CDOs, 36 CMBS and 13 ABS). DR ratings were lowered 190 times compared with 43

Housing Market Fundamentals According to the National Association of Realtors (NAR), existing home sales are expected to decline to 5.67m in 2007, down from 6.48m in 2006. New home sales are projected at 796,000 in 2007, compared with 1.05m in 2006. In October 2007, the median price for existing home sales declined on a yoy basis to USD207,800 from its peak of USD230,200 in July 2006.

US House Price Measures Annual change (%) OFHEO

Case Shiller NAR Census

2005 13.0 16.9 12.8 7.5 2006 9.0 7.4 2.0 3.8

Q107 4.5 (1.2) (1.6) 4.5 Q2 3.3 (3.4) (1.6) (2.1) Q3 1.8 (4.9) (2.2) 1.3

June (4.0) (0.4) (3.2) July (4.4) (1.0) 3.4 August (4.9) (0.1) (4.3) September (5.5) (5.7) 5.2 October (6.3) (13.0)

Memo 1990 2.6 0.8 2.7 1.6 1991 1.3 (4.2) 5.4 (1.8) Source: National Association of Realtors, Census Bureau, S&P/CaseShiller and Thomson Datastream

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upgrades so far in 2007. The number of classes with a current DR Rating of ‘DR6’, or poor recovery expectations, increased to 680 at endNovember 2007 from 317 at the beginning of the year. These trends illustrate both the increased frequency and severity of recent downgrades. Please see Appendix

3 for a breakdown of outstanding DR ratings by sector and current rating.

DR Ratings are issued on a scale of ‘DR1’ (highest) to ‘DR6’ (lowest) to denote the range of recovery prospects given a currently distressed or defaulted security.

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2008 US ABS Outlook 2008 outlook

Market sector Asset class

Asset performance Ratings 2008 areas to watch

US macro Liquidity constraints and deteriorating credit fundamentals. Higher borrowing costs/access to credit. Fallout of subprime mortgage issues to broader economy.

US consumer ABS Consumer health/household leverage. Home price declines. Tighter lending standards and consumer exposure to variable rates. The subprime consumer.

Auto loan/lease Prime Subprime Leases

Declining Declining Declining

Stable Stable Stable

Competitive and manufacturer pressures/deteriorating financial performance. Pricing strategies: dealer incentives and employee discount programmes. Increasing loan maturities and rising loantovalues (LTVs). Wholesale vehicle market conditions. Lease turnins and residual value realisation.

Credit Cards Prime Subprime Retail

Declining Declining Declining

Stable Stable Stable

Impact of bankruptcies on chargeoffs. Consumer credit quality – especially of the subprime borrower. Rising interest rates. Reloading of revolving credit lines. Higher available credit limits. Ongoing industry competition/consolidation. Underwriting and servicing of portfolios.

Student Loans FFELP Private

Stable Declining

Stable Negative

Legislative environment, to include the reauthorisation of the Higher Education Act and potential bankruptcy reform. Rising tuition rates and private loan growth. Rising interest rates. Performance trends and the impact on liquidity/excess spread. Changes to the competitive landscape resulting from legislation. Alternative loan underwriting/servicing quality.

Timeshare receivables

Declining Stable Consumer debt and household leverage. Developer growth and profitability. Product saturation in key markets. Consistency of underwriting screening policies and procedures.

US commercial ABS Aircraft operating lease

Stable Stable Airline profitability/bankruptcy. Event risk (i.e., terrorism, SARS). Oil fuel prices. Labour and pension costs.

Equipment leases/loans

Stable Stable Spending on business equipment and software. Long disposition and weak recoveries.

Dealer floorplan Auto related Non auto related

Declining Declining

Stable Stable

Impact of declining auto sales on payment rates. Inventory turnover/sales rates versus credit lines. Interestfree and low loan rates. Increasing dealer concentrations. Assetbased lending.

Rental fleet finance

Declining Stable Air traffic volume. Nonprogramme vehicle exposure. Wholesale market conditions. Adequacy and utilisation of fleet.

Utility Tariff Monetization Bonds

Stable Stable Unanticipated reduction in consumption rates. Litigation/remediation risk. Political risk. Geographical concentration of service territory.

Tobacco Structured Settlements

Stable Stable Industry competition. Reduction in profits and increased borrowing costs. Decline in US cigarette consumption rates. Negative outcome of pending litigation issues.

ABCP – Stable Liquidity and credit provider ratings. Continued credit deterioration in subprime mortgage and structured finance CDO holdings. Financial guarantor credit stability.

Source: Fitch

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ABCP Market Update The assetbacked commercial paper (ABCP) market endured unprecedented liquidity pressures, volatility and ultimately credit issues in the second half 2007. US ABCP outstanding has dropped 31% to USD824bn to November 2007 from the peak in July at USD1.2trn. The drop is largely attributed to a waning investor base, driven by fears of subprime mortgagerelated issues, particularly in the riskaverse money market funds. Moreover, the inability of the investment community to identify and quantify precisely where the subprime exposure resides added to the turmoil in the market. The spillover effects of this crisis and the rapidly spreading credit market turmoil has resulted in some ABCP investors abstaining or scaling back their traditional commercial paper investments, which in turn has forced conduits to pay historically exorbitant rates. Meanwhile, some conduits reluctant to pay higher rates tapped liquidity facilities and direct bank lending. In cases where no committed liquidity lines were available, particularly in SIVs and other alternative liquidity structures, certain conduits were forced to be sellers of assets in a declining market.

Nontraditional programmes with market value risk (SIVs, SIV Lites and market value ABCP and asset backed extendible note programmes) continue to experience severe funding difficulties, spread widening and declines in underlying asset prices. Several programmes have been forced to liquidate into the stressed environment resulting in rating downgrades and defaults and/or restructurings.

Despite a significant level of uncertainty surrounding the ABCP market, Fitch expects the market, at least in the foreseeable future, will mainly consist of traditional bank sponsored multisellers with diversified portfolios and traditional credit and liquidity support. For a more detailed analysis on this sector please see Fitch’s “The ABCP Paper Trail”, dated 26 November 2007 and available at www.fitchratings.com. Our 2008 outlook is expected to be published in early January.

n US ABS (NonReal Estate) While fears of subprime contagion persist, Fitch has observed little direct impact on collateral and ratings performance in both consumer and commercial ABS sectors. Overall, rating activity has been positive with upgrades outpacing downgrades by a ratio of 4.4:1, occurring across a diverse range of collateral types in both the consumer and commercial

segments. As shown in the charts on page 60, for the 11 months to endNovember 2007, Fitch issued 195 upgrades and 44 downgrades, compared with a total of 203 upgrades and 77 downgrades in 2006. As shown in Appendix 1, downgrades represent 0.8% of outstanding ratings, compared with a total of 1.4% in 2006 and 3.9% in 2005.

Consistent with historical trends, most of the upgrades were concentrated in the consumer sectors. Although there has been limited increased rating volatility in US consumer and commercial ABS as a direct result of the subprime mortgage risks, changes in consumer spending, employment growth and increased household debt leverage are signalling that asset performance may be more volatile in the future.

n US Consumer ABS

Auto ABS Autorelated ABS has exhibited weaker performance during the third quarter with both higher delinquency and loss rates in both prime and subprime sectors. At the outset, however, it should be noted that delinquency and annualised net loss (ANL) rates in 2007 follow the historical lows produced in 2006. Recent weakness is due in part to actual collateral performance combined with seasonal factors. Subprime collateral performance has shown greater seasonal volatility and those borrowers also remain more sensitive to economic pressures.

Areas of focus for both the prime and subprime sectors include lengthening loan terms and higher LTV ratios. Fitch notes that auto ABS with a higher concentration of loans with original terms greater than 60 months exhibit higher losses from both a frequency and severity perspective. Performance pressures are expected to persist in the subprime sector and, to a lesser extent, the prime sector, into 2008.

Fitch is also concerned about competitive pressures and declining sales faced by the US auto manufacturers. Declining sales and market share by the auto manufacturers will likely intensify competition, which could push their finance companies to loosen underwriting and origination to gain sales. Furthermore, manufacturers may also offer incentives to spur sales, which would negatively impact wholesale vehicle values. However, this was not observed in 2007 as manufacturers showed discipline and held levels steady.

Fitch expects the rate of upgrades to diminish in 2008. Negative rating actions, however, are expected to be limited as current levels of losses and

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delinquencies remain within historical levels produced in the 20012005 period.

Fitch’s outlook for the prime and subprime sector is that asset performance is declining; however, the rating outlook is stable. The agency remains cautious regarding subprime auto ABS performance due to pressures facing the consumer and historical volatility in monthly delinquencies and losses. Asset performance in the auto lease sector is expected to decline but ratings are anticipated to remain stable.

Fitch took 95 positive rating actions in the auto sector in 2007 compared with a total of 58 upgrades in 2006. There have been no negative rating actions in 2006 or thus far in 2007. One prime auto loan transaction was placed on Rating Watch Negative (RWN) in November 2007.

Wholesale Vehicle Prices Conditions in the wholesale vehicle market were stable during the third quarter of 2007. The Manheim Used Vehicle Value Index stood at 113.9 in October 2007 down from 115.8 in the previous month, but up 1.6% yoy on a seasonally adjusted basis. The monthly decline is largely attributable to normal historical seasonal patterns. According to ADESA Analytical Services, wholesale usedvehicle prices averaged USD9,721 in October, a 2.3% increase over the same period in 2006. Overall, wholesale usedvehicle prices have been supported by lower production levels, lower offrental supply and relatively less incentives offered by domestic manufacturers. In addition, with the recent slowing down of the economy, demand for used vehicles remains healthy and, relative to new vehicles, used vehicles are showing better value in certain vehicle segments. The seasonal weakness usually seen in the fall/autumn months, traditionally the time of year when new models are introduced, was less marked in 2007 relative to prior years given the factors mentioned previously. However, supply from leasing is expected to pick up in the near term as leasing volumes have increased in 2007, and should continue into 2008.

US Manufacturer Pressures US auto manufacturers continue to cut back on production as declining home prices and credit concerns have led to slower US auto sales. In the year to November 2007, sales of US light vehicles by domestic manufacturers fell 3.9% for the yearto date versus the same period in 2006. By contrast, sales by overseas manufacturers rose 2.6% as US automakers continue to lose market share to their international counterparts.

Prime Auto Loans

Ratings Outlook: Stable Asset Performance Outlook: Declining Fitch’s asset performance outlook for the prime auto loan sector is declining. The 60 days or more delinquency rate for the November 2007 collection period was 0.65%, compared with 0.64% in the previous month, but nearly 23% higher when compared to the same period in 2006. The ANL rate increased to 1.16% in November 2007, 25% above October’s level, while jumping 33% higher versus November 2006. From a ratings perspective, Fitch expects transactions to continue to build enhancement which should mute negative rating actions. However the rate of upgrades is expected to diminish.

Subprime Auto Loans

Ratings Outlook: Stable Asset Performance Outlook: Declining Fitch remains cautious in its outlook for the US subprime auto loan sector as the delinquency and ANL indexes have produced noticeably weaker performance in recent months relative to 2006. The subprime auto loan sector is volatile from a performance perspective and remains sensitive to a number of economic pressures including elevated household debt levels, falling home prices, higher borrowing costs and volatile gasoline/petrol prices.

Subprime auto delinquencies of 60 days or more were 3.52% in November 2007, compared with 3.55% and 3.18% in October 2007 and September 2007, respectively. Delinquency levels were 33% higher through November versus the same period in 2006. ANL rates increased to 7.35% in November 2007 up 10.5% over October’s level and 15.7% in November 2006 after being as much as 26% higher in September. The ratings outlook for subprime auto is stable due to the fact that most subprime transactions rated by Fitch are supported by a financial guaranty insurance policy.

Auto Leases

Ratings Outlook: Stable Asset Performance Outlook: Declining Asset performance in the auto lease sector is expected to decline but the rating outlook remains stable. This view is supported by stable wholesale vehicle prices and the use of conservative Automotive Lease Guide (ALG) information used to set residual values on newly originated leases. Over the long term, Fitch remains cautious in its outlook due to concerns centring around persistent pressure

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on wholesale vehicle prices and residual value realisation for certain vehicle segments and brands, especially domestic names.

Auto loans 48%

Student loans 23%

.

Credit card receivables

7%

Aircraft finance 7%

Timeshare receivables

1%

.

Insurance premium receivables

1%

US ABS Upgrades by Asset Type – 2007ª

ª Data through Nov 30. ABSAssetbacked Securities Source: Fitch

RV/marine/ recreational vehicle loans

1%

Equipment leasing/loans

12%

Structured debt/

repackaged securities 16%

Franchise loans 45%

.

Aircraft rinance 9%

Other asset types 7%

.

. Credit card receivables

5%

US ABS Downgrades by Asset Type – 2007ª

ª Data through Nov 30. ABSAssetbacked Securities Source: Fitch


11%

Entertainment/int ellectual property

2%

Small business loans 5%

Structured debt/ repackaged securities

16%

Credit Card ABS Credit card ABS has historically exhibited strong credit and payment performance and has provided investors with a relatively liquid secondary market. Despite ongoing liquidity issues, which have threatened to spill over to credit cards, performance for prime, subprime and retail card segments has remained stable. Although delinquencies and charge offs on both prime and subprime portfolios have been trending higher, Fitch believes current excess spread levels in existing transactions will be able to absorb higher losses that may result from ongoing disruption caused by problems in the subprime mortgage sector.

Credit card delinquencies and chargeoffs on both prime and subprime portfolios have been trending higher – back toward historically observed levels seen prior to the implementation of the Bankruptcy

Reform Act in October 2005. Monthly payment rates (MPRs) have levelled off after climbing in 2005 and 2006 as consumers have increased their utilisation of revolving debt as other consolidation options have become less accessible. Excess spread climbed to new highs in 2006; however, in the first nine months of 2007, excess spread trended lower. Fitch anticipates that spread compression will continue in the remainder of the year as chargeoffs return to historically observed levels.

Although consumers are increasingly feeling the impact of declining house prices, higher interest rates and energy prices, Fitch believes that lending standards for credit card issuers were not loosened to the same extent observed in RMBS and has not detected any material loosening to date. In addition, credit card products can be frequently re underwritten as terms (i.e., pricing, fees and credit lines) can be adjusted commensurate with credit profile changes.

Through November 2007, personal bankruptcy filings have increased by 42.1% yoy to 739,114. In addition, tightened regulation of card lending practices (minimum payment requirements, over limit fees and negative amortisation of credit card balances) has prompted credit card issuers to focus on underwriting and account management standards.

Over time, Fitch expects delinquencies and losses to continue to trend upward towards their longterm historical averages as the benefits of bankruptcy reform dissipate and consumers find it increasingly difficult to extract equity from their homes to consolidate their financial obligations. These factors, combined with the potential negative effects of ongoing intense industry competition on underwriting standards, may increase the propensity of some borrowers, especially in the mid/subprime segment, to draw on unused revolving credit lines to finance spending. Although healthy excess spread levels will likely cushion deals against higher losses in the short term, this may lead to the emergence of further tiering among issuers.

Prime Credit Cards

Ratings Outlook: Stable Asset Performance Outlook: Declining Fitch expects prime credit card asset performance to weaken from current levels; however, this decline is occurring from the unusually low loss levels experienced since the implementation of Bankruptcy Reform Act of 2005. As a result, Fitch expects stable rating performance in 2008.

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Latestage 60+ day delinquencies for October 2007 (capturing the September collection period) increased to 2.74% from 2.60% in the previous month and 2.40% during the same period in 2006. At the same time, chargeoffs fell slightly to 4.50% in October 2007 from 4.75% in the previous month but remain above the 3.78% reported during the same period in 2006. Threemonth average excess spread increased to 7.67% in October 2007 from 7.65% in the previous month and remains above the 7.41% reported during the same period in 2006. On a yoy basis, gross yield rose to 18.83% from 17.58% while the MPR declined slightly, down to 19.09% from 19.30% in 2006.

While Fitch expects the asset performance in the prime credit card sector to decline. Fitch believes current excess spread levels are sufficient to absorb the increases leading to a stable ratings outlook.

SubPrime Credit Cards

Ratings Outlook: Stable Asset Performance Outlook: Declining Although rating volatility is anticipated to be limited, Fitch expects that asset performance in the subprime segment will weaken as increased economic pressures put additional stress on already strained household budgets.

During the second half of 2007, late payments and chargeoffs have dropped. In the October 2007 collection period, 60+ day subprime delinquencies improved to 4.86% from 5.54% during the same period in 2006. At the same time, chargeoffs have decreased to 8.04% from 8.89% in November 2006. In addition, both yield and payment rates have shown some volatility, but have averaged around 25% and 10%, respectively. These positive trends have boosted threemonth average excess spread levels to around 9% since November 2006.

Retail Credit Cards

Ratings Outlook: Stable Asset Performance Outlook: Declining Asset performance for the retail credit card ABS sector, which includes both store cards owned by individual retailers and private label programmes administered on behalf of retailers, is expected to decline in the near term, although the rating Outlook remains Stable.

Latestage 60 days or more delinquencies for retail cards were little changed at 3.54% in October 2007 from 3.47% in the previous month and 3.86% during the same period in 2006. Chargeoffs for retail cards increased to 6.06%, down from 6.35% in the

previous month yet up from 5.34% during the same period in 2006. Both gross yield and MPRs have remained near 2006 levels at 25.19% and 13.55%, respectively. Threemonth average excess spread levels declined to 10.94% from 12.42% during the same period in 2006.

Despite recent weakness, excess spread levels compare favourably to both prime and subprime credit card segments due to several factors including: geographical concentration, brand loyalty, demographics, card value propositions and retail consumer behaviour. In addition, ongoing consolidation among the major retail brands, is also further strengthening business models, underwriting standards, collections and servicing in this sector.

Student Loans ABS Although the economic challenges facing consumers may potentially push delinquency and loss rates moderately higher, performance for Federal Family Education Loan Program (FFELP) ABS is expected to remain generally stable in 2008. The private student loan sector will experience a more challenging environment due to economic conditions and more aggressive underwriting practices employed by issuers. Recent legislation has altered competitive dynamics among FFELP issuers within the sector which may have a significant impact on credit enhancement levels on new student loan ABS. (See Student Loan Legislative Update below for further details.)

Auction Market Update With the auctionrate market affected by spread volatility, issuers have had to reevaluate their existing auctionrate notes. Typically, student loan auctionrate securities are determined via a “Dutch Auction” for periods of 28 or 35 days depending on whether the securities are taxable or taxexempt, respectively. Similar to other shortterm securities such as ABCP, existing debt is transferred to a new investor at the end of the auction rate period. In the event that no new investors bid in subsequent auctions, the investor does not have the protection of a liquidity provider to make them whole. This type of financing has generally allowed student loan lenders to fund long maturity debt at the short end of the yield curve.

Generally, auctionrate notes have an available funds cap based on the maximum rate and/or the net loan rate. The maximum rate is a predetermined rate based on Libor, CP, and/or TBills, while the net loan rate is typically the student loan interest rate less fees. If the clearing auction rate exceeds the maximum rate, the auction rate will be set at the maximum rate, not to exceed the net loan rate. The

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difference between the clearing auction rate, the net loan rate and/or the maximum rate, also known as carryover interest, is generally paid to investors on a subordinated basis in the flow of funds.

With investors currently demanding higher yields to hold existing securities in new auctions, clearing auction rates have been exceeding the maximum rate definitions and, at times, the net loan rates. As a result, issuers have temporarily modified the maximum rate and net loan rate definitions to prevent any carryover interest from accruing. To date, this has not had an adverse affect on any outstanding ratings as trusts continue to generate sufficient excess spread despite increased financing costs from the auctionrate market and overall spread levels.

Despite any disruption in the markets, new student loan ABS issues have continued to access the auctionrate market in lieu of Libor floatingrate notes, as an issuer’s cost of funds with auctionrate securities may be lower over the long term than a transaction priced under current Libor floatingrate note spreads. Fitch continues to monitor the auction rate market and its effect on new and existing transactions.

FFELP Student Loans

Ratings Outlook: Stable Asset Performance Outlook: Stable Delinquencies and losses in FFELP ABS portfolios are expected to remain stable in 2008. Parity ratios are also projected to improve due to positive excess spread levels despite the increase in funding costs caused by higher auction rates. The deferment index for secondquarter 2007 was 12.90%, a decrease of 10.91% over the same period last year. The forbearance index improved slightly to 10.40%, compared with 10.75% for secondquarter 2006.

Forbearance levels remain at historically low levels, reflective of a strong job market and low unemployment rates. Forbearance is typically used for borrowers experiencing economic hardship and is granted in six to 12month increments, not to exceed three years. In addition, incomesensitive repayment plans and reduced payment plans are classified as forbearance. As such, a portion of these loans may still be generating cash flow.

Fitch recently revised the expected growth in consumer spending to an annualised rate of 2.6% in 2007, down from 3.2% in 2006. Should any of these economic factors deteriorate, the agency would expect increases in forbearance levels for the portfolio. Deferment levels remain high as a

significant amount of the portfolio generally consists of consolidation loans, with a proportion of those originated to borrowers while in school.

The deferment index has started to decline and is expected to eventually reach 2003 levels as these borrowers graduate and enter repayment. When this occurs, the potential for higher prepayments exists for inschool consolidation loans as borrowers are able to reconsolidate their existing consolidation loan with additional Stafford and/or PLUS loans upon graduation. Consolidation loans can no longer be originated to borrowers while they are in school.

Private Student Loans

Ratings Outlook: Negative Asset Performance Outlook: Declining Private student loans remain the fastest growing segment of the student lending industry, as demand remains high due to increased tuition costs. Performance in this sector has been relatively stable; however, recent increases in delinquency rates may indicate a potential weakening in overall performance.

As certain structures provide additional credit enhancement for collateral performance when compared to others, Fitch issued 12 upgrades in the private student loan sector and placed one tranche on RWN. Additionally, the agency downgraded The Education Resources Institute’s (TERI) Insurer Financial Strength (IFS) Rating to ‘A’ and revised TERI’s Rating Outlook to Negative from Stable.

Job and income growth remain an area of concern, as the ability of new graduates to obtain employment may have a direct effect on forbearance, delinquency and loss performance as their loans enter repayment. Additionally, recently proposed legislation removing the bankruptcy protection for student loans may have a negative impact on recoveries on defaulted loans. Unlike FFELP loans, private loans do not benefit from a guarantee by the federal government, relying instead on collection from defaulted borrowers. The inability to discharge student loan debt in bankruptcy has been a powerful tool in that process. Fitch will continue to closely monitor developments in these key areas, as well the underwriting and servicing of new and existing programmes.

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Timeshare Receivables

Ratings Outlook: Stable Asset Performance Outlook: Declining Collateral performance in the timeshare sector is likely to weaken in 2008 due primarily to economic challenges faced by consumers. Although longterm positive demographic trends, market consolidation and competition within the industry will benefit sector performance, mixed collateral performance in certain timeshare segments and portfolios will likely emerge as problems in the housing market and higher energy costs pressure some timeshare owners. This potential concern is somewhat amplified by the absence of significant underwriting standards by many in the timeshare originator community. However, it should be noted that, to date, most Fitch–rated timeshare transactions have exhibited minimal deterioration in collateral performance.

InsuranceLinked Securitisations Continue to Grow Issuance of insurancelinked securitisations (ILS) grew again in 2007. This continues a trend that started after the severe US hurricane season in 2004 and accelerated following Hurricane Katrina in 2005. Nonlife insurance (primarily natural catastrophe) issues doubled in 2004 to USD2bn from USD1bn in 2003 and doubled again to almost USD5bn in 2006. Although the rate of growth moderated in 2007, new issuance of almost USD6bn in the seven months to July 2007 had already exceeded total issuance for 2006.

Although still good, the rate of issuance for life insurance securitisations fell in 2007 with about USD2bn in new issuance in the seven months to July 2007 as compared withUSD5bn for full year 2006. Approximately USD32bn of ILS (life and nonlife) are now outstanding.

Fitch expects the issuance of all ILS, particularly catastrophe bonds, to continue to grow as insurers look to reduce their catastrophe exposure. Catastrophe bonds provide insurers with fully collateralised, multiyear reinsurance coverage. In addition, new structures such as catastrophe CDOs may also provide market access to smaller insurers.

The ratings Outlook on existing transactions is expected to remain stable as transactions, especially older vintages, continue to season and build credit enhancement. On a yoy basis, delinquencies and defaults moderated throughout the summer of 2007. During the first nine months of 2007, Fitch raised one rating, compared with a total of eight upgrades in 2006.

Student Loan Legislative Update The College Cost Reduction and Access Act (CCRAA) became law in September 2007. The law amends the Higher Education Act of 1965 (HEA) with several changes to the federal financial assistance programmes related to postsecondary education. The law could result in more than USD20bn being cut from FFEL programmes. The majority of the savings will be allocated across new and existing grant programmes, increased loan limits, interest rate reductions and “loan forgiveness programmes”.

Highlights of the CCRAA include: • Reduction of 0.55% in Special Allowance

Payments (SAP) for Stafford and Consolidation loans and 0.85% for PLUS loans (0.40% and 0.70% for eligible notforprofit lenders, respectively);

• Repeal of the exceptional performer (EP) programme, with insurance levels set at 97% over the next five years and 95% beginning in 2012;

• Increase of 0.50% in lenderpaid origination fees; and

• Establishment of a PLUS loan auction process in two years.

The CCRAA also lowers the interest rates charged to the borrower on subsidised Stafford loans from the current fixed rate of 6.8% to 3.4% over the next four years, with the fixed rate reverting to the current level in 2012. Additional affordability measures include an incomebased repayment programme and a loan forgiveness programme for qualified borrowers, both of which may carry a government subsidy.

Fitch does not anticipate these changes will result in negative rating actions on existing ABS transactions backed by FFELP student loans. For transactions financing higher levels of collateral with first disbursements on or after 1 October 2007, Fitch anticipates that the resulting higher loan loss severities coupled with decreased available excess spreads will require higher credit enhancement levels accordingly.

For more information on the impact of the CCRAA on student loan ABS, see “Analysis of FFELP Legislative Changes on Student Loan ABS Credit Enhancement”, dated 8 November 2007 and available at www.fitchratings.com.

Education continues to be a hot topic in Washington, and with the presidential election cycle already under way, Fitch expects to see additional higher education reform proposals in the months to come. House Republicans have already submitted a Higher Education Act Reauthorization Bill proposing elimination of the auction process described above. Fitch will continue to monitor these developments and their effect on student loan ABS.

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n US Commercial ABS The US commercial ABS sector has benefited from overall strong domestic growth and profitability across most corporate sectors. In Q307, growth in private fixed investment increased by an annualised 9.4% compared with 11.0% in Q207. Within this

category, capital spending on equipment and software expanded 7.2%, compared with 4.7% in Q207.

Although facing the prospect of weaker economic conditions in the near term, domestic business strengthened from the lowinterest rate environment and revenue growth is expected to maintain reasonable levels of capital expenditures and investment. In fact, the falling dollar may help sustain corporate profits and business spending levels.

Factors that bear watching include domestic employment rates and their impact on consumer spending levels as well as continued fallout in the residential real estate sector. Industries expected to face continued pressure include financial services, residential construction and transportation, while others such as agricultural and healthcare may contribute offsetting strength.

In general, Fitch notes stable asset and ratings performance for certain commercial ABS sectors, including aircraft, equipment lease, utility tariff bonds and tobacco settlements. The agency remains less optimistic about other sectors, most notably the autorelated dealer floorplan and rental fleet segments, both of which remain vulnerable to a cyclical downturn, industryspecific factors and external shocks. The aircraft leasing sector has benefited from the improved financial conditions of domestic carriers as well as the increased global demand for certain aircraft. Performance on equipment lease/loan transactions remains stable, although delinquency trends indicate some weakness. Particular areas of concern include the financial health of domestic small to mediumsized business and residential construction and transportation exposure. The agency remains cautious in its outlook for the autorelated dealer floorplan and rental fleet ABS sectors as they may be exposed to higher loss severities and lower payment rates resulting from exposure to US auto manufacturers.

Equipment Leases/Loans

Ratings Outlook: Stable Asset Performance Outlook: Stable Fitch’s stable ratings and asset performance outlook for the US equipment lease sector is due to generally steady collateral and financial metrics for most US commercial sectors. Despite more challenging economic conditions in 2008, Fitch expects marginal ongoing increases in business investment and spending on new equipment. Potential weaknesses in certain sectors, including both residential and commercial construction, financial services and

New Assets Outlook for 2008 In 2007, Fitch noted a continued increase in banker enquiries about structured finance transactions involving nontraditional assets. Underlying collateral in these transactions includes nonreal estate collateral (such as lotteries, music, film or pharmaceutical royalties or other types of intellectual property), non traditional real estate such as casinos, timber farms, truck stops, amusement parks, mines and billboards, as well as whole business securitisations. While recent turmoil in the structured finance markets may impact the economics of these types of transactions in the short term, Fitch anticipates moderate growth in the new asset sector in 2008 as corporate securitisation continues to grow, as investors seek to diversify from consumerbased ABS exposures and as issuers find that structured financing arrangements still remain an attractive alternative to traditional bank financing or debt issuance in the current credit environment.

Whole business securitisation (WBS) also took on a larger role as a corporate finance strategy tool in 2007. In the restaurant sector, WBS transactions were completed by Domino’s, IHOP Corp. and Applebee’s International, Inc., and several other restaurant companies announced that they were pursuing WBS transactions. WBS transactions by companies in the security alarm and telephone directory publication sectors were also completed in 2007. Fitch notes that a number of companies, typically those with highly predictable cash flows and contractual revenues, reflecting their dominant positions in mature industries with high barriers to entry, have also begun exploring the feasibility of WBS, particularly in conjunction with a recapitalisation or sale of the company. Based on company announcements and inquiries to date, Fitch expects an increase of WBS transactions in 2008 in both the restaurant and nonrestaurant sectors.

Fitch also notes that WBS transactions to date in the US have been executed with insurance policies from monoline guarantors. However, the agency expects to see a significant component of WBS issuance in 2008 to be executed on a non insured basis.

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transportation, may be offset by ongoing strength in others such as agricultural and mining and oilrelated sectors, where there is significant overseas growth potential. Performance in 2008 may be impacted by potential declines in consumer spending and a weaker employment outlook, particularly for domestic small to mediumsized businesses.

Overall performance to date, however, has remained fairly stable. In addition, performance has been supported by reliable underwriting and servicing of portfolios by the larger, wellestablished issuers in the market. According to Fitch’s Equipment Delinquency Index which tracks performance data from transactions composed of largerticket agricultural, construction and truck/transportation along with small, mediumsized and large ticket portfolios delinquency rates increased slightly through the first six months of 2007 relative to the same period last year, with delinquencies up slightly across both the small, mediumsized and large ticket portfolios. As of the endJuly 2007 reporting period, 60 day or more delinquencies for averaged 0.67%, in line with the 0.69% average delinquency rate experienced in Q1 2007, but higher that the 0.53% average experienced through the second quarter of 2006.

From a ratings perspective, Fitch issued 24 upgrades and five downgrades in the first 11 months of 2007, compared with a total of 17 upgrades and no downgrades in 2006. It should be noted that positive rating activity has occurred across a diverse group of equipment types and transaction sponsors while negative rating actions remain isolated to downgrades relating to one sponsor. The agency remains optimistic that stable business dynamics and spending patterns will persist into 2008, further benefiting collateral performance and credit enhancement levels.

Aircraft Operating Lease

Ratings Outlook: Stable Asset Performance Outlook: Stable Fitch remains guardedly optimistic about the aircraft finance sector. The aircraft industry has staged a meaningful comeback over the past several years, both from a demand and value perspective. Although US domestic airlines are on track to carry a record number of passengers (see text box, page 16), high oil prices and a weaker potential global economic outlook could weigh negatively on longerterm prospects.

The aircraft ABS sector, which includes financing of large commercial aircraft, regional jets, corporate jets and aircraft engines, has experienced renewed

issuer and investor interest. Having largely recovered from a series of negative exogenous impacts such as the events of 11 September 2001, and the outbreak of severe acute respiratory syndrome (SARS), the US domestic and global airline industry continues to report record passenger traffic volume.

In recent years, the two leading aircraft manufacturers, Airbus and Boeing, have secured a record numbers of new orders, causing order backlogs for new aircraft to be extended well into the next decade for certain models. Simultaneously, production delays on new generation longhaul carriers such as the Airbus A350 and A380 have extended delivery times for these aircraft. These factors, combined with significant increases in demand for aircraft from abroad (including many developing regions in the Middle East and Asia), have helped to support higher rents and values for the leased aircraft that support operating lease securitisations. In general, aircraft values and lease rates have shown continued improvement since the trough of 20022003. Lease rates have improved both on certain inproduction mid and longrange wide bodies, such as the Boeing 767300ER as well as on nextgeneration narrow bodies such as the Airbus A320200 and Boeing 737800. However, rent cash flows on many older, outofproduction aircraft remain weak. Certain securitisations, including many pre2001 vintage transactions that contain meaningful concentrations of these older aircraft, remain hampered by this and other considerations, such as higher maintenance expenses and declining demand.

Improvement in the US commercial aviation sector has largely been driven by capacity and cost reductions, which have increased pricing power and operating profitability for the major US carriers. Airlines have continued to streamline their fleets and have disposed of older airplanes to maximise fuel and labour cost efficiencies. Of note, both Northwest Airlines and Delta Air Lines emerged from Chapter 11 bankruptcy protection in Q207. This led to the ratings upgrades of a number of existing Delta Enhanced Equipment Trust Certificate (EETC) issuances in 2007.

Despite these positive developments, significant challenges face the US airline industry. High debt levels and fuelrelated costs will continue to weigh on profitability, leaving the airlines vulnerable to fuel spikes, higher funding costs or other exogenous shocks (e.g., terrorism, pandemics and natural disasters). Similarly, operating lease transactions remain vulnerable to the unstable financial condition of the average lessee, the volatility of global travel and commercial aviation, fuel price fluctuations and event risk.

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Fitch’s Q307 portfolio review of 13 transactions in its aviation operating lease portfolio resulted in few rating changes. The agency’s analysis included a review of current aircraft values based on the aircraft type, vintage and supporting engines as well as expectations on future lease rates and value declines. In addition, earlier in 2007, Fitch raised the ratings on four classes of notes from three GE Corporate Aircraft Finance transactions due to strong collateral performance (no defaults) and improving credit enhancement levels. Yeartodate, the agency has issued 13 upgrades and four downgrades, compared with no upgrades and 31 downgrades in 2006.

Dealer Floorplan

Ratings Outlook: Auto-Related: Stable Non-Auto-Related: Stable Asset Performance Outlook: Auto-Related: Declining Non-Auto-Related: Declining Performance of the US auto and nonautorelated dealer floorplan collateral has been stable in 2007. Fitch completed a portfolio review of all outstanding US dealer floorplan transactions in October 2007, affirming all outstanding classes of 22 series. Each transaction is performing as expected, which resulted in no rating actions.

Diversified nonautorelated floorplan ABS performance trends are expected to continue to show stability in 2008 based on the inherent product diversification across sectors despite certain industries such as construction investment, slowing in 2007 and into 2008. However, US autorelated dealer floorplan performance will remain under pressure due to the ongoing impact of the resulting weakness among certain domestic manufacturers and declining vehicle sales, rising dealer costs and resultant lower dealer profitability. Furthermore, to a large degree, dealerships rely on the underlying manufacturers to provide support to the dealer network. This includes providing assistance in the form of incentives and lowcost financing, as well as marketing new vehicles.

Fitch remains particularly concerned about the potential impact of ongoing financial and operating difficulties at U.S. auto manufacturers and on their dealer networks and also the resulting implications on wholesale values. Recently, Ford announced that it is planning to shrink its US dealer network in the next three years to align distribution better with its current market share, while others are trying to slim down excess dealer capacity. Also at risk are standalone franchises that have heavy US manufacturer concentrations. The threat of lower

auto sales, particularly at GM, Ford and Chrysler, and waning demand may put pressure on payment rate trends and inventory levels, which could then further increase costs for dealers.

A key performance indicator that Fitch monitors is the MPR, which indicates the rate at which a product is sold. Other trends that will be watched closely in 2008 include obviously auto sales, purchase rates, vehicle ageing, healthy dealer profitability and loss rates. Although the sector has not experienced any adverse rating actions in recent years, the prospect of lower sales, fierce competition, rising dealer costs and operational issues at US auto manufacturers will lead to a more challenging environment for the sector in 2008.

Airline Industry Fundamentals According to the US Bureau of Transportation Statistics, US airline traffic volume is expected to increase to 660m passengers in 2007, surpassing 2006’s record of 658m. US domestic departures are estimated to decrease to 10,278m from 10,476m while the passenger load factors are forecast to increase to 79.1% from 77.9% in 2006. However, according to the Air Transport Association of America (ATA), US passenger airline costs rose 10.6% in the first quarter of 2007, due primarily to a 12.6% increase in prices for jet fuel.

Globally, airlines are projected to post a USD5.6bn net profit for 2007, up from the USD5.1bn forecast in June of this year according to the International Air Transport Association (IATA). On a yoy basis, international passenger demand increased 8.6% for the month of August 2007 while the average passenger load factor was 80.3% remaining near its record high.

New Orders and Deliveries Commercial Aircraft Manufacturer Orders Deliveries Total 2007 – through October Airbus 1,021 374 1,395 Boeing 959 371 1,330 Total 1,980 745 2,725

2006 Airbus 824 434 1,258 Boeing 1,058 398 1,456 Total 1,882 832 2,714 Source: Company reports

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Rental Fleet Finance

Ratings Outlook: Stable Asset Performance Outlook: Declining Fitch is guarded in its outlook for the rental fleet sector. The rental fleet industry provides vehicle rental services to business and leisure travel participants and local market sales. As a result, the sector is highly dependent on revenues derived from air travel. Although demand for air travel in the US is expected to surpass the record set in 2006, sector performance is likely to weaken due to higher fixed operating costs faced by rental fleet sponsors. These include higher borrowing costs and fuel prices and the other costs associated with the introduction of new models, which cannot be readily passed on to consumers.

Fitch is equally concerned about the consequences of current credit conditions on corporate profits and spending on business travel. In 2006, the US rental fleet market recorded total revenues of USD20.1bn, compared with USD18.9bn in 2005. However, fleet size decreased to 1.68m units in 2006 versus 1.71m in the previous year as sponsors strive to maximise utilisation rates.

In line with industry trends, Fitch sees a higher percentage of nonprogramme vehicles in rental fleet transactions. On the positive side, this helps mitigate exposure and reliance on certain US domestic manufacturers such as GM and Ford and insulates rental fleet sponsors from programme car cost increases. At the same time, higher nonprogramme concentration increases exposure of rental fleet sponsors to declining auto sales and wholesale vehicle prices as rental car companies are responsible for the disposition of the vehicles at the end of their rental service term. It should be noted that Fitch takes into consideration residual value risk when evaluating credit enhancement on programme and nonprogramme vehicles.

No negative credit rating activity in the rental fleet sector is expected due to the fact that the majority of Fitchrated transactions are wrapped by monoline guarantees. However, as with the subprime auto loan sector, the monoline insurance companies are under heightened pressure and if this continues this may negatively impact the ratings of rental fleet transactions. Over the intermediate term, corporate restructuring and the potential for lower ratings at Ford and GM could put pressure on performance for both new and existing rental fleet transactions. Fitch will monitor developments closely.

Utility Tariff Bonds

Ratings Outlook: Stable Asset Performance Outlook: Stable Fitch recently completed a portfolio review and affirmed all 35 outstanding Fitchrated utility tariff bond transactions. All of the bonds in its portfolio are performing as originally expected and continue to build credit enhancement where applicable.

Cash flows supporting utility tariff bonds are derived from a dedicated utility tariff established under legislative or regulatory authority charged to consumers. In addition to being backed by a large, diverse pool of fees charged to consumers, revenues supporting bonds benefit from an extra layer of protection provided by the trueup mechanism. The trueup mechanism maintains the expected amortisation of the bonds by allowing customer charges to be adjusted to account for differences between expected usage and actual usage and replenishes the credit enhancement accounts as required. Recent transaction structures have incorporated trueup features that adjust on a semi annual basis, or more frequently in some cases.

With more than USD40bn raised since 1995, utility tariff bonds are continuing to be increasingly adaptable to additional funding needs for US utilities. Until recently, this structure has been primarily used to fund traditional stranded costs. However, in February 2005, tariff bonds were issued for the benefit of Pacific Gas and Electric Co. to reduce the cost to consumers of a regulatory tariff component that was crucial to the utility’s bankruptcy reorganisation. In April 2007, tariff bonds were issued for the benefit of Monongahela Power Co. and Potomac Edison Co. to fund an environmental project. In May and June 2007, tariff bonds were issued for the benefit of Florida Power & Light Co. and Entergy Gulf States Inc., respectively, to fund the recovery of hurricane or storm reconstruction costs.

The sector has experienced no negative rating activity since this type of bond (asset class) was first introduced.

Tobacco Settlements

Ratings Outlook: Stable Asset Performance Outlook: Stable All outstanding Fitchrated tobacco settlement ABS ratings were placed on Rating Watch Positive on 12 September 2007 as a result of the agency’s upgrade of the US domestic tobacco industry.

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Fitch upgraded the domestic tobacco industry rating to ‘BBB’ from ‘BBB–’ with a Stable rating Outlook on 29 August 2007. Fitch’s rating of tobacco settlement bonds is tied to the corporate rating of the tobacco industry due to the executory nature of the Master Settlement Agreement (MSA). In the event of bankruptcy, Fitch believes there is an incentive for the manufacturer to continue to make payments under the MSA. As a result, the maximum attainable rating of tobacco settlement bonds is one notch above that of the tobacco industry rating.

The rating upgrade and stable outlook for the US tobacco industry reflects operational and financial improvements of the major US domestic tobacco manufacturers since 2005 and a decline in litigation risk. Performance of the three largest public tobacco manufacturers (Altria Group, Inc., Reynolds American Inc. and Loews Corporation), which account for approximately 90% of US domestic market share, is expected to remain strong. However, declining US cigarette consumption, ongoing litigation and regulatory risk such as bans on public smoking in public spaces and potential increases in excise taxes pose longerterm challenges. On the litigation front, several significant class action lawsuits have been dismissed; however, there are certain suits still remaining and additional class action or individual suits may be filed in the future.

Despite these positive developments, areas that Fitch continues to watch include competitive pressures facing the industry, low singledigit cigarette volume decline and ongoing, albeit currently manageable, litigation risk. The agency anticipates that the industry will continue to be subject to negative pressures, including (but not limited to) smoking bans and rising excise taxes, which diminish pricing

flexibility, and contribute to overall consumption declines. Fitch will continue to analyse the effect of these factors on tobacco manufacturers’ operating margins and ratings.

In addition, there remains a concern for a larger thanforecast decline in original participating manufacturer (OPM) market share and domestic consumption and liquidity strains due to potential future nonparticipating manufacturer (NPM) adjustments. Fitch will continue to observe the impact of OPM market share decline, domestic consumption decline and the NPM adjustment payment dispute as they relate to reduced current and future revenues for bonds.

n US RMBS The US RMBS market in 2007 had experienced one of the most tumultuous years in recent history with farreaching implications for the global capital markets. Subprime RMBS has severely underperformed initial expectations, and Alternative A RMBS (AltA) are showing significant weakness as well. While the downturn in home prices that began in mid2006 is at the root of the turmoil, the presence of additional, significant risk factors has exacerbated the effects of a slowing housing market on the 2006 and 2007 collateral performance.

The rate of home price growth occurring between 2003 through mid2006 was extraordinary, particularly for the US states where the majority of the originations are concentrated. States such as California and Florida, which combined make up about 40% of the 2006 and 2007 vintages, witnessed home price appreciation (HPA) of 51% and 65%, respectively, between Q403 and the peak in Q206. Not surprisingly, these states have experienced the

2008 US RMBS Outlook Table 2008 outlook



US RMBS Prime and AltA Declining Stable/ negative

Prime ratings may see an increase in downgrades due to the impact of home price depreciation on low doc mortgages with a simultaneous second lien. The impact of home price declines and concentrations of high risk attributes will be more severe in the AltA sector. AltA delinquencies to date are well outside initial expectations, which may cause downgrades to reach further up the capital structure

Subprime, Home equity and speciality products

Declining Negative Continued home price declines and sharply deteriorating performance of the 2007 vintage will continue to pressure ratings. Loan modifications may provide added relief for the 2006 collateral that will begin to reset in 2008. Closedend second deals will continue to experience high rates of delinquencies and losses

Net interest margin securities

Declining Negative Fallout from subprime sector will continue to spill over into net interest margins. Slower prepayments and higher delinquencies and losses will deplete cash flows and halt overcollateralisation release triggers.

Source: Fitch

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steepest declines, with early indications for 3Q07 suggesting declines of 10% and higher. In contrast, states such as New York (where home prices grew 24% over the same period) had not experienced any price depreciation by Q207. Those states with lower rates of home price growth have seen prices soften by only 1%2%. Fitch’s fiveyear home price decline projection for the US is 9.5% on a nominal basis.

Underpinning the runup in prices and loan demand was the widespread usage of the stated income underwriting programme and simultaneous second liens (SSLs) (aka piggyback loans made to finance the borrower’s downpayment). These programmes were accessible by all the credit sectors; prime, Alt A and subprime, and facilitated first time homebuying among borrowers constrained by the rapidly rising home prices. They also fuelled speculative borrowing. While history has shown a tendency for speculative investing to rise during a heated real estate market, it appears that this dynamic has played a far greater role in the current downturn relative to prior housing cycles because of the ease at which the 2006 and 2007 borrowers could obtain a mortgage without proof of income or a downpayment.

Another major risk factor associated with the 2006 and 2007 subprime vintages is growing evidence that the risks associated with the stated income, SSL products were not controlled by sound underwriting practices. Based on the severe borrower response to the home price declines, it appears that underwriting standards were not in place to assess the borrowers’ ability and willingness to repay. Since owner occupants rarely view their home as a shortterm investment, they typically do not default based solely on a drop in value. Rather other conditions, such as a life event or a loss of income, will cause a default and lack of equity does not allow the borrower to resolve the problem outside of foreclosure. Alternatively, in the absence of sound underwriting, misrepresentation of occupancy status could more easily occur and borrowers who were believed to be owneroccupants were, in fact, speculators who are highly prone to default when home values decline.

The stated income and SSL products are exhibiting a greater sensitivity to the home price declines than those underwritten to a fully documented programme with some equity in the home. While delinquencies are up across the board on an absolute basis, loans underwritten to a more traditional programme are exhibiting lower delinquencies relative to the high risk programmes and are performing similarly to previous downturns. The 60+ day delinquency rates for the highrisk loans originated in 2006 and 2007 are averaging 16% of the current balance versus 10%

for loans underwritten to a fully documented programme without a second lien.

AltA bonds have been exhibiting signs of stress due to some of the risk factors affecting the subprime market, albeit to a lesser degree on an absolute basis. In addition, the AltA option adjustable rate mortgage (ARM) borrowers, many of which have not yet faced a recast, face the compounded exposure of negative amortisation in a deeply declining home price environment. Fitch has rated very few Option ARM RMBS subsequent to publication of Option ARM rating criteria in 2005. AltA rating performance for RMBS backed by fixed rate and other ARM products have come under pressure, with 270 downgrade actions taken on the 2006 RMBS vintage and no upgrades as of endNovember 2007. Fitch expects this trend to continue into 2008. While the prime sector will witness an increase in downgrades, upgrades are likely to continue to outnumber downgrades in 2008 but by a lower margin than in the past.

In the year to 30 November 2007, Fitch had downgraded 1,087 subprime classes issued in 2006 and 235 classes issued in 2007. The rating actions were taken on deals secured by first lien mortgages as well as those backed by closedend second liens (CES). The rating actions taken on the 2007 vintage reflect only those bonds issued in Q107. As the 2007 collateral seasons, bonds issued in Q207 are likely to experience downgrades given the trajectory of late stage delinquencies. Also, since the 2006 subprime vintage will start to reset in 2008, additional rating actions could be taken based on performance trends exhibited by the resetting ARMs, which strongly depend on the availability and effectiveness of the refinancing and streamline loan modification programme announced by the Bush Administration as well as the servicers’ standard loss mitigation strategies discussed in the subprime section of this outlook.

Market Environment The current national home price decline is notable for its sharpness and broad effect around the US. However, even after factoring in home price declines, the high delinquencies and defaults currently being experienced by the subprime and AltA sectors are well outside initial expectations. While Fitch’s rating models penalised loans for the risk of lowequity and lowincome documentation, it is becoming evident that poor underwriting and, in some instances, fraud, have generated loans that are even weaker than their attributes suggest. The latter is of particular importance since borrowers who misrepresented the occupancy status or income amount will perform

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much worse than expected in a negative housing environment.

Fitch made several criteria revisions to ResiLogic, the agency’s mortgage default and loss model for US RMBS prime, AltA and subprime transactions. Loss expectations will be more dynamic in response to changes in regional housing markets and greater weight is now given to the regional default multiplier component of the model. Fitch also added a new loan documentation category and adjusted the debt toincome ratio analysis. The impact of these changes generally produces higher loss expectations at each rating category for transactions rated from August 2007 and later.

In addition, beginning in January 2008, Fitch’s US RMBS rating process will incorporate a more extensive review of mortgage origination and acquisition practices, including a review of originator/conduit/issuer due diligence reports, and a sample of mortgage origination files. Fitch is also studying how a more robust system of representation and warranty repurchases could help provide more stable RMBS performance. Fitch will conduct enhanced originator and issuer reviews for all subprime transactions. Fitch will not rate subprime RMBS without completion of the review process. Fitch also intends to conduct enhanced reviews for AltA RMBS; however, these will be phasedin based on Fitch’s view of the risk of particular AltA programmes. Highrisk programmes include Pay Option ARMs and programmes exhibiting substantial risklayering. Such programmes will be high priority for review.

Mortgage collateral originated in H207 reflects an industrywide shift towards less risky credit attributes. Fewer loans are being originated with a SSL and the number of loans underwritten to a full documentation programme has increased. A more prudent lending approach should help newer collateral exhibit greater performance stability relative to H206H207 originations. Together, with regional default adjustments made to Fitch’s criteria and the addition of originator reviews, ratings performance for RMBS issued in Q108 and later should also stabilise. However, the severe lack of liquidity in the nonconforming mortgage market has dramatically reduced the amount of available mortgage credit for qualified borrowers looking to refinance or purchase a home, which is adding to the current home price and delinquency pressures for the H206H207 collateral. The lack of liquidity is most evidenced by the substantial slowdown in prepayment rates, which are among the slowest since 2000.

While Fitch expects the jumbo market to gradually recover in H208, origination volume could drop by 50%75% from 2007’s levels. Given the prolonged dislocation in the credit markets, it is difficult to make a confident projection at this time. Mortgage lenders constrained for cash are currently turning to Freddie Mac and Fannie Mae for liquidity; therefore, agency product will make up a large portion of 2008’s volume. This has clearly been the current strategy for some of the larger nonconforming originators and will continue to be until liquidity returns to the jumbo market. Still, the agencies are restricted by loan size limits, which remain at USD417,000; therefore, nonconforming loan demand will go unmet until investor confidence is restored and stability returns to the capital markets. With many lenders exiting subprime lending altogether, origination volume in this sector will take longer to recover, and will ultimately stabilise at much lower levels than in recent years. As the prime jumbo and subprime markets recover, much needed stability will be brought to the housing market and recent vintage collateral performance.

Prime Sector

Ratings Outlook: Stable Asset Performance Outlook: Declining Prime jumbo mortgage performance is beginning to show some evidence of deterioration as a result of the interaction of home price declines with concentrations of high risk loans. This is exacerbated by the severe lack of liquidity in the jumbo market.

The 60+ day delinquencies for the 2006 and 2007 vintages are higher compared to the very low rates of recent vintages and are exhibiting the same trajectory as the 2000 vintage during an economic downturn. Currently about 2% of the 2006 vintage is 60+ days past due with 21 months seasoning and 0.50% of the 2007 vintage is 60 days past due after nine months of seasoning. The low relative delinquency rates of the prime sector in comparison to AltA and subprime indicates a lower sensitivity of prime borrowers to home price declines. While prime borrowers are not totally immune to the negative housing climate, they tend to respond more strongly to changes in unemployment and other factors that would affect their ability to repay.

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Prime RMBS 34%

Subprime RMBS 52%

.

RMBS NIMs 3%

. Specialty RMBS 0%

US RMBS Upgrades by Asset Type – 2007ª

ª Data through Nov 30 RMBSResidential Mortgagedbacked Securities Includes government, reperforming, subperforming, and nonperforming loan securities Source: Fitch

AltA RMBS 9%

Manufactured housing 2%

.

Specialty RMBS 1%

.

Subprime RMBS 83%

AltA RMBS 9%

US RMBS Downgrades by Asset Type – 2007ª

ª Data through Nov 30. RMBS Residential Mortgagedbacked Securities Includes government, reperforming, subperforming, and nonperforming loan securities Source: Fitch

RMBS NIMs 7%

Prime RMBS 0%

The trend towards highrisk attributes within the prime sector continued in 2007. The percentage of loans originated with an SSL reached an all time high of 30% in 2007, up from 27% in 2006, and the number of low doc loans slightly increased to 54% from 53%. The 2007 vintage has the highest concentrations of these risky attributes among all the vintages 20002007. More notable is the growth in risklayered products. Roughly 14% and 17% of the 2006 and 2007 vintages, respectively, consisted of low doc loans originated with an SSL.

Both vintages have a heavy concentration in California (43% in 2006 and 42% in 2007), where house prices are rapidly declining. To that end, the most vulnerable to default are the risklayered loans, which are exhibiting a heightened sensitivity to home price declines relative to those without the low doc SSL features. These loans are defaulting at more than twice the rate of the loans having neither or just one of these attributes.

The 2007 60+ day delinquency rate for the risk layered product is 1.6% at the ninemonth seasoning mark, double the 0.80% rate of the 2006 risklayered loans at the same age. However, the weighted average current loantovalue ratio (CLTV) of 75% for 2007 (versus 74% for 2006) indicates that an equity cushion is available to absorb home price declines if the borrower needs to refinance or sell the home. This feature will contain losses in the prime sector.

The number of prime borrowers choosing an ARM has been declining since peaking at 72% in 2004 when interest rates began to rise. The fixed rate interestonly (IO) mortgage, where the rate on the mortgage stays fixed for the life of the loan and the payment increase is only for principal amortisation, has been gaining in popularity and accounted for 14% of originations in 2006 and 19% in 2007. Because the payment increase at the end of the IO period is a smaller amount than the increase from an interest rate adjustment, borrowers are less likely to be financially pressed when amortisation begins. Hence the payment shock impact is less severe and default risk should be lower relative to the ARM products.

Prime collateral has continued to exhibit relatively slow prepayment rates. The 2007 vintage is exhibiting the slowest prepayment rates of all the vintages between 2000 and 2007. The combination of higher delinquencies and slower prepayment rates will result in higher cumulative losses for the 2007 vintages relative to levels experienced by the 2002 to 2004 vintages.

The slower prepayments have also resulted in slower credit enhancement buildup and deleveraging for prime bonds, which has significantly slowed the rate of upgrades in the sector. By Q306, Fitch had upgraded 438 prime bonds, which was on track for the lowest number of upgrades since the year 2000. This was dwarfed by the steep drop in prime bond upgrades taken by Fitch as of 30 November 2007, which totalled only 174. This was the lowest number since 1998, when 96 prime bonds were upgraded. While only four bonds have been downgraded in 2007, Fitch expects some of the lower rated bonds to come under pressure in 2008 and downgrades will occur based on the risk factors discussed above.

AltA Sector

Ratings Outlook: Negative Asset Performance Outlook: Declining AltA collateral performance deteriorated markedly in 2007, reflecting the stressed market environment and resulting in a significant increase in downgrades.

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Year to 30 November 2007, Fitch had downgraded more AltA classes (472) than in all prior years (20002006) combined (331). The downgrades were concentrated heavily in pools issued in recent vintages. Of the pools issued in 2006, approximately 60% had a class downgraded or placed on RWN, including almost 15% that had classes rated as high as ‘AA’ affected. Fitch expects continued negative rating pressure in the AltA sector in 2008, particularly among the 20062007 vintage pools.

Credit attributes for AltA loans originated in 2006 and 2007 continue to exhibit the trend towards increased borrower leverage. The percentage of loans originated with an SSL in 2006 peaked at 40%, and in 2007 slightly declined to 36% of origination volume. The SSL concentrations are triple the amount of loans reporting a subordinate second lien in 2003.

The high percentage of low doc loans in the AltA sector (83% in 2007) is an inherent characteristic of the segment and the risk associated with this attribute is typically mitigated by the relatively high weightedaverage Fair, Isaac & Co. (FICO) scores, which on a combined vintage basis, is about 710. However, a significant portion of each vintage (33% of 2006 and 31% of 2007) consist of low doc loans with an SSL. As with the prime and subprime sectors, this risklayered product coupled with the sharp decline in home prices is the primary contributor to the early poor performance of the 2006 and 2007 AltA collateral. Roughly 11% of the 2007 loans with an SSL and 16% of the 2006 loans are 60 days or more past due.

While affordability products such as IO and option ARMs continue to dominate the sector, there has been a shift from adjustable rate products in 2007. The fixedrate IO product represents over 14% of 2007 AltA originations and, as noted earlier, pose a lower payment shock risk than the ARM products.

Loan prepayments and bond deleveraging among the 2006 and 2007 collateral are the slowest of all the AltA vintages for the period 20002007. In a shifting interest structure, fast prepayments help to delever a bond by paying down the most senior classes and building credit enhancement for the mezzanine and subordinate classes; therefore, a slow rate of prepayments means slower growth in loss protection. Conversely, in a structure that relies on excess spread and overcollateralisation (OC) build up for credit enhancement, slower prepayments benefit the transaction by providing more excess spread for loss coverage later in the life of the deal.

The number of AltA bond upgrades in 2008 will likely be less than that in 2007 and downgrade

actions are expected to greatly increase. As of 30 November, 2007, Fitch had not upgraded any AltA bonds issued in 2006 and had downgraded 244. The agency affirmed 2,704 classes from the 2006 vintage. Given the continued underperformance of the sector, Fitch expects significantly more downgrades to occur in 2008.

Subprime Sector

Ratings Outlook: Negative Asset Performance Outlook: Declining RMBS issued in 2006 and 2007 backed by pools of subprime mortgages are substantially underperforming initial expectations, which has led to substantial downgrades of the 2006 bonds as well those issued in Q107. The number of subprime downgrades as of endNovember 2007 totalled 3,074, of which 1,087 were taken on the 2006 deals and 235 were for the 2007 deals. Fitch expects asset performance for the 2007 vintage to continue to deteriorate and for the ratings environment to remain negative throughout 2008. The 2006 collateral will begin to reset in 2008, which could impact the current ratings depending on the availability and effectiveness of loan modification programmes.

Despite a slight improvement in the 2007 collateral characteristics, the risk factors that contributed to the early poor performance of the 2006 vintage continue to predominate. FICO scores in 2007 dipped slightly from a weightedaverage of 626 in 2006 to 625 but there has been a slight improvement in some of the other risk attributes such as weightedaverage CLTV (86% versus 87% in 2006), low doc loans (43% versus 44%) and SSLs (22% versus 29%).

Declining home prices and loose underwriting guidelines remain the main drivers of high defaults and losses in the subprime sector, particularly for the 2007 vintage where 60+ day delinquencies are running at 14% after nine months of seasoning compared to 11% for the 2006 vintage at the same seasoning mark. Currently, about 21% of the 2006 vintage is 60+ days past due after 20 months of seasoning.

Roughly 15% of the 2006 vintage and almost 12% of 2007 comprised low doc loans with an SSL. The 2007 risklayered product is defaulting at an alarmingly high rate; roughly 25% of these loans are 60 days or more past due. In addition, 11% of the 2007 vintage consist of full doc loans that have an SSL. Of these loans, 15% are 60 days or more past due. The high delinquency rates of the SSL product demonstrate the extreme sensitivity of high borrower leverage to home price movements. Similarly, the low doc loans have a high percentage (16%) of 60+

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days past due loans, which reflects the increased risk of the stated income product and loose underwriting. While the 2006 vintage delinquencies for each of these risk attributes are exhibiting the same patterns, the absolute levels of delinquencies were 57 percentage points lower at the same ninemonth seasoning mark.

The number of subprime RMBS secured by CES almost doubled each year between 2003 and 2005 to USD22bn. By the end of 2006, CES volume reached an alltime high of USD44bn and sharply declined to USD15bn as of 30 November 2007. These figures include CES pools backed by SSLs made to AltA and subprime borrowers. The very high default and loss rates experienced to date have put downward pressure on the highly rated bonds, including those rated ‘AAA’ at issuance.

RMBS backed by CES collateral are severely underperforming subprime RMBS backed by first lien collateral. Because of the recent drop in home values, many of the CES borrowers have negative equity. Therefore, the incentive to avoid default is dramatically reduced when borrowers find themselves unable to cope with the mortgage and housing expenses; this is true for subprime, AltA and prime borrowers who took out a SSL, which is reflected in each sector’s delinquency rates. More importantly, CES borrowers are less likely to face foreclosure by the CES lender if they default on the second lien. Fitch expects downgrades on RMBS secured by CES to continue to outnumber upgrades in 2008.

The rapid rise in delinquencies and losses has resulted in a higher expected loss. As a result, Fitch had revised its loss estimates for the first lien and CES transactions issued in 2006 and 2007. The revised loss estimates, together with changes made to Fitch’s downgrade methodology, has resulted in a more severe base case assumption than that used in determining the original rating. Bonds that cannot survive at least 1.10x Fitch’s higher expected loss assumption are subject to a rating adjustment below investment grade. Given the severity of both vintages’ delinquencies and losses and the negative impact it is having on excess spread and OC buildup, many bonds, particularly at the lower end of the rating scale, have been unable to maintain the 1.10 loss coverage ratio.

Fitch conducted a review of the 228 subprime first lien and CES transactions it rated in 2006 using its revised downgrade methodology. Approximately 11% by dollar volume were downgraded. The agency also completed a review of the transactions issued in Q107. Roughly 27% by dollar amount were

downgraded. Transactions issued in Q207 are currently under review and the number of downgrades is expected to be substantial given the underperformance of the 2007 vintage. In addition, Fitch will conduct a second review of its 2006 portfolio by the end of Q108.

While the agency expects downgrades to outnumber upgrades in the subprime sector in 2008, it will pay particular attention to the trend in defaults among the 2006 resetting ARMs, which will be directly impacted by the loan modification framework announced by the Bush Administration to assist homeowners who face an initial rate reset between 1 January 2008 and 31 July 2010.

The framework is described in a document published by the American Securitization Forum (ASF), which describes a voluntary programme under which mortgage servicers can identify loans that are good candidates for refinancing, as well as loans that might be eligible for a “streamlined” modification process. The framework proposes that a streamlined modification would consist of a fiveyear mortgage rate “freeze”. Loans that are not recommended for streamlined modification (for example, severely delinquent loans) would be subject to the servicers’ standard loss mitigation procedures, which include modification. Additionally, the framework details a recommended set of data reports on modified loans that servicers should provide.

Fitch believes that, on balance, by mitigating the impact of ARM resets on borrower default rates, the framework can help to reduce the risk of principal loss on senior subprime RMBS. If a substantial number of borrowers prove to be eligible for streamlined modification and accept the fiveyear fixed rate, this should lead to lower default and loss rates than might be expected, if borrowers incurred a large payment increase at ARM reset. A major concern regarding the largescale conversion to five year fixed rates is that excess interest within RMBS will decrease. Excess interest is an important source of credit enhancement, which compensates for loss of cash flow due to mortgage losses. Uncertainty around the benefit of loan modifications is centred on the relative reduction in loss, versus reduction in excess interest that could be incurred. On balance, Fitch believes that stabilisation of loss rates can outweigh excess interest reduction when analysing the impact on senior RMBS. Greater refinancing opportunity can also help senior bond performance, as it will cause those bonds to prepay and reduce the risk of principal loss.

For subordinated RMBS, excess interest is a much greater component of credit enhancement, and in

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some instances only substantially lower loss rates would offset a reduction in excess interest. Fitch also notes that extensive use of rate “freezing” will lead to lower collateral weightedaverage coupon (WAC), which in turn could lead to more extensive available funds cap (AFC) interest shortfalls. AFC shortfall risk is not addressed by Fitch's credit ratings.

Net Interest Margin Securities

Ratings Outlook: Negative Asset Performance Outlook: Declining The number of net interest margin (NIM) security downgrades outnumbered the number of upgrades in 2007 by a ratio of 15 to 1. Many of the same challenges faced by the underlying transactions in the subprime sector put negative pressure on seasoned NIMs in 2007. Deterioration in collateral performance in the underlying transactions and a reduction in excess spread has generally led to weaker performance for NIMs issued in 2005 and 2006 relative to earlier vintages. This trend is expected to carry over into 2008.

While most recent vintage NIMs were well hedged against a rise in rates through the use of credit derivatives, the unexpectedly fast prepayments in the early months of the 2005 vintage and the poor credit performance of the 2006 vintage led to rapidly disappearing underlying pool balances for 2005 and decidedly lower projected residual cash flow for 2006. The result is that many 2005 and 2006 NIMs will extend deeper into the underlying pool’s loss curve and in some cases beyond the termination date of the pledged interest rate derivatives. However, extension (and not default) will be the most significant consequence of the market pressures for the vast majority of 2005 NIMs, as those NIMs that extend to the stepdown date are typically able to be paid in full with the release of the OC.

Given the poor performance of the 2006 (and many of the 2005) underlying subprime transactions, many of the 2006 (and some of the 2005) NIMs will not benefit from OC release, particularly the lower tranches of multitranche NIMs. Seasoned NIMs that have underlying transactions with no expected release of OC will likely see a higher number of negative rating actions.

Speciality Products

Ratings Outlook: Negative Asset Performance Outlook: Declining In the scratch and dent and reperforming sectors, it is generally difficult to meaningfully compare vintage performance due to the variation in collateral attributes, seasoning and pool types. However,

delinquencies and rollrates appear to be deteriorating as the deterioration in the housing market is severely affecting borrowers. Similar to the subprime sector, the combination of declining asset performance, approaching rate resets and the potential for adverse selection resulting from previously rapid prepayments in seasoned transactions will likely increase negative ratings pressure. As of 30 November 2007, Fitch downgraded 43 speciality RMBS backed by scratch and dent loans; none were upgraded. The agency expects the negative trend to continue throughout 2008.

n US CMBS US CMBS issuance for the first nine months of 2007 totalled USD191bn, an increase of nearly 50% compared to the same period in 2006. Volume declined in the second half of the year, as turbulence continued in the credit markets. For the second half of 2007, issuance has dropped off by approximately 43% from the first half of the year, with the majority of the decline attributed to the fourth quarter.

Commercial real estate fundamentals generally remain strong and while Fitch expects loan defaults to increase in 2008, the agency does not anticipate sizeable increases in downgrades. Within CMBS, the main area of concern revolves around upcoming maturities of current CMBS loans and the ability of these borrowers to obtain acceptable refinancing given the current contraction in real estate capital markets, which has made CMBS issuers much more hesitant to provide capital to borrowers. Should the current volatility in the financial markets continue or should the economy fall into a recession, the result could be more rating actions.

Upcoming Loan Maturities Fitch is closely monitoring transactions with a high concentration of loans that are scheduled to refinance in the near future in a potentially illiquid market. The agency recently analysed 124 of these transactions, representing approximately USD91bn. The results indicate that, even with significant stresses applied to the loans, potential bond defaults would be within expectations.

Refinance risk is a greater concern with loans that were transitional and originated as shorter term floatingrate or fiveyear fixedrate loans. Generally, these properties were in a state of transition as either acquisition loans or property repositionings. Expectations were that the cash flow would improve before entering into longterm fixedrate financing. In some cases, the business plan created to achieve the property improvements may not be realised. However, in most cases, additional credit support for

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these loans often exists in the form of a Bnote held outside the trust. In the event of a default, this would absorb losses first and provide protection for the CMBS securitised loan balance.

MultiBorrower FixedRate Transactions

Ratings Outlook: Stable During 2007, Fitch’s stressed debt service coverage ratio (DSCR) on new issuance CMBS decreased from a weightedaverage 1.06 times (x) in Q107 to 1.03x for Q307, and Fitch’s stressed loantovalue (LTV) ratio increased from 109.9% to 113.3% over the same period, reflecting more aggressive underwriting as lenders often included pro forma income as current cash flow. Further, given the excess liquidity in the market in the first half of the year, more transactions included additional debt outside of the trust, which increased property level leverage nonetheless. The weightedaverage percentage of loans with or allowing subordinate debt for Fitchrated transactions was approximately 44.6% as of Q107. As of Q307, this number had increased to 50.1%. However, as bankers gradually return to more traditional underwriting practices,

Fitch expects these numbers to improve. For example, the percentage of loans in Fitchrated transactions that were interestonly decreased from a high of 64.8% in Q107 to 56.5% as of the end of Q307.

The expected decrease in deal size should be greater than the decrease in the number of deals in 2008. It is likely that banks will have smaller balance sheets in 2008 and will need to execute deals more quickly to originate additional loans.

The upgradetodowngrade ratio for multiborrower deals was 10.6 to 1 through 30 November 2007. Of the 60 classes downgraded in 2007, 57 of the actions affected speculativegrade classes and were attributable to increased loss expectations. Upgrades in 2008 are likely to be driven primarily by collateral paydown and some loan defeasance. Downgrades will generally affect speculativegrade classes in deals experiencing adverse selection and those with existing credit issues.

2008 US CMBS Outlook Table 2008 outlook



US CMBS Multiborrower fixedrate transactions

n.a. Stable Aggressive underwriting was common as lenders often included pro forma income as current cash flow. Further, given the excess liquidity in the market in the first half of the year, more transactions included additional debt outside of the trust but which increased property level leverage nonetheless.

Large loan floatingrate transactions

n.a. Stable Adverse selection will continue to transpire in floatingrate transactions with stronger performing loans paying off leaving a higher concentration of weaker loans in the pool.

Single borrower transactions

n.a. Stable Fitch expects that the pace of acquisitions will slow as less capital is available and at less advantageous terms. Therefore, the agency expects the number of single borrower transactions to decline.

Retail property type

Declining n.a. Retail fundamentals have begun to weaken. Pressures resulting from lower consumer spending and significant new supply added in 2007 could impact retail property performance in 2008. Falling home values and higher interest rates have significantly reduced the level of cash out financing that had helped keep consumer spending at historically high levels.

Multifamily property type

Stable n.a. Supply is up, which is expected to somewhat offset gains in occupancies and rents. Regional market stresses such as additional pressure on the auto industry in Michigan and continued over supply in Texas, could impact performance.

Office property type

Stable n.a. New supply in 2007 combined with slower office employment growth may limit rent and net operating income l growth.

Industrial property type

Stable n.a. Potential weakness in markets driven largely by consumer spending and the housing market. The continued weakening of the US dollar and the subsequent impact on imports could also begin to negatively impact demand for warehouse storage space.

Hotel property type

Declining n.a. New supply is expected to place a strain on occupancy levels and Average Daily Rates resulting in further tightening of operating margins. The weaker US dollar may help boost performance in major tourist markets, but continued pressures on leisure travel combined with the possibility of a decrease in business travel due to current economic conditions could place further stress on the sector in 2008.

Source: Fitch

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Large Loan FloatingRate Transactions

Ratings Outlook: Stable Adverse selection will continue to transpire in floatingrate transactions with stronger performing loans paying off leaving a higher concentration of weaker loans in the pool. The lowestrated bonds, most of which are investment grade at issuance, are most at risk to be downgraded to speculative grade, although they may be somewhat insulated to losses by additional debt (such as B notes and mezzanine financing) held outside of the trust that would absorb losses prior to affecting any rated securities.

The upgradetodowngrade ratio for largeloan floaters for the 11 months to 30 November 2007 was 18.0 to 1. The downgrades were primarily attributed to one transaction that had weakening performance of the underlying collateral and resulted in three classes being downgraded.

SingleBorrower Transactions

Ratings Outlook: Stable Singleborrower transactions are generally secured by a geographically diverse crossed pool of loans to one borrower rather than a single large property, as was more common prior to 11 September 2001. Due to event risk and lack of diversity, many loans that would have secured a single asset transaction in the past are now included in larger multiborrower pools.

Fitch expects that the pace of acquisitions will slow as less capital is available and at less advantageous terms. Therefore, the agency expects the number of single borrower transactions to decline.

Rating activity for the first nine months of 2007 was positive with 42upgrades and one downgrade. The sole downgrade is secured by a credit tenant lease and included a residual value insurance policy. The ratings of the insurance provider were downgraded, which resulted in a downgrade to the transaction. Rating actions in 2008 are expected to remain stable.

Property Type Outlooks

Office Property Type Outlook: Stable Fitch expects the office sector to be stable in 2008, driven by slower office employment growth and a corresponding levelling off of rent growth. At the same time, new office completions are expected to rise to 94 million sq ft in 2007, the highest level since 2002, which could further temper net operating income (NOI) growth.

Large loan 14%

.

US CMBS Upgrades by Asset Type – 2007ª

ª Data through Nov 30 CMBS – Commercial Mortgagebacked Securities Source: Fitch

Single borrower

5%

Multiborrower 81%

Large loan 9%

.

US CMBS Downgrades by Asset Type – 2007ª

ª Data through Nov 30 CMBS – Commercial Mortgagebacked securities Source: Fitch

Single borrower

1%

Multiborrower 90%

Major metropolitan markets will continue to perform more strongly than suburban and tertiary markets where rent growth may be nominal and vacancies may begin to creep upward.

Retail Property Type Outlook: Declining Over the past year, retail fundamentals have begun to weaken. Pressures resulting from lower consumer spending and significant new supply added in 2007 could impact retail property performance in 2008. Falling home values and higher interest rates have significantly reduced the level of cashout financing that had helped keep consumer spending at historically high levels (resulting in slower retail sales growth of 4.7% as of July 2007, down from 8% a year earlier). In addition, new supply added in 2007 has resulted in rising vacancies across many markets and slower rent growth.

Multifamily Property Type Outlook: Stable Fitch expects the multifamily sector to be relatively stable in 2008. Continued job growth, albeit at a slower rate than the past few years, and household

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formations should bolster apartment occupancy levels and rents. In addition, as the residential market continues to be impacted by subprime issues, the multifamily market may benefit as subprime borrowers who are now unable to obtain mortgage financing return to the multifamily market for housing needs.

However, supply is also up, which is expected to somewhat offset gains. Regional market stresses such as additional pressure on the auto industry in Michigan and continued oversupply in Texas could impact performance. Transactions with loan concentrations in those geographical locations could be negatively impacted.

Hotel Property Type Outlook: Declining While generally viewed as more volatile, the hotel sector has seen strong growth over the past few years. However, with higher expenses and slower RevPar growth expected in 2008, Fitch expects the hotel sector will see smaller increases. New supply is also

expected to place a strain on occupancy levels and Average Daily Rates (ADRs), resulting in further tightening of operating margins. While the weaker US dollar may help boost performance in major tourist markets, continued pressures on leisure travel combined with the possibility of a decrease in business travel due to current economic conditions could place further stress on the sector in 2008.

Industrial Property Type Outlook: Stable The industrial sector is expected to be stable in 2008, with potential weakness in markets driven largely by consumer spending and the housing market. The continued weakening of the US dollar and the subsequent impact on imports could also begin to negatively impact demand for warehouse storage space. However, Fitch’s principal concern with industrial properties continues to be their ease of construction and low construction costs, which result in many borrowers and tenants building new structures rather than using existing vacant space.

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2008 European SF Outlook Table 2008 outlook

Market sector Asset class Asset performance Ratings 2008 areas to watch

European consumer ABS

All UK credit card sector, Spanish consumer/auto

France Stable Stable France still has one of the lowest consumer debt burdens in Europe so interest rate increases should have a negligible impact on performance.

Austria Stable Stable Germany Stable Stable/positive Continuously decreasing unemployment rate and growth

in net incomes expected to mitigate higher levels of indebtedness and increasing number of private insolvencies.

Italy Stable/declining Stable More aggressive origination standards and consumer default rates as these may increase rapidly

Portugal Stable Stable Little new activity, existing transactions in amortisation. Spain Stable Stable Overall economic outlook on Spain appears more

challenging than recent years, early signs of increasing arrears trend are being monitored.

UK credit cards Stable/declining Stable/negative Concerns about impact of weak housing market on unsecured consumer credit and extent to which debt management programmes are deferring, rather than avoiding, chargeoffs.

European commercial ABS

Corporate ABS (excl. WBS)and infrastructure

Stable Stable This broad asset group has few general trends but all transactions are vulnerable to special event risk. Most transactions will continue to meet expectations.

Aircraft ABS Stable/declining Stable High fuel costs remain a concern, as well as susceptibility to a downturn in economic activity.

WBS pubs declining Stable The outlook for pub transactions remains stable, albeit with a few concerns about asset performance linked to the effect of the smoking ban.

WBS care homes

Stable Stable The overall performance remains stable, bar the potential impact of new care standards in 2009.

WBS other Stable Stable The overall performance will be transactionspecific. Corporate ABS (excl. WBS)and infrastructure

Stable Stable This broad asset group has few general trends but all transactions are vulnerable to special event risk. Most transactions will continue to meet expectations.

European RMBS

Prime Stable/declining Stable/Negative Outlook depends upon country. Declining Asset Performance: UK, Spain, Ireland. Negative Rating Outlook: Recent vintage Spanish deals, particularly those backed by high LTVs loans, loans originated by regional banks operating outside of their local areas and particularly those originated through brokers. Certain German transactions carry the risk of further crystallisation of losses, especially, deals with a high concentration of investment properties or properties situated in the east

Subprime Declining Stable/Negative Market events during summer 2007 exposed certain deals for various reasons. Those with fixed/unhedged positions are especially vulnerable with Libor not yet stabilised. In addition, with many lenders having withdrawn products, borrowers will be less able to refinance and will therefore suffer payment shock.

European CMBS

UK Declining Stable/Negative Property values will decrease as required yields increase. Occupational markets expected to be stable but with moderate potential for decline.

France, Germany, Netherlands

Stable/Declining Stable/Negative Property values in Germany will stabilise from a few years of growth. Some downward pressure on values may occur if liquidity issues linger. France and Netherlands markets are expected to be more stable; however, the current liquidity situation could cause some dampening if it lingers long term.

Nonperforming Loans

Stable Positive As seasoning continues, upgrades are likely in all areas.

WBS – Whole Business Securitisation Source: Fitch

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n European Structured Finance In June 2007, Fitch introduced Rating Outlooks in European structure finance to provide more forward looking information to the market. Rating Outlooks, which were already published for corporate, financial institution, sovereign and municipal issuers, indicate the likely direction of any rating change over a one to twoyear period. Outlooks may be Positive, Negative, Stable or, occasionally, Evolving. As with other rating actions, changes in Outlook are accompanied by a rating action commentary (RAC) and will be reviewed along with the rating.

References in the text below to Outlooks on specific transactions may vary from the overall sector/asset outlook indicated in the headings.

n European ABS

European Consumer ABS The performance of European Consumer ABS continued to deteriorate in 2007, mainly driven by deterioration in the performance of the UK credit card transactions. Auto ABS accounted for 72% of overall issuance in H107 while new deals in the credit card sector remained low as originators remain focused on addressing performance issues seen in the current stressed environment.

In this report, Fitch examines the performance and outlook of consumer ABS for each major country of assets with UK card ABS reviewed separately. Fitch’s only rating actions in 2007 so far, other than affirmations and actions not covered in the following countryspecific categories, relate to the placing on Rating Watch Negative of three tranches of The Higher Education Securitised Investments Series No. 1 Plc, a UK student loan ABS. The action reflects the continuing uncertainty regarding future servicing arrangements.

France

Ratings Outlook: Stable Asset Performance Outlook: Stable There were no Fitch rating actions in 2007 other than affirmations. French ABS transactions have performed well, in line with Fitch’s base case, and are expected to continue doing so in 2008. Securitisation has never been as popular with French banks as with those in other countries, neither for funding diversification purposes nor for regulatory purposes. Most of the unsecured consumer deals were set up in early 2000 and most have been redeemed by now. French auto deals are quite recent, they are still in their revolving period and there is no noticeable trend in their performance.

The increase in interest rates might affect the current performance of the French consumer market leading to an increase of the household debt burden. However, it should be noted that French household indebtedness is among the lowest in Europe. Fitch therefore expects French ABS transactions to remain in line with past sound performance.

Austria and Germany

Ratings Outlook: Stable/Positive Asset Performance Outlook: Stable German and Austrian ABS transactions have generally performed in line with Fitch’s expectations. In Germany in 2007 to date, Fitch has upgraded five tranches and placed one tranche on Rating Watch Positive. These upgrades reflected the increase in credit enhancement as a result of amortisation of senior notes and overall performance comparing favourably with Fitch’s base case expectations. Looking at performance across all consumer ABS in these countries during the first half of 2007, delinquencies, gross losses and net losses remained stable and excess spread evidenced a slight improvement but only influenced two transactions, Silver Arrow and Free Mobility 3, as the other German transactions are all structured without the benefit of excess spread.

Delinquency rates have remained at low levels. Generally, the German consumer sector has benefited from a considerable increase in employment in 2007 despite the fact that the number of overindebted households has risen. The issuance activity in 2007 came from the auto loan and lease sector, and due to a significant number of transactions conducted in the first half of the year, overall volumes will be in line with previous years.

For 2008, the positive economic development is expected to continue although at moderated levels along with a further decrease in unemployment rates. Resulting from this, a stable to positive performance of Fitchrated transactions is expected.

Italy

Ratings Outlook: Stable/Declining Asset Performance Outlook: Stable Fitch’s rating actions in 2007 to date consisted of 11 tranches upgraded and 8 tranches where the Outlook changed to Positive. No tranches were downgraded; however, the Outlook for nine tranches was changed to Negative. The upgrades generally reflect the increase in credit enhancement since closing due to the amortisation of the notes and good performance relative to base cases. Fitch affirmed all ratings for Ducato Consumer S.r.l.. However, the Outlook on

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the class B and C notes changed to Negative from Stable because the overall performance has been deteriorating since May 2007 and compares negatively with Fitch’s base case expectations, although excess spread levels remain healthy. The Outlook for FE Gold’s notes was revised to Negative from Stable as the earlier originated portfolios by FinEco Leasing S.p.A. (FE Blue and FE Green) are performing better than the more recently originated portfolio (FE Gold). In particular, Fitch revised the Outlook to Negative from Stable for Italfinance Securitisation Vehicle 2 S.r.l. Series 20071, reflecting the possible operational risk as a result of potential further downgrades of Banca Italease S.p.A., the servicer.

Looking at the performance of all Fitchrated Italian Consumer ABS during the first half of the year, delinquencies and losses are still relatively low and the older transactions all report relatively stable performance. Compared to the last quarter of 2006, delinquencies, net losses and gross losses and excess spread were all slightly down by the end of November 2007.

Fitch expects the performance of Italian Consumer ABS deals to remain in line with past satisfactory performance — i.e., broadly in line with Fitch’s base case expectations. A slight deterioration of the credit quality of the consumer portfolios in 2008 might be caused by increased financial pressure on Italian households due to increased interest rates and growth of level of debt, although the level of debt among Italian families is still rather low compared to other EU countries. Also fierce competition in the consumer and auto loans market may cause originators to pursue a more aggressive origination strategy and consequent deterioration of underlying credit quality. So far, however, default rates have not shown signs of any significant increase.

Financial leasing market performance should not change in 2008; the agency expects stable borrower defaults rates given that the recessionary phase of the Italian economy seems to be over. Real estate leasing could experience some deterioration of the underlying credit quality given the end of real estate positive cycle, although Fitch does not expect significant impact on the performance of securitised contracts given that these are typically small ticket leases, which are less affected by changes in the overall real estate business cycle.

Some negative rating actions may need to be taken on the healthcare receivables side of the market, where the worsening financial condition of Italian regions and regional health authorities (ASLs) may result in downgrades of their ratings, which in turn may affect the ratings of securitised deals. As for

performance of Italian government deals, the agency expects these to remain stable and satisfactory throughout 2007.

Portugal

Ratings Outlook: Stable Asset Performance Outlook: Stable Fitch upgraded four tranches of the three Portuguese consumer loan transactions still outstanding: Nova Finance No. 2; Nostrum Consumer Finance; and Atlantes Finance No.2. The upgrades reflected the increased credit enhancement levels following amortisation of the senior notes and the satisfactory performance to date of these highly seasoned transactions. There have been no Fitchrated consumer deals in Portugal in 2007 and the existing transactions are expected to continue to perform satisfactorily in 2008.

Spain

Ratings Outlook: Stable Asset Performance Outlook: Stable Fitch’s only rating action other than affirmations in 2007 to date was for Santander Consumer Finance Spain 021. Fitch changed the Outlook for the class B notes to Positive from Stable because cumulative net losses currently remain far below the base case assumptions set at closing and the credit enhancement levels have increased sharply since closing.

Most other Spanish consumer ABS transactions are fairly recent, with the majority of the issued amount launched to the market during the past two years, and are still within their revolving periods. Reflecting the increased volume of Spanish consumer ABS transactions in the European market, Fitch included a separate country report for Spain in its latest European Consumer ABS Performance Index dated September 2007 (see “Eye on Europe The Fitch European Consumer ABS Performance Index 2007 (Vol II) (Europe ABS)”, dated 10 September 2007 and available at www.fitchratings.com). As a proportion of the volume of Fitch’s European consumer transactions, Spanish deals weigh in at 10.5%, third behind the UK and Italy.

Performance is in line with base case expectations, and as of H107 (the latest data available), the Spanish delinquency index on consumer loans stood at 1.06% compared with 1.8% for the European aggregate, while the Spanish index on auto loans stood at 0.87%, compared with 0.9% for the European aggregate. Delinquencies remain low and performance is well below revolving trigger levels.

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In the current environment, with an increasing trend in market interest rates, it is important to note that as most of the Spanish consumer exposure is linked to fixed rates, actual and future further increments on the interest rates curve is not expected to directly impact transaction performance. However, as the general economic outlook for Spain is expected to be more challenging compared to recent years, Fitch will continue to monitor the performance of transactions and look in particular for any indication of an increasing arrears trend.

UK Credit Card ABS

Ratings Outlook: Stable/Negative Asset Performance Outlook: Stable/Declining The first quarter of 2007 brought little respite to the deterioration in performance witnessed in 2006. In Q1o7, chargeoffs grew and excess spread continued to fall across the transactions. However, after reaching a peak of 7.8% in March 2007, the Fitch Chargeoff Index for UK Card ABS fell in April 2007 and has subsequently hovered around the 7% level, reaching 6.6% at the end of the third quarter, its lowest level for 16 months where it remained unchanged at the end of October. The Fitch Monthly Payment Rate (MPR) Index and Yield index have both been relatively stable to September, but increased by 260bp and 190bp, respectively from September to October 2007, both likely to be distorted by the higher day count in October. The Fitch Delinquency Index dropped 49bp from end of Q207 to end of Q307 and then remained relatively unchanged through October. While the third quarter in 2007 provided some positive indications, particularly with respect to chargeoffs and delinquency levels, overall UK credit card ABS transactions still reported levels of performance that were consistent with the stressed environment within which they are operating.

Individual voluntary arrangement (IVA) volumes, seen as a major contributory factor to the rising level of chargeoffs in 2006, fell for the first time in two years in the first quarter of 2007 and continued to decline in the two following quarters. Whilst the exact reasons for the fall are not yet clear, credit card originators have started to challenge IVA proposals which will have had a positive impact on the numbers. However, given the continued high levels of credit card debt and the still easy availability of IVAs, a significant reduction in insolvency volumes is not expected in the near term. There has been a decline in the number of bankruptcy orders in 2007, although this reduction has been less pronounced than the fall in IVAs.

There have been no upgrades or downgrades in 2007 to date. However the Outlook has been changed to Negative for the class A notes of Cumbernauld Funding No. 3 Plc and for the class C notes for Chester Asset Receivables Dealings Trust (CARDS) and Chester Asset Receivables Dealings II Trust (CARDS II). The change of Outlook to Negative from Stable reflects performance to date, the current market conditions and more specifically the current stress on the UK credit card industry, while taking into account the additional risk brought by originator specific debt management programmes, which can be seen as deferring rather than eliminating charge offs. Fitch placed all the ‘BBB’ rated class C notes for the Pillar Funding Trust on Rating Watch Positive in response to the servicer’s (Egg Banking Plc) return to more conservative reporting for the Pillar trust and the issuance of a privatelyplaced junior note, which increases the credit enhancement available to the existing notes. The reduction in delinquency levels due to Egg’s buyback in November of nonperforming receivables offsets concerns regarding the current performance of the trust. Fitch affirmed the ratings for Arran Funding Limited Series 2005A and 2005B following the restatement of yield, chargeoffs and excess spread by RBS, the servicer.

Credit card issuance was sparse in 2007, driven mainly by the continued poor performance of this asset class. While signs of improvement were seen in the latter half of the year, it remains to be seen whether this trend will continue. Fitch does not expect performance to improve significantly in 2008 and if macro economic conditions worsen, the agency would expect this to have a direct negative impact on credit card performance. Issuance in 2008 is expected to be limited given the current market conditions and the stressed environment in which the credit card industry is still operating.

.

Auto loans 14%

.

Europe ABS Upgrades by Asset Type – 2007ª

ª Data through Nov 30. ABS – Assetbacked securities Source: Fitch

Trade receivables

3% Equipment leasing/loans

25%

Unsecured consumer loans

24% Whole business 24%

Auto leases 10%

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Asset backed securities 61%

Whole business 23%

Europe ABS Downgrades by Asset Type – 2007ª

ª Data through Nov 30. ABS – Assetbacked Securities Source: Fitch


8%

Government 8%

European Corporate ABS (Excluding Aircraft and Whole Business)

Ratings Outlook: Stable Asset Performance Outlook: Stable This area covers a variety of asset groups with few repeat deals, the major sectors being corporate trade receivables, UK social housing and government related issues. Corporate securitisations in particular are often exposed to seller/servicer risk so rating actions generally tend to be linked to individual situations. As this is a broad, heterogeneous asset group, the rating actions that have occurred during this period have been attributable to situations specific to the transaction rather than any generalised trends across the sector. Performance has remained relatively stable and the only rating actions other than affirmations are explained below.

Fitch upgraded one tranche for CF Finance, an Italian trade receivable ABS due to good performance and increased credit enhancement due to amortisation. Fitch downgraded to ‘B’ from ‘B+’ the class T notes for SAGRES STC Explorer 2004 Series 1, resolving the Rating Watch Negative from earlier in the year and assigning a Negative Outlook. This action reflects the risk that the current collections may not be sufficient to guarantee the full payment of principal and interest of these notes at final legal maturity. Fitch repeatedly downgraded the Havenrock II Limited transaction which consists of loan facilities provided by IKB Deutsche Industriebank AG and IKB International S.A. and changed the Outlook to Negative. The rating actions are the result of rating migrations in the portfolio referenced by the Havenrock II credit default swap.

Issuance in the Corporate ABS sector is difficult to predict but there are increasing signs of interest in insurancerelated transactions, banks seeking to

release capital against assetbacked loans (e.g., ships and aircraft) and regulatory assets in some countries. Although it is hard to generalise with such a broad asset group, there are no classes (with the exception of Sagres and Havenrock) that at this stage cause any credit concerns and both asset performance and ratings are expected to remain stable.

European Aircraft ABS

Ratings Outlook: Stable Asset Performance Outlook: Stable/Declining The only ratings actions other than affirmations consisted of placing six tranches on Rating Watch Negative for Iberbond 1999, 2000 and 2004. This was related to a possible acquisition by a private equity group of the underlying corporate, Iberia Airlines. Iberbond 1999 has since been repaid in full.

In common with the US airline industry (see text box, Airline Industry Fundamentals, page 16) the European airline industry posted robust passenger traffic figures for the first nine months of 2007, which were 5.1% up on 2006, with capacity again rising by 4.2% for the same period. Consequently, the load factor increased by 0.6% to 77.7% (source: Association of European Airlines (AEA)). Consistent with prior years, these figures do not include the largest lowcost carriers, which do not aggregate their statistics with those of the AEA.

Individual European countries’ domestic routes have seen little change in capacity. Therefore, growth has been in the mediumhaul sector (geographical Europe), where load factors have also improved, and the longhaul sector, particularly for the South Atlantic albeit with a slight reduction in its load factor. For the lucrative North Atlantic routes, traffic was up by 4.9% with the load factor falling by 0.8% as consistent with last year, additional capacity has outstripped traffic growth.

The industry continues to be beset by issues that have surrounded it for years: the threat of terrorism with security across Europe remaining tight, particularly for carryon luggage; high fuel costs with some airlines continuing to increase fuel surcharges to mitigate some of the increased cost of fuel; the growing acceptance of lowcost carriers and their ability to draw business from the traditional airlines, mainly in the shorthaul segment but with the potential for them to enter certain longhaul segments; and environmentalists who continue to target air travel alongside their campaigns against car usage.

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In March 2007, the “open skies” agreement between the EU and US was ratified. It will come into effect on 30 March 2008. This deal has provided a level playing field within Europe for US airlines serving Europe but does not enable EU airlines to operate domestic US services. Whilst this split might appear inequitable, the ability of US airlines to expand into Europe will continue to be constrained by some countries’ lack of runway capacity at their main hub(s). Incumbent airlines generally hold the majority of runway slots at their major hubs e.g. BA and BMI hold 40% and 12% of slots, respectively, at London Heathrow, although additional slots are available at Paris and Frankfurt. Fitch expects that US and EU airlines will continue to cooperate, such as the recently announced joint venture between Air FranceKLM and Delta.

In line with the increases in passenger numbers, freight traffic increased by 2.6% for the first nine months of 2007 compared with the same period last year. Cargo transport in domestic markets fell. However, there was strong growth from Europe to North Africa and the South Atlantic.

Consolidation in Europe remains high on the agenda with Iberia and Alitalia being the current prime candidates. The consortium led by TPG and British Airways has pulled out of the bidding for Iberia, leaving only one remaining bidder, Gala Capital. The Italian government has for some time now been trying to dispose of its 49% stake in Alitalia. Only Air FranceKLM and Air One have so far put in non binding bids.

European Whole Business

Ratings Outlook: Stable Asset Performance Outlook: Stable Pub Sector: Stable/Declining; Care Homes: Stable/Stable; All Other Sectors: Stable (Transaction Specific) In 2007, the overall performance of whole business securitisation (WBS) transactions was stable with 48 tranches affirmed (for 11 transactions), three tranches downgraded (Globe Pub Issuer Plc and Fixed Link Finance BV (FLF)) and seven tranches upgraded (Punch Taverns Finance, FLF).

Apart from these rating actions, 20 tranches were paid in full, including Tussauds Finance Limited, Avebury Properties Ltd., Craegmoor Funding No. 2 Limited, UK Hospitals and Red Funnel Finance PLC.

Fitch lowered the ratings of both tranches for Globe as a result of the trailing 12month EBITDA being 12.4% short of the runrate used by Fitch at close in 2006. The main reasons for the lower EBITDA were

the high number of pub closures due to refurbishments and high tenancy turnover.

Following FLF1’s receipt of cash from Eurotunnel, which refinanced its debt in June 2007, Fitch upgraded the class G, A1, A2, B1 and B2 notes of the transaction to ‘AAA’. However, the class C notes are expected to incur a capital loss with an estimated recovery between 70 and 90%, so were downgraded to ‘CCC’ with a Recovery Rating of DR2.

For 2008, the outlook for pub transactions remains stable, albeit with a few concerns about asset performance linked to the effect of the smoking ban. Fitch has noted that summer trading results from pub transactions were down yoy mainly due to a combination of poor weather, absence of a major worldwide sport event (like the football World Cup in 2006) and the start of the smoking ban, introduced in England on 1 July 2007. The agency will wait for winter figures for England and other parts of the UK, available as of March 2008, to assess the impact of the smoking ban. In the meanwhile, Fitch has published a short update entitled “Clear of Smoke but Too Early to Breathe?” UK Pub Industry Update”, dated 26 November 2007 and available at www.fitchratings.com.

In the healthcare sector, which includes nursing homes and private hospitals, Fitch expects the overall performance to remain stable, bar the potential impact of new care standards in 2009. The private hospitals sector should continue to benefit from the delays incurred by the National Health Service (NHS) in achieving its waiting targets and the slow implementation of the new NHS Choose andBook system, a new system that will allow patients to select the NHS hospital in which they have treatment rather than automatically be directed to the nearest to their home.

In other sectors, the overall performance will be transactionspecific.

Fitch expects new issuance from new entrants in existing sectors, from new sectors and the continuing refinancing/tapping of existing deals.

n European RMBS The majority of rating actions in the first nine months of 2007 were upgrades of tranches in deals with stable performance and sequential paydown and static reserve funds resulting in increased credit enhancement.

The continued strong performance of most European RMBS resulted in upgrades in this sector outnumbering downgrades by more than 30:1 in the first nine months of 2007. This was an improvement

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on the position 12 months earlier, when the upgrade to downgrade ratio was over 20:1.

Further downgrades to Provide Gems 20021 in Q207 came as elevated losses continued to be realised. The ratings outlooks on all but the class E notes are currently negative, reflecting ongoing concern given loan concentrations in the former East Germany and the high proportion of second charge loans in this deal.

Onethird of the sector upgrades during the period relate to 29 tranches from eight of the first 10 issues from Northern Rock’s Granite master trust and all six tranches from Whinstone Capital Management Limited, which references the reserve funds from the “capitalist” Granite issuers.

The Netherlands continued to see strong performance resulting in 60 upgrades in the period January to September 2007. Nine German RMBS tranches were also upgraded, along with six Italian tranches, three Greek, two Irish and two Belgian tranches.

European Prime RMBS (Spain)

Ratings Outlook: Stable/Negative Asset Performance Outlook: Declining Since the end of Q307, the performance of Spanish RMBS issued in 2006 onwards has deteriorated to the extent that the two junior tranches from TDA 25, Fondo Titulizacion de Activos, were downgraded in October 2007. The downgrades followed two draws on the reserve fund and higher than expected three month plus arrears and defaults for the deal’s stage of seasoning. The reserve funds fell to a level below that at closing, resulting in a reduction of credit enhancement to both class C and D. The high arrears plus the presence of an IO strip, on top of the provisioning mechanism, is reducing the amount of excess spread that might otherwise be available to replenish the reserve fund. At the same time as the downgrade, the two lowest tranches had their rating Outlooks changed to Negative from Stable, as continued uncertainty over the timing and size of future recoveries remains.

Generally, the Spanish mortgage market faces deteriorating performance due to affordability issues exacerbated by interest rate rises and a 97% variable rate market. The 2006 vintage of deals has seen increased migration to higher average LTVs in transactions, as well as other more recent features, such as – among others — originators diversifying away from their core region to other regions of Spain, often using broker distribution networks. A result has been increased arrears at a relatively early stage,

culminating in many transactions seeing early reserve fund draws. Most of these draws have been amplified by the financial structure of the transactions in question, which include provisioning for defaulted loans. For these reasons, more recent vintage Spanish deals face a Negative rating Outlook.

European Prime RMBS (Excluding Spain)

Ratings Outlook: Stable/Positive Asset Performance Outlook: Declining/Stable The outlook for 2008 is more uncertain than in previous years for all European countries following the “credit crunch”. Interest rates have continued to increase, both in the UK and across the euro zone, putting pressure on arrears. This is especially true for transactions in countries with high proportions of floating rate loans, although any payment shocks are likely to be less marked outside of the UK, where shortterm teaser rate products are less prevalent.

In the UK, house price inflation seems to be coming to the end of its long upward run as past interest rate rises and the influence of the credit crunch take effect. As a result of these factors, plus the general uncertainty in the market, the volume of new lending dropped significantly in October 2007 and many house price indices have reported monthly price drops for October and November.

This lower level of lending may impact on the master trust programmes though reduced levels of substitution. Granite, in particular, has been the subject of much media speculation and the future of this programme depends to a large extent on what happens to Northern Rock. The bank was downgraded twice in quick succession in September 2007, the latest rating action resulting in a stable outlook and upwardly revised Support Rating Floor of ‘A’ and a Support Rating of ‘1’. The ratings of all tranches issued from the “socialist” Granite Master Issuer currently have Stable rating Outlooks which are not expected to change due to original ratings encompassing many different scenarios, including discontinued substitution by Northern Rock. All outstanding notes from the Granite programme were affirmed in September 2007, when the final ratings to notes from Granite Master Issuer plc Series 200703 were assigned. Other UK prime master trusts are similarly expected to retain stable ratings, despite the slowing down of the UK mortgage and housing markets and likely declining asset performance.

Ireland, which has experienced very strong house price appreciation over the past 10 years or so, is now seeing a decline in property prices, with prices

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dropping in most months of 2007 to date. Even if this downturn accelerates, this is unlikely to impact Fitchrated Irish RMBS transactions outstanding due to high levels of seasoning and low LTVs.

In Italy and Portugal, higher principal payment rates are expected, as refinancing becomes more prevalent due to legislation reducing the extent of prepayment penalties in these countries. While this will accelerate the accumulation of credit enhancement to lower rated notes as transactions amortise, it will also mean a reduction in available excess spread to absorb losses as the volume of the portfolio declines faster.

European Subprime RMBS

Ratings Outlook: Stable/Negative Asset Performance Outlook: Declining The majority of deals in the sector are still backed by UK assets, 54 tranches of which were upgraded during the period under review, with a further three being upgraded in October 2007. Of the few nonUK nonconforming transactions, two tranches from the Irish subprime transaction Lansdowne Mortgage Securities No. 1 Plc were upgraded in August 2007.

Most upgrades related to the more seasoned UK transactions, for example the Leek, Mortgages plc, RMAC and Southern Pacific programmes, as credit enhancement continued to grow as a result of the sequential paydown of notes. In addition, three of the upgraded tranches were from the first Rooftop transaction, Farringdon Mortgages No. 1 Plc (FM1), where the three junior tranches were upgraded in April 2007. The high arrears and higherthan expected expenses that had led to the earlier reserve fund draw in this deal (and ultimately to the downgrades of these same tranches in 2006), have now stabilised and performance of the transaction has strengthened. Only the most junior tranche of notes, class B2a, remains below its initial rating.

The main influences on performance in the subprime sector in 2008 will be whether the disparity between the Bank of England base rate and Libor continues and whether the range of products available in the market continues to be highly restricted.

The summer liquidity crisis and resultant socalled credit crunch signalled a significant negative change for the performance prospects of the sector. On 22 November 2007, the junior tranches of Ludgate Funding Series 20061 FF1 (Ludgate 061) had their rating Outlooks revised to Negative, along with the junior tranches from the 2006 issues in the RMAC series. While the specific reasons behind the changes in outlook differ, they all relate to the turmoil seen in

the market over the summer of 2007 following performance issues in the US subprime sector.

On 5 December 2007, Fitch changed the Outlooks for 43 tranches of 17 UK nonconforming RMBS transactions to Negative from Stable. The revision in Outlooks for these tranches reflects the deteriorating outlook for the UK nonconforming sector as a whole following the impact of the summer 2007 liquidity crisis. The transactions have features that are deemed most at risk of performance deterioration or prolonged interest rate dislocation. At the same time, all 263 tranches outstanding were affirmed. On 6 December 2007, the class S notes from Ludgate 061 were downgraded to ‘B’ from ‘BB’.

Rates payable on many UK subprime mortgage loans are linked to Libor rather than BBR and rates are reset quarterly. For Liborbased borrowers, the increase in Libor will again lead to a large payment shock when it resets in December 2007, as it did in September 2007 when the LiborBBR disparity was at its highest.

Structurally, certain deals include no hedging to cover the mismatch between the fixedrates due on the loans and the floating rate due on the notes. This is expected to lead to significant reserve fund draws over the coming quarters, for example in the 2006 issues of the RMAC series.

Prime RMBS 73%

Subprime RMBS 27%

Europe RMBS Upgrades by Asset Type – 2007ª

ª Data through Nov 30. RMBS – Residential Mortgagedbacked Securities Source: Fitch

The outlook for 2008 is more deal specific than in previous years. Lengthy continued dislocation in interest rates described above will affect a number of deals with unhedged positions, irrespective of underlying collateral performance. Oil prices remain high and rising food prices have added pressure to headline inflation, although core measures have been more subdued and survey based measures of inflation expectations have levelled off since the summer. Downside risks to activity from tighter

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credit conditions, a weakening housing market and slower external demand growth are starting to carry greater weight in the MPC's assessment of the two year inflation outlook and interest rates are likely to be cut again in the first quarter of 2008. But this would still leave policy interest rates 75 basis points higher than 2006Q1, with Libor even higher, adding to the strain on borrowers in servicing higher levels of mortgage debt.

Last year, the entrance of new lenders in the sector was a significant feature of the market, amid concerns of how the market could accommodate so may mortgage originators. Even prior to the fallout from the US subprime market in the summer of 2007, Fitch expressed doubt that there was room for all players without adverse migration of credit standards. More aggressive products did emerge – in terms for example of LTV ratio, extension of selfcertified products and more unlimited adverse products. The credit crunch brought an abrupt end to these developments and sparked mass product withdrawals, tightening of credit and product repricing to help preserve available funding. As a result of funding challenges, one of these new lenders, Victoria Mortgages, has ceased trading. Some hitherto well established nonconforming lenders have pared back their participation in the subprime space to virtually nothing.

Borrowers will therefore find it much more difficult to refinance their loans on expiry of lower teaser rates, as products have been withdrawn from the market. This means voluntary prepayment rates will slow and more borrowers will remain in portfolios of existing deals and become delinquent. Product withdrawals relate particularly to high LTV, heavy adverse credit loans and second charge borrowing, among others. Transactions with significant exposures to such products which have teaser rates yet to reset are therefore more exposed to deteriorating performance and potential adverse rating action.

The November house prices figures generally show house prices starting to drop – it remains to be seen whether this is a temporary effect of the credit crunch disruption, or whether house price declines will gather pace. While earlier transaction vintages will have built up a large degree of equity protection through house price inflation, more recent vintages – particularly 2007 transactions – will have more minimal protection via this route and could see it erode completely if house prices start to decline more stridently. While 2007 vintage transactions will not yet see extensive teaser expiry, those mortgages that do default can be expected to see lower

recoveries and higher loss severities than have been seen in the recent past.

As with previous Bank of England base rate increases, threemonth plus arrears, as shown in the Fitch UK nonconforming index, did not increase until two years after the first rate rise in 2005. This was not unexpected, given the high proportion of loans on teaser rates, typically lasting for around two years. With respect to the base rate rises seen in 2006 and 2007 and recent increased Libor rates, while the Q207 index showed a 6.6% increase in arrears from the previous quarter, by end Q307 the increase had fallen to 2.7%. The full impact is therefore unlikely to yet have been reflected in threemonth plus arrears cases. Repossessions continue to climb in a number of transactions and are expected to continue to do so given market conditions.

All the factors described are the major drivers in revising Rating Outlooks to Negative from Stable. Extensive tapping of reserve fund credit protection should be expected in the coming months.

n European CMBS

European Standard CMBS

Ratings Outlook: Stable/Negative Asset Performance Outlook UK: Declining Asset Performance Outlook Other Europe: Stable/Declining The European CMBS market continued to grow rapidly in the first half of 2007. Compared to the first half 2006, volume was up by 54% (EUR34bn versus EUR22bn). However, like all other structured finance classes, volume decreased significantly during the second half. The slowdown will result in transaction volumes similar to that in 2005.

During 2007, CMBS performance worsened slightly but, on a whole, has remained stable. Between January and November, 399 tranches have been affirmed, 59 upgraded and only 10 downgraded. As in previous years, the upgrades were usually caused by prepayments and increased seasoning (and the resulting increase in property value or rent receipts), and was especially prevalent in multiborrower transactions. All downgrades were triggered by performance issues, unlike in 2006, when 12 of the 13 downgrades had been caused by the downgrade of creditlinked entities, either corporate or sovereign. The number of upgrades amounted to 41 in 2006, whereas 416 tranches were affirmed.

Between January and November 2007, parts of five transactions were downgraded for performance reasons: DECO Series 2005–UK Conduit 1 Plc,

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DECO 6 – UK Large Loan 2 plc, Deutsche Hypothekenbank (Actiengesellschaft), Hannover 19991, European Prime Real Estate No. 1 plc and S.C.I.P — Societá Cartolarizzazione Immobili Pubblici — S.r.l. The downgrades were for a variety of factors including borrower defaults, property development and poor financial performance.

During 2007, there were two transactions in which the AFC mechanisms were used. This is usually caused by prepayments in sequential, or modified sequential transactions, and happens because a prepayment of loans causes a high percentage of higherrated, loweryielding notes to be paid off. The remaining lowerrated notes have higher required interest rates, and in some instances, the required interest rate on these notes can surpass that being supplied by the pool’s assets, in this case, the commercial mortgage loans. If there is a shortfall, there can be a default if interest cannot be deferred or an AFC is not in place. The available funds cap simply extinguishes any interest shortfall on that particular class for that particular period. The transactions affected in 2007 were, Coronis (European Loan Conduit No. 8) Plc and Titan Europe 20041 p.l.c.

Additionally, a higher number of loan defaults occurred in 2007, albeit at very low levels, and as could reasonably be expected with the significant increase in rated transactions. These defaults were either technical or payment in nature, and occurred in the following transactions: Titan Europe 20062 plc, Titan Europe 20063 plc, and Titan Europe 20065 plc. These have not negatively affected the ratings on the notes as they have been on a relatively small percentage of these transactions.

Single borrower 10%

Europe CMBS Upgrades by Asset Type – 2007ª

ª Data through Nov 30. CMBS – Commercial Mortgagebacked securities Source: Fitch

Nonperforming 8%

Multiborrower 82%

Single borrower 10%

Europe CMBS Downgrades by Asset Type – 2007ª

ª Data through Nov 30. CMBS – Commercial Mortgagebacked securities Source: Fitch

Multiborrower 90%

Outlook As happened during the second half of 2006, Fitch expects a general tightening in credit terms and conditions to persist over the short term across much of Europe. This should create a shift in equilibrium between debt and equity and should cause high leverage investors to be less active in the market. The number of property transactions in the market will undoubtedly slow, and the agency expects a flight to quality causing a general reweighting away from secondary assets and specialist asset classes (such as student housing, nursing homes, pubs and hotels) towards prime assets, especially in the UK. High quality assets in liquid markets where property development is more controlled will suffer less — e.g., Paris CBD offices. Also, those markets (such as Germany and the Netherlands) which are recovering from a more sanguine past should also remain more stable. However, these markets can be negatively affected if the current liquidity conditions persist for a long period. Some established markets, such as London and the rest of the UK, which have experienced extraordinary tightening in underwritten capitalisation rates, may suffer a longer or steeper correction.

Transactions most likely to be affected negatively are as follows:

• UK transactions (and to a lesser extent, other transactions) closed in the last two years with short maturity dates (less than four years).

• Transactions with lower debt service coverage ratios (DSCRs), especially with higher than normal lease expirations.

• Multijurisdictional, multiborrower transactions with high loantovalue (LTV) ratio loans included in them. This is more of a risk for the lower rated tranches.

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Mitigating these risks are the following:

• Most transactions are longer term and refinance risk is limited within the next two years, especially for transactions closed within the last two years.

• Underlying cash flows supporting the mortgage loans are usually long term in nature, many supported by rents from high quality tenants.

• Most of the underlying mortgages are fixed rate to the borrower, thus fluctuations in interest rates during the term have less of an impact on default rates.

• Occupational markets remain relatively stable. They will be under more pressure if the current liquidity situation persists.

Overall, the outlook for 2008 CMBS performance is more stable to negative for the UK, and more stable with some potential for negativity in continental Europe.

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n Global CDOs Global CDOs faced difficult challenges in 2007 as a result of the US subprime residential mortgage crisis earlier in the year and the ensuing liquidity problems that riled the global credit markets. Many SF CDOs with varying levels of exposures to US subprime residential mortgages experienced a significant amount of stress and a precipitous decline in their ratings performance. These credit problems also created a ripple effect in other CDO sectors. For

instance, the housing market woes spread to residential and commercial REITs which in turn negatively affected some CDOs of US trust preferred securities (TruPS) issued by these REITs. US commercial real estate (CRE) CDOs, CDOs of CDOs, some European and AsiaPacific SF CDOs also suffered to the extent they had US subprime RMBS exposures, while liquidity issues impacted CLOs and MV CDO structures. These market worries have resulted in a significant slowdown in

2008 Global CDOs Outlook Table 2008 outlook

Market sector Asset class Ratings performance

Asset Performance 2008 areas to watch

Global CDOs Investment grade (IG) Corporate CDOs

Stable/Negative (US/Europe); Negative (Asia Pacific

Stable/Declining (US/Europe/Asia Pacific

Potential for increased correlation and contagion risks

High Yield (HY) Bond CDOs

Stable/Negative Stable/Declining Potential for higher default rates

Leveraged Loan CDOs (CLOs)

Stable/Negative (US/Europe); Stable (Asia Pacific)

Stable/Declining (US/Europe); Stable (Asia Pacific)

Covenantlite & secondlien loans for US CLOs, refinancing risks

Market value (MV) CDOs

Negative Declining MV CDO exposure to RMBS sector, MV declines

US CDOs Pre2003 Vintage Diversified Structured Finance (SF) CDOs

Stable Stable Historically poor performance due to exposure to underperforming sectors

High Grade Residential Mortgage Backed Securities (RMBS) CDOs

Stable Declining Exposure to other underlying SF CDOs

Mezzanine RMBS CDOs

Stable Declining Exposure to subprime RMBS

Commercial Real Estate (CRE) CDOs

Stable/Negative (Nonfirst Loss CRE CUSIP) Stable (CREL CDOs); Negative (First Loss CRE CDOs)

Stable (Nonfirst Loss CRE CUSIP& CREL CDOs) Declining (First Loss CRE CDOs)

First loss CUSIP deals and CREL deals collateralised by highly leveraged subordinate debt positions

Middle Market Loan CDOs Stable/Negative

Stable/Declining Lower expected prepayment rates on referenced loans, slower amortisations for senior CLO tranches

Trust Preferred (TruPS) CDOs

Stable (Bank & Insurance TruPS); Negative (REIT TruPS)

Stable (Bank & Insurance TruPS); Declining (REIT TruPS)

Underperformance of REIT TruPS CDOs

European CDOs

Small and Mediumsized Enterprise (SME) CDOs

Stable Declining Spanish SME CDOs have high concentration in real estate

Europe & Asia

SF CDOs CDOs of CDOs

Stable

Stable (Europe); Stable/Negative (Asia Pacific)

Declining

Stable (Europe); Stable/Declining (Asia Pacific)

Exposure to US subprime RMBS, Spanish RMBS & UK nonconforming RMBS

Vulnerable to corporate default risk

Source: Derivative Fitch

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issuance in many CDO types as investors retreated to the sidelines.

As of the end of November 2007, Fitch downgraded a total of 1,217 tranches, upgraded 302 tranches and affirmed 3,163 tranches of Fitchrated global CDOs. These global rating actions are, not surprisingly, clustered in the SF sector. Approximately 70% of total tranche downgrades were in the global SF sector. On 29 October 2007, Fitch completed the review of 431 global SF CDOs with RMBS exposures and the following month resolved transactions that were placed on rating watch status. In total, Fitch’s rating actions resulted in the downgrade of USD67.0bn (USD and USD equivalent) of liabilities across 158 global SF CDO transactions. Fitch also rates an additional 273 SF CDOs that were not subject to rating actions during that review period. For more analysis on these rating actions, please see Fitch’s “Summary of Global Structured Finance CDO Rating Actions” report, dated 29 November 2007 and available at www.fitchratings.com.

CDO asset managers, especially those whose businesses were heavily dependent on SF CDOs, were not spared by the credit downturn. For

established and new managers alike, these challenging times tested their companies’ financial wherewithal, credit skills and abilities to navigate a volatile credit market. In 2007, some high profile asset managers were put under pressure because of their exposures to subprime mortgages and SF CDOs. In the SF sector, Fitch’s CDO Asset Manager (CAM) ratings team has reviewed a total of 23 managers, and taken actions on most of them. To date, there are eight CAM ratings downgrades and nine affirmations, with the remaining SF CDO managers either under review or on Rating Watch Negative. Only a few SF CDO managers have distinguished themselves in terms of performance. These managers had limited their exposures to the problematic 2006 and 2007 vintage subprime RMBS collateral that have caused much of the deterioration in SF CDO portfolios. As a result, these managers were able to enhance their performance track records compared with their competitors. Ultimately, it is the intangible factors such as managers’ welltimed decisions to remove themselves from an overheated market that distinguish the strong managers from their peers. Fitch attempts to capture these factors in its CDO manager reviews and ratings.

Despite the hurdles mentioned, a few notable transactions emerged in the global CDO and credit derivatives market in 2007 including the development of new structures and asset types, such as commoditieslinked credit obligations (CCOs), the application of credit default swap (CDS) technology in CLOs or loanonly CDS, CDOs of European projectfinance and infrastructure portfolios and CDOs of US municipal bonds and loans. In the AsiaPacific region, investors are showing an increased interest for CLO structures, partly driven by Asian banks who are seeking to transfer a portion of their corporate credit risk in response to Basel II requirements. In addition, the nascent credit derivative product companies (CDPCs) sector grew in 2007. The number of such vehicles has increased to 10 yeartodate from only two transactions a year ago. CDPCs are structured operating vehicles that sell protection in the form of credit default swaps, primarily on single name corporate entities and synthetic tranches of corporate names.

Fitch expects the challenging credit conditions to persist in 2008 in terms of CDO credit ratings performance and future issuance. The agency believes that the current ratings performance issues may not only be contained within SF CDOs but could potentially spread into other CDO types. In the past few years, the global structured credit markets have been characterised as a period of rapid product innovation, aggressive issuance, borrowerfriendly and loosening lending standards and increasing

SIV Market Update SIVs have also experienced ratings pressure due to the US subprime mortgage and liquidity crises. SIVs rely on shortterm funding via the issuance of CP and mediumterm notes (MTNs) to purchase assets with a weighted average life (WAL) of approximately 3.5 years and an average ‘AA’ rating. However, this reliance on the ability to refinance the debt has meant that these structures are susceptible to the current weak credit environment. Many SIVs had to refinance a bulk of their debt or liquidate assets right at the boiling point of the market turmoil. Fitch has seven outstanding public ratings on SIVs. Fitch’s senior note ratings are assigned to notes issued by SIVs based on the vehicles’ ability to meet its obligations even upon the liquidation of the portfolio. As of the end of November 2007, Fitch has taken rating actions on three SIVs. Currently, two Fitchrated SIVs have defaulted, namely Rhinebridge in October 2007 and Axon in November 2007. Both vehicles defaulted because they were unable to secure funding in the market, were forced to sell assets at distressed prices, and suffered mark to market losses on the remaining portfolio which had 100% structured finance exposure. For a more detailed analysis on this sector please see Fitch’s “SIVs Rating Performance Update – Issue 4”, dated 17 December 2007 and available at www.fitchratings.com.

http://www.fitchratings.com/

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leverage usage, which may extend beyond US RMBS to other structured products as well as the broader corporate markets. Fitch is currently undertaking a comprehensive review of its current CDO ratings methodology and model assumptions to provide the most prospective and stable CDO ratings as possible. The key factors that are being examined include default probabilities, ratings migration, credit concentrations and recovery assumptions. Fitch announced on 7 November 2007 that it will not be publishing new ratings on CDO transactions that may be impacted by these criteria changes until the methodology reassessment is completed.

The following sections provide a sectorbysector analysis of Fitch’s 2008 global CDO ratings and asset performance outlook. Fitch frequently monitors all outstanding CDO transactions and may revise its ratings and asset performance forecasts when it deems necessary to reflect the rating agency’s most current credit views.

HY Bond CDOs 13%

CRE CDOs 65%

Structured finance CDOs 7%

Trust preferred CDOs 5%

IG corporate CDOs 5%

Other CDOs 0%

SME CDOs 2%

HY loan CDOs 3%

US CDO Upgrades by Asset Type – 2007ª

ª Data through Nov 30. CDO Collateralized Debt Obligations Source: Fitch

Market value CDOs

10% Structured finance CDOs 77%


HY bond CDOs 2%

CRE CDOs 1%

Other CDOs 4%


US CDO Downgrades by Asset Type – 2007ª

ª Data through Nov 30.CDO – Collateralized Debt Obligations Source: Fitch

n Global Investment Grade (“IG”) Corporate CDOs

Ratings Outlook: US & Europe IG Corp. CDOs: Stable/Negative Asia-Pacific IG Corp. CDOs: Negative Asset Performance Outlook: US & Europe& Asia Pacific IG Corp. CDOs: Stable/Declining Global investment grade (IG) corporate CDOs exhibited mixed ratings performance in 2007. This sector is mostly composed of synthetic transactions including synthetic bespoke inner CDOs of CDOs. While there were no major defaults in the global corporate sector in 2007, the aggressive LBO activity during the period has increased the percentage of noninvestment grade positions in many CDO portfolios. The active pace of LBOs, fuelled mostly by private equity shops, generally resulted in significant changes in companies’ capital structures and increased the risk associated with the entities’ debts. This increased exposure to LBO activity has led to the downgrades of some IG corporate CDOs, as well as synthetic bespoke inner CDOs of CDOs.

Synthetic IG corporate CDOs are either categorised as static or activelymanaged. Managed transactions in 2007 exhibited better performance globally, with less than 1.0% of all rating actions consisting of downgrades, while 4.4% were upgrades. In contrast, global static transactions resulted in approximately 12.5% downgrades and 1.4% upgrades based on a percentage of total outstanding par balance. Fitch expects this trend to continue in 2008 given the ability of managers to trade out of assets that are deemed to pose greater credit risk in their portfolios.

Asia Pacific originated IG corporate CDOs suffered the highest number of downgrades in 2007 with 37 tranches affected. These downgrades are concentrated on static transactions and are due to limited surplus credit enhancement in the transactions at closing coupled with the negative ratings migration in the static referenced portfolio due to the multinotch downgrades of several LBO entities as well as the general migration of a number of referenced entities.

Seven tranches were downgraded in the US and a single tranche in Europe. Fortyseven European and nine US IG corporate CDO tranches were upgraded. These upgrades were largely driven by the reduced risk horizons that remain in the transactions before they reach their maturities. The regional breakdown of affirmations is 260 European, 79 US and 18 Asia Pacific tranches of IG corporate CDOs.

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Fitch expects US and European IG corporate CDOs ratings and asset performance to be stable in the near term because IG corporate collateral is currently considered to be broadly well positioned to meet liquidity needs. LBO activity has recently subsided; however, it may become prevalent in the medium to longer term. In contrast, Fitch expects Asian IG corporate CDOs to experience further negative ratings migration.

The areas of concern in this sector include the potential for increased correlation and contagion risk. In addition, the question remains about the degree to which certain sectors, such as homebuilders, which have already been impacted by the RMBS crisis along with the liquidity crisis, will experience additional stress.

n Global HY Bond CDOs/CBOs

Ratings Outlook: US & Europe CBOs: Stable/Negative Asset Performance Outlook: US & Europe CBOs: Stable/Declining The issuance of CDOs backed by high yield (HY) bonds or collateralised bond obligations (CBOs) has stagnated as investors avoided this sector due to the underperformance that resulted from the high levels of corporate defaults in 20002002. Although the peak of HY CBO issuance occurred between 1997 2000, there are several transactions that remain outstanding to date. The high corporate default rates in that period led to a set of circumstances where there was no incentive for equity investors to call CBO transactions. As a result, the transactions continued well beyond their expected maturities. Fitch has continued to actively review these transactions given that they tend to require further rating actions.

Globally, from January to the end of November 2007, Fitch affirmed 69 tranches from 27 CBO transactions. The downgrades impacted 23 tranches (one European and 22 US CBO tranches) from 14 transactions, while 32 tranches were upgraded (six European and 26 US) from 13 transactions. This split of upgrade and downgrade rating actions has been the combination of measured redemptions of the underlying high yield bonds leading to amortisation and improving credit enhancement of the CBOs’ senior tranches. In addition, any credit deterioration occurring to one or more of the underlying high yield bonds puts additional stress on the current lowest rated CBO tranches, which may no longer have any remaining equity subordination due to the years of previous defaults. This is further magnified by the fact that many of these portfolios have become

smaller and less diversified, leaving the lowest tranches more vulnerable to single asset credit events.

The downgrades are largely a result of collateral deterioration and principal being applied to pay interest. For example, there could be several tranches above the first level of overcollateralisation or interest coverage tests. If there is an interest shortfall before the first coverage test, then the structure typically applies principal proceeds to cover the interest shortfall. While this keeps the note current on interest, it also reduces the amount of credit enhancement in the transaction. The upgrades were driven by increasing credit enhancement levels as transactions continue to sequentially deleverage.

The continuing uncertainty in the nonIG corporate bond market may reduce the incentives for corporations to refinance their debt early, and may lead to a slowdown in the pace of amortisations to the senior CBO tranches in the near term. The overall default rate for high yield bonds has continued to remain low at 0.4% yeartodate, according to Fitch’s US High Yield Default Index. Fitch’s corporate finance team updates this index frequently and the latest data can be found in the Credit Market Research section at www.fitchratings.com.

A sharp increase in default rates would significantly impact the most vulnerable tranches at the lower end of CBOs’ capital structures. Fitch will monitor any changes that would likely affect these transactions.

n Global Leveraged Loan CDOs/CLOs

Ratings Outlook: US & Europe CLOs: Stable/Negative Asia-Pacific CLOs: Stable Asset Performance Outlook: US & Europe CLOs: Stable/ Declining Asia-Pacific CLOs: Stable Global CLO performance has been strong due to sustained low default rates and high recovery rates in the leveraged loan space. There were no global CLO tranche downgrades as of the end of November 2007 and no underlying performance problems have been observed in this sector to date. Eight tranches(two European and six US CLO tranches) were upgraded from three transactions. A total of 101 tranches were affirmed (72 European, six Asian, 23 US) from 14 Fitchrated transactions. Global CLO issuance remains active to date. However, with the current credit climate, new issue CLO liability spreads have widened to levels that are making it difficult to generate a positive arbitrage spread. If this spread widening continues, it will likely have an impact on the pace of new CLO issuance in the coming year.

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The drop in leveraged loan secondary market prices, which started in the onset of the subprime mortgage crises in July, has been the sharpest decline in the history of the secondary market for leveraged loans. For US cash flow CLOs, the impact from this market price decline may not be immediately apparent because the structures do not have MV triggers. However, the decline has also caused the historically high rate of leveraged loan refinancing activity to slow down. If the credit markets continue to deteriorate, companies may face problems refinancing maturing debt. For CLOs that have passed their reinvestment periods, this refinancing slowdown should lead to multiple consequences. The pace at which principal proceeds will be made available to amortise senior CLO tranches is likely to decline. In addition, the likelihood of transactions being voluntarily called is expected to drop given the sharply lower secondary market prices at which CLO portfolios could be liquidated.

On a positive note, there has been no associated rise in defaults with the drop in secondary market prices. Sustainable low default rates are critical to CLO performance. Fitch expects some potential problems that could alter CLO performance. As corporate leverage levels rise and macroeconomic conditions worsen, highly leveraged companies will have less flexibility and will be at higher risk for default. A slower economy may also, for the first time, test the resilience of loan instruments that have recently emerged such as covenantlite and secondlien loans. Issuance of covenantlite loan transactions, which are loans that contain little or no maintenancestyle financial covenant protections, increased during the first half of 2007 fuelled by the demand from CLOs, hedge funds and other investors. Issuance did taper for covenantlite loans during the second quarter of 2007 as riskaverse investors became less willing to buy into transactions that did not contain key structural provisions. In contrast, the traditional covenanttight, first lien senior secured loan asset class has proven itself to be a relatively stable performer, even in times of stress because of the presence of structural covenant protections, and its senior secured position in the corporate capital structure.

n Global MV CDOs

Ratings Outlook: Negative Asset Performance Outlook: Declining Fitch groups CDO transactions with market value (MV)based performance triggers that reference SF and corporate assets, collateralised fund obligations (CFOs), as well as total rateofreturn (TRR) CLO structures under this broad MV CDO category.

The evaporation of liquidity in the credit markets combined with the repricing of SF risk has caused the market value of most SF assets to decline. As a result, many MV CDOs came under significant pressure over the latter part of 2007. MV CDOs with underlying assets in RMBS were impacted the most. As of the end of November 2007, Fitch downgraded 60 tranches of global MV CDOs and TRR CLOs. There were zero tranche upgrades; however, 106 tranches remained at their current rating levels, during this period.

Fitch took negative rating actions on several mortgagebacked MV transactions that were exposed to “gap risk”, which is the risk of credit spreads suddenly jumping rather than moving gradually. Fitch witnessed the liquidation of three such structures, despite their underlying assets having generally high credit quality and liquidity. Some MV transactions with deep outofmoney triggers, such as leveraged superseniors (LSS), where risk is based on long term declines in market values, were also downgraded due to the unprecedented declines in portfolio values. In addition, a small number of other MV transactions were downgraded due to concerns about the continued availability of repo funding with terms (haircuts and funding rates) similar to those that were in place initially at closing.

On a more positive note, credit opportunity funds, where the majority of investments are in corporate securities, were typically more seasoned and were relatively stable with no rating actions taken to date. These transactions benefited from larger levels of overcollateralisation due to their advance rates as well as higher levels of equity with less leverage. Collateralised fund obligations backed by highly diversified portfolios of hedge funds were also stable and performed well.

Similarly, total rate of return collateralised loan obligations (TRR CLOs) leveraged with total return swaps or other similar structures performed well. However, as these transactions typically feature unwind triggers that can be hit by credit events, market value declines, or a combination of both, TRR CLOs came under exceptional pressure due to the unprecedented market value declines.

Over the latter half of 2007, senior secured bank loans experienced a severe drop in price over a very short period of time. The magnitude of the drop was in the range of 5%6% over 1014 days. This resulted in decreased cushion from the transactions respective termination thresholds. The majority of TRR CLOs structures have two triggers: a cash diversion trigger that prompts for cash reserve build up whenever realised and unrealised losses exceed a

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predetermined level, and a termination trigger that is set off whenever losses exceed the threshold level. All of the Fitchrated TRR transactions survived the market value drop of the underlying collateral without violating the termination trigger and have remained on the run. Fitch took negative rating actions on two TRR CLOs due to concerns that in lieu of the cash trapping mechanism, the CLOs would not be able to restore the cushion should market volatility persists. All other TRR CLOs remained at their current rating levels. The transactions benefited from the leverage, the large level of overcollateralisation due to conservatively set trigger levels, and relatively stable credit performance. In the future, the distressed loan prices and long revolving periods may lead to buying opportunities. However, the potential credit issues have yet to surface on account of concerns with liquidity, general economic and companylevel performance. A severe market value drop in the underlying collateral or significant losses may result in a violation of the liquidation trigger and would instigate a crystallisation of loss for investors.

Fitch is in the process of reviewing its rating methodology and modelling assumptions for all new MV CDOs. Key review factors include spread risk, expected price volatility, credit enhancement levels, and market liquidity assumptions. Fitch notes that for 2008, investors should remain cautious of the credit, economic and MV risks associated with all types of MV CDOs.

US CDOs

n SF CDOs

Pre2003 Vintage Diversified SF CDOs

Ratings Outlook: Stable Asset Performance Outlook: Stable US SF CDOs that were launched before 2003 referenced diversified portfolios of SF assets such as manufactured housing (MH), aircraft finance loans, 12b1 mutual fund fee and equipment lease securitisations. The ratings performance of these early vintage SF CDOs has faltered due to their exposures to some of these troubled sectors. Diversified SF CDOs took a hit during the MH industry shakeup in the midtolate 1990s caused by aggressive underwriting and overbuilding. Similarly, the aircraft sector struggled with declining revenues and steeper operating costs. In most cases, downgrades have been severe for early vintage diversified SF CDOs. Fitch expects the ratings and asset performance outlook for the outstanding pre 2003 vintage SF CDOs to be stable as many of these

transactions are close to reaching their call periods. Many of these older transactions are also turning into static pools which enable them to avoid the risk of investing in more troubled SF assets. 104 tranches have been affirmed, seven tranches upgraded and 96 tranches downgraded in this early vintage SF CDO sector.

20032007 Vintage SF/RMBS CDOs

Ratings Outlook: High Grade SF CDOs: Stable Mezzanine SF CDOs: Stable Asset Performance Outlook: High Grade SF CDOs: Declining Mezzanine SF CDOs: Declining Unlike the pre2003 vintage SF transactions, US SF CDOs issued in 20032007 were less diversified and heavily referenced RMBS collateral. Many of these transactions, particularly those in the most recent vintages, suffered severe credit deterioration, which resulted in downgrades and put a stop to historically aggressive issuance during the last few months of 2007.

Cash flow and hybrid SF CDO issuance dropped more than 60% during the second half of 2007 versus the same period in 2006.

The bulk of the negative credit ratings migration has been in cash flow/hybrid mezzanine SF CDOs but high grade SF CDOs also deteriorated. 91% of Fitch rated US mezzanine SF CDO tranches were downgraded compared to 9% of US high grade SF CDO tranche downgrades from January to the end of November 2007. Most of these downgrades occurred in SF CDOs that were issued in 2006 and 2007. This steep drop in ratings reflects the rapid deterioration of the underlying referenced US subprime RMBS assets. Yeartodate a total of 545 US SF CDO tranches from the 2003 to 2007 vintages have been affirmed and seven tranches upgraded.

Highgrade SF CDOs generally benefit from their underlying high credit quality portfolios compared to mezzanine SF transactions, but they also have lower levels of credit enhancement to support their rated notes. Thus, high grade SF CDOs are also highly vulnerable to rating actions, particularly in the junior ‘AAA’ and ‘AA’ classes. In addition, to referencing highgrade RMBS, these transactions also have buckets for other SF CDOs, which exacerbates the negative rating migration for this SF CDO segment.

US synthetic SF CDOs also experienced downgrades as many of them have high levels of exposure to subprime RMBS, although few had exposure to

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recent RMBS vintages. Many of these synthetic SF transactions allow managers to substitute assets.

Fitch believes that the SF CDO rating actions it took in November 2007 already account for future credit deterioration. However, Fitch maintains a conservative view for the underlying RMBS collateral and believes that due to the uncertainty still facing the US mortgage market, a declining asset performance outlook is appropriate at this time.

These actions are based in part by changes to the default forecasting assumptions used in Fitch’s Default VECTOR model. The updated assumptions reflect increased probabilities of default with respect to recent vintage subprime RMBS and SF CDOs. For more details about these model changes, the rationale behind Fitch’s recent rating actions and additional commentary on the SF CDO sector, please see the following reports: “Global Criteria for the Review of Structured Finance CDOs with Exposure to US Subprime RMBS”, dated 15 November 2007, “Summary of Global Structured Finance CDO Rating Actions”, dated 29 November 2007, and “Structured Finance CDOs and Event of Default Risk,” dated 3 December 2007. All are available at www.fitchratings.com.

n CRE CDOs

Ratings Outlook CRE CUSIP CDOs (First Loss): Negative CRE CUSIP CDOs(Non-First Loss): Stable/Negative CREL CDOs: Stable

Asset Performance Outlook CRE CUSIP CDOs (First Loss): Declining CRE CUSIP CDOs(Non-First Loss): Stable CREL CDOs: Stable US CRE CDOs are classified according to their collateral composition. CRE CDOs predominantly contain CMBS and REITS, resecuritisations of CMBS collateral (ReREMICs) and CRE CDOs that are backed in part by syntheticallyreferenced collateral (Hybrids) are grouped together under CUSIP CDOs. This group is further classified by transactions that contain noninvestment grade bonds from CMBS transactions (first loss bonds) and those with higher grade bonds (nonfirst loss bonds). Transactions that consist of more than 50% of unrated commercial real estate loans (CREL) are referred to as CREL CDOs. As of the end of November 2007, Fitch maintains ratings on 113 outstanding CRE CDOs – 78 CUSIP CDOs and 35 CREL CDOs.

CRE CDO issuance has been strong during the past few years as the market developed. Performance has been relatively stable to date. Nonetheless, CRE CDOs have not been immune to the problems persisting in the overall credit markets. Issuance of CRE CDOs was strong during the first half of 2007, but has stagnated since August 2007 as a result of the current liquidity crisis. This decline in issuance can be attributed to a capitalconstrained and distracted investor base rather than poor collateral performance. In the eleven months ending 30 November 2007, 142 CRE CDO tranches have been upgraded, 738 tranches affirmed and 11 tranches downgraded.

Nonfirst loss CRE CUSIP CDOs have benefited from a strong US CMBS performance track record. For these CRE CDOs, upgrades to date have been due to the positive rating migration of their underlying CMBS assets. The defeasance of the underlying loans in CMBS pools has been a major contributing factor in the upgrades that have occurred in the CMBS sector. Fitch expects upgrades to moderate on more seasoned vintage high grade and mezzanine CRE CUSIP CDOs. As mentioned in Fitch’s CMBS outlook, the CRE sector is expected to continue to have stable fundamentals. However, fewer loans will defease over the next year, resulting in fewer upgrades of CMBS bonds. Also, upcoming maturities in 2008 will demonstrate some adverse selection and face increased refinance risk due to lack of available capital. Properties that have not yet stabilised will have the most difficulty refinancing. Fitch expects more extensions and modifications of loans as they near their maturities. As a result, fewer upgrades are also expected for CRE CDOs, resulting in a lower upgrade to downgrade ratio in the coming year.

Given the current liquidity crisis and expectation of higher default and loss rates, Fitch expects higher actual and projected losses on the first loss bonds collateralising many of the first loss CRE CUSIP CDOs. First loss CMBS bonds are classes with the least seniority within a CMBS transaction and are the first classes to take losses. To date, five of the downgrades to CRE CDOs were to the speculative grade classes of first loss CRE CUSIP CDOs. Fitch expects more downgrades to this asset class over the next 12 months.

CREL CDOs that maintain their current poolwide expected loss (PEL) cushions are anticipated to be affirmed. PEL is a credit measure used to assess the hypothetical loss in the pool at the ‘AA’ rating stress level before incorporating the effects of the structural features of the CDO. Fitch analysts monitor the PEL over the life of the CDO to evaluate the transaction’s

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credit migration and remaining reinvestment flexibility.

Since the end of the first quarter, PEL cushions have begun to tighten and Fitch expects these cushions to tighten further over the next year to the extent that business plans on loans secured by properties in a state of transition do not materialise. In particular, the agency has increased expected losses on land loans secured by home sites, loans whose interest and/or operating reserves have been depleted, and any other loans whose business plan has fallen behind schedule. Each of these situations could lead to an increased risk of term or balloon default. Lastly, Fitch will assume higher probabilities of default for any loan with old or incomplete information. Investors can expect negative rating actions on transactions in which the PEL decreases below 2.0% and the cash flow modelling indicates potential breaches to the stress hurdles.

Fitch anticipates there will be a distinct tiering of asset managers and their respective CREL CDOs in the coming year. The agency believes that those managers who can provide uptodate information on their transactions are actively monitoring their assets and can actively manage potentially troubled assets before the loans default. One of the advantages of a CDO structure is that it allows managers greater flexibility to modify and extend loans before they actually experience a default. Secondly, those managers with better liquidity in place can also support their transactions by purchasing impaired assets out of the CDO at par.

With respect to specific loan types within CREL CDOs, Fitch is concerned with CREL transactions composed of highly leveraged thin subordinate debt positions to the degree property valuations continue to decline and refinancing options remain low. To the extent these loans are unable to repay at maturity, the subordinate debt could experience 100% severity of loss, particularly if they are thin tranches of a property’s overall debt stack. CREL CDOs concentrated with whole loans are not immune to the current market stress and are expected to experience higher delinquencies as well, albeit with lower loss severities. Although Fitch has concerns with the amount of leverage on these loans, CREL CDOs are rated to withstand some negative collateral quality migration.

Lastly, less than 8.9% of the CRE CDO universe has an exposure to subprime RMBS. Each of these transactions contains less than 36% subprime exposure. Six tranches from Crystal River 20051 were recently downgraded due to its subprime exposure. The other transactions with subprime

exposure have been reviewed and generally have sufficient cushion to their current ratings to date. Their exposure to 20062007 vintage RMBS subprime is currently 5% or less.

n Middle Market CLOs

Ratings Outlook: Stable/Negative Asset Performance Outlook: Stable/Declining Middle market CLO ratings and asset performance is stable to date. However, despite this credit quality stability, the middle market CLO segment will be facing similar challenges as the broadlysyndicated CLO market. These include lower expected prepayment rates on the underlying loans, which could lead to slower amortisations of senior CLO tranches, as well as much wider liability spreads for newlyissued middle market CLOs. The much wider new issue liability spread levels that currently exist will likely have a negative impact on middle market CLO issuance volume for the remainder of the year as arbitrage spread levels have been squeezed lower. Over the last year, some middle market CLOs have also included significant buckets for broadly syndicated loans. Fitch does not currently foresee a divergence in performance between pure middle market CLOs and middle market transactions that also reference broadlysyndicated loans.

Although credit conditions currently remain satisfactory, a potential slowdown in the US economy may put the more recent covenantlite loan transactions to the test. Yet, similar to broadly syndicated CLOs, the middle market CLO sector continues to be primarily represented by the historically resilient firstlien senior secured loan pools, which are supported by covenant protections, and the senior secured position in the corporate capital structure.

n TruPS CDOs

Ratings Outlook: Bank and Insurance TruPS CDOs: Stable REIT TruPS CDOs: Negative Asset Performance Outlook: Bank and Insurance TruPS CDOs: Stable REIT TruPS CDOs: Declining The ratings performance of TruPS CDOs backed primarily by bank and insurance collateral is expected to remain relatively stable in 2008. This sector has benefited from the overall stable performance of mediumsized US bank and insurance companies. While Fitch believes it is unlikely that bank and thrift issuers will be entirely immune to the credit downturn, more diverse

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balance sheets and more stable funding profiles serve to temper the magnitude of credit and liquidity risks facing banks, relative to other sectors such as REITs. To this point, underlying bank defaults and deferrals observed by Fitch in 2007 were attributable to well defined problems that were only exacerbated by the recent emergence of issues in the mortgage and credit markets. Insurance companies are also expected to continue to exhibit relatively uncorrelated performance to REITs and homebuilders.

In contrast, the performance outlook of CDOs backed by newer collateral types such as REITs (particularly mortgage REITs), homebuilders and single property loans, is negative due to the continued pressures in the overall US residential housing market. A handful of hybrid TruPS CDO transactions, which are predominately composed of bank and insurance collateral but with a minority allocation to REITs, homebuilders or middle market loans, are expected to perform relatively in line with bank and insurance TruPS CDOs, but with some downward ratings pressure due to direct real estate exposures.

TruPS CDO dollar issuance has fallen in the latter half of 2007 with USD1.5bn issued in the third quarter compared to USD4.4bn during the same quarter in 2006. In 2008, issuance is expected to remain in line with these lower volumes, with well established bank and insurance TruPS CDO managers more likely to execute on transactions, albeit at wider liability spreads versus 2006 levels. Fitch expects there to be minimal market appetite for REIT TruPS CDOs, at least in their current form, due to the recent underperformance.

As 20002001 vintage TruPS CDOs reach their five year noncall periods, many underlying TruPS issuers may take advantage of lower borrowing costs through refinancing issued securities. Although Fitch expects active refinancings in the sector to continue, these levels may be somewhat more restrained compared to 20062007 due to current market conditions. Notwithstanding, the resulting de leveraging of transactions may have some positive rating implications on the liabilities. However, this may be offset by the risks of more concentrated portfolios and adverse selection.

For an overview of the asset performance of the bank/thrift, insurance, REIT and homebuilder sectors, please refer to Fitch’s special report “REIT and Hybrid TruPS CDOs: Summary of Rating Actions and Portfolio Characteristics”, dated 30 October 2007 and available at www.fitchratings.com.

European CDOs

n SME CDOs

Ratings Outlook: Stable Asset Performance Outlook: Declining The performance of small and mediumsized enterprise (SME) CDOs typically varies by country. By transaction count, Spain represents the largest European SME sector with 47 outstanding SME CDOs. The projected slowdown of the Spanish real estate market and rising delinquency levels are among the growing risks facing this segment. There have been no downgrades of Spanish SME CDOs to date. The vast majority of the transactions are supported by static portfolios of loans. The rated notes have benefited from increasing credit enhancement levels as the portfolios amortise and as the rated notes sequentially deleverage. Despite this improvement in subordination, the underlying portfolio performance trends are showing signs of strain. Delinquency levels in several transactions have increased. Because the underlying loans are primarily floating rate, if interest rates in Europe rise, it would be prudent to assume an increased risk of defaults. Many of the Spanish SME portfolios have high concentrations of real estate and construction loans and any downturn in Spain’s macroeconomic environment will certainly put pressure on these transactions. So far, deleveraging and excess spread have offset the rising delinquencies. However, a clustering of defaults could overwhelm the structural protections built into most of these transactions.

Unlike Spain, rapidly falling real estate prices are not a major concern for the German SME CDO market. However, several German SME CDOs have suffered due to a few isolated corporate defaults. While traditional balance sheet SME CDOs continue to exhibit stable performance, some of the more recent capital market mezzanine transactions have stumbled. Multiple credit events in mezzanine transactions led to one SME CDO being placed on RWN, StaGe Mezzanine, and another, Preps 20051, being downgraded. The rating action on Preps 20051 was the first European SME CDO downgrade since November 2003. The downgrade was a result of both a recent credit event and underlying performance deterioration. Granted, structural features, such as excess spread trapping mechanisms, serve to mitigate the risk of mild levels of defaults. For example, over a period of several months robust levels of excess spread in StaGe Mezzanine repaired the damage caused by the underlying default. As a result, the transaction was removed from RWN and affirmed. Overall, the German balance sheet SME

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CDO outlook is stable, while mezzanine SME CDOs could see continued exposure to idiosyncratic risk.

While Spain and Germany are not the only European SME CDO sectors, they do dwarf the other markets. SME CDOs originated in the Netherlands, Italy and Switzerland are expected to continue to exhibit stable ratings performance in 2008.

For the latest update on this sector and a countryby country analysis, please see the most recent edition of the “PanEuropean SME CDO Performance Tracker”, under Performance Reports in the CDO section of www.fitchratings.com.

HY loan CDOs 2%

Other CDOs 11%


SME CDOs 4%

HY bond CDOs 10%


Structured finance CDOs 13% 13%

EU CDO Upgrades by Asset Type – 2007ª

ª Data through Nov 30 CDO – Collateralized Debt Obligations SME – Small and mediumsized enterprize Source: Fitch


Other CDOs 36%


SME CDOs 1%


HY bond CDOs 1% Other CDOs

6%

CRE CDOs 1%

EU CDO Downgrades by Asset Type – 2007ª

ª Data through Nov 30 CDO – Collateralized Debt Obligations Source: Fitch

n SF CDOs

Ratings Outlook: Stable Asset Performance Outlook: Declining Fitch uses two general performance subcategories used for European SF CDOs: pure European SF portfolios and global blended portfolios with US SF exposure. The transactions with pure European SF

portfolios continue to perform in line with Fitch’s expectations. Only one pure European SF transaction was downgraded due to the basis risk between the asset and liabilities but not because of portfolio performance. The blended European SF CDOs suffered because of their exposure to both US subprime assets as well as US SF CDOs. Downgrades affected 94 tranches from 36 European CDOs with US subprime exposure. 11 tranches from nine transactions were upgraded and 229 classes from 66 CDOs were affirmed.

The ratings of downgraded European transactions are expected to remain stable for the next several years. The conservative and prospective assumptions applied in Fitch’s November global SF CDO review should account for future deterioration in these transactions for the foreseeable future. The magnitude of the downgrades was high due to rapid deterioration in the portfolio and the low levels of credit enhancement in most highgrade synthetic SF CDOs. Portfolios rapidly declined from having a small ‘BBB’ bucket to a large noninvestment grade bucket.

For pure European SF portfolios, exposure to Spanish RMBS and UK nonconforming RMBS remains a concern. To date, there has been no substantive deterioration in any of the pure European portfolios. However, given the exposures to these potentially troubled asset classes, Fitch will continue to carefully monitor these portfolios.

n CDOs of CDOs

Ratings Outlook: Stable Asset Performance Outlook: Stable European CDOs of CDOs are typically driven by corporate risk. The master level of the CDO is typically composed of ‘AAA’ SF securities as well as bespoke or customised CDOs. These bespoke inner CDOs are made up of IG corporate CDOs. The risk in these transactions is driven by corporate default risk, overlap in various inner CDOs, as well as correlation risk. In Europe, 303 tranches from 168 transactions were affirmed. 43 tranches from 34 transactions were downgraded, and seven tranches from seven transactions were upgraded. 36 tranches from 19 transactions were redeemed in full.

Only one European CDO of CDO suffered from US subprime performance. The transaction, Mustique Series 20071, is a CDO that references 23 US cash flow SF CDOs. Mustique was downgraded as a result of underlying deterioration in its reference portfolio. All other downgrades in the European CDO of CDO sector were due to corporate credit deterioration within the inner bespoke CDOs.

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n AsiaPacific Structured Credit

Issuance and Outlook Summary Due to the US subprime credit crisis, the CDO market in Asia was quiet in the second half of 2007, compared to the steady issuance in the first half of the year. A number of transactions, in particular cash flow CDO deals, have been put on hold until 2008 due to the current volatility in the financial markets. Similarly, no Australian bank balance sheet CLOs have been completed so far in 2007, as market conditions have pushed any potential transactions into 2008.

Looking ahead to 2008, Fitch expects that structured credit issuance in the region will continue to be driven by synthetic CDOs with managed deals growing in importance. The agency also expects to see increasing issuance of CLOs originated from regional banks, due to regulatory capital relief and balance sheet risk management, as well as CLOs by hedge funds to access nonrecourse term funding and arbitrage CDOs by Singaporebased asset managers. In Australia, the forthcoming year is expected to see low levels of single tranche synthetic issuance and more emphasis on balance sheet CLOs originated by the major Australian banks.

There has been an increasing number of US and European asset management firms establishing their operations in Asia in 2007. Fitch expects this trend to continue in the region, in particular with managers being established in Singapore, as the country is looking to position itself as the regional hub of CDO asset management.

Given recent market events, it is likely that in 2008 investors may focus on plain vanilla transactions over more complex structured credit products. It is also likely that there will be more focus on CDOs with Asian assets.

AsiaPacific IG CDO AsiaPacific investment grade corporate CDOs typically reference global corporate obligations and are predominantly issued out of Hong Kong, Japan and Australia. The majority of Australian dollar denominated investment grade corporate CDOs are managed transactions while for Hong Kong and Japan most of these transactions are static.

The rating performance of investment grade corporate CDOs rated by Fitch has been negative, particularly for static transactions. Many of these static transactions had limited surplus credit enhancement at closing, and therefore had limited ability to withstand the negative rating migration that took place during the year due to multinotch

downgrades of LBO credits as well as general negative rating migration. The asset performance of this IG CDO sector is stable/declining and therefore its rating outlook is negative. Fitch notes that most IG CDOs rated in Japan have comparatively more surplus credit enhancement at closing and therefore have suffered less rating downgrades in the first three quarters of 2007.

In contrast to static transactions, managed transactions have to date demonstrated higher rating stability.

AsiaPacific CDO of CDOs Synthetic CDO of CDOs rated by Fitch, where the inner CDOs reference corporate obligations, are largely issued out of Singapore with some issuance from Japan. Most of these are managed transactions (except for CDO of CDOs issued out of Japan). The rating performance for this asset class has been largely stable, due to a relatively high level of credit enhancement in the inner CDOs, which so far has offset the negative rating migration in the underlying reference portfolios.

AsiaPacific CLO Fitchrated Asian CLOs have been originated from the Hong Kong and Singapore offices of international banks, as well as Japanese banks. These CLOs are referenced or backed by either highgrade or highyield loans, as well as a variety of corporate loans. The rating and asset performance of the CLOs has been stable.

AsiaPacific SF CDO In the region, Fitch has rated four SF CDOs, of which only one static cash flow high grade SF CDO transaction, originated by a Singaporebased asset manager, was downgraded in November 2007 as the underlying collateral of this transaction has significant exposure to US subprime RMBS and US SF CDOs.

The other three SF CDOs include two Japanese SF CDOs that reference only Japanese assetbacked securities, and one synthetic SF CDO, which references globalblended diversified ABS with no US subprime RMBS exposure. The asset performance of these two Japanese SF CDOs is stable/positive and Fitch upgraded one of these deals in the first three quarters of 2007. The agency has also affirmed the abovementioned synthetic SF CDO in 2007 in view of its stable asset performance, which is likely to continue in 2008.

Taiwan (National Ratings Only) Taiwan’s structured credit market has been dominated by CBOs with liabilities in the form of

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either ABCP or term notes. A number of domestic CBO transactions were unable to close in 2007 due to market conditions and have been put on hold until 2008. In 2007, Fitch rated one domestic CBO of TWD19.7bn, versus 11 transactions (TWD48.2bn) in 2006. Looking ahead to 2008, Fitch would expect stable issuance driven by CLOs from Taiwanese banks. The agency does not expect to see strong ABCP activity in the near term, given the lack of money market investors in Taiwan and regulatory capital requirements for CP house underwriters to set aside capital to cover offbalance sheet commitments. Lack of investor interest in foreign currency denominated CDOs in the near term, together with limited structured bonds available for repackaging, will also likely confine the issuance growth of TWD CBO in 2008.

The rating and asset performance of Fitchrated Taiwanese structured credit transactions has been largely stable. Out of 17 outstanding deals, the agency has affirmed 16 transactions in 2007. Only

one class of a domestic CBO deal was downgraded as the rating of this class of note is creditlinked to the Westways XI income notes (a US MV CDO), which was downgraded to ‘CCC’ and placed on Rating Watch Negative in September 2007.

Other Markets CDO issuance is limited in other markets such as China and India. In China, there have been a few domestic balance sheet CLO issuances. Despite arranger interest, there was no CDO issuance in India or Thailand in 2007. Issuance in both China and India is likely to be driven by CLOs.

In South Korea, there continues to be interest in synthetic CDO technology following the completion of the first wondenominated CDS in early 2007 and anticipated regulatory changes to the ABS Act.

In India, draft guidelines for the introduction of CDS have been released for commentary this year by the Reserve Bank of India, which may ultimately lead to a domestic CDS market.

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n Asia Pacific Structured Finance

Australia Structured Finance

Ratings Outlook: RMBS: Stable; ABS and CMBS: Stable Asset Performance Outlook: RMBS: Declining; ABS and CMBS: Stable Fitch believes that the overall ratings outlook for Australian SF for 2008 is stable with few or no downgrades expected. As mortgageinsured transactions still dominate the market, this however is dependent on the outcome of the negative outlook placed on one of the major mortgage insurers, PMI Mortgage Insurance Ltd. Any potential downgrades are unlikely to be attributed to the performance of the mortgage collateral, but would be more likely to be the result of the downgrade of a mortgage insurance company. We have undertaken analysis of all Fitchrated Australian RMBS transactions where PMI is a mortgage insurer, determining that all ‘AAA’ rated tranches will unlikely be downgraded even if the rating of PMI deteriorated by one notch in the future.

Performance in the nonmortgage insured RMBS transactions has been deteriorating both in delinquencies and losses over the past six to 12 months. The transactions typically have sequential pay structures so the senior classes of notes should be protected. Downgrades of lower rated notes could be possible due to the further deteriorating performance.

Overall, property prices in 2008 will be stable; however, certain areas will continue to grow. Increases in arrears and claims against mortgage insurance are expected but will still be below the longterm trend.

Commercial property values should be stable with the potential widening in capitalisation rates from all time lows being balanced by low vacancy rates and little new supply. The growth in the economy should lead to continuing stability in most ABS ratings.

Overall, RMBS issuance volumes are expected to fall in 2008 due to the recent liquidity crisis. The size of transactions in 1H 2007 averaged approximately AUD1.91bn while 2H YTD average deal size is AUD0.405bn. Fitch expects the trend from 2H 2007 will continue in 2008 with much lower average transaction sizes. For this reason, the number of transactions will likely increase as most nonbank lenders will still need to securitise similar volumes if they have been unable to increase their warehouse capacity. The major banks, however, will unlikely securitise the same volumes that they have in previous years. Other asset classes, however, such as auto receivables, CMBS and balance sheet CLOs are expected to grow compared to 2007. These asset classes should also become a more regular feature of the Australian market due to a combination of the introduction of Basel II and mortgage lenders having diversified into other assets over the past couple of years and having to issue term debt to refinance their warehouses.

2008 Asia Pacific Outlook Table 2008 outlook

Market sector Asset class Asset performance Ratings 2008 areas to watch

Australia/NZ Australia RMBS Declining Stable Interest rate increases and house prices Australia ABS and CMBS

Stable Stable Interest rate increases

New Zealand Declining Stable Interest rate increases and house prices Japan Japan ABS Declining Stable/negative Sustained concerns about unsecured consumer loan sector

unlike the other ABS sectors

Japan RMBS Stable Stable Evolving nonconforming market Japan CMBS Stable Stable Interest rate, general real estate investment market

NonJapan Asia

Taiwan Stable Stable Political uncertainty; potential changes on withholding tax rate

Singapore Stable Stable Further property acquisitions by listed REITs through increased leverage

Korea Stable Stable Security concern with North Korea Thailand Declining Stable/negative Political uncertainty, weak consumer confidence, high oil

price India Stable/

declining Stable Regulatory changes with respect to recovery practices

Source: Fitch

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New Zealand 6%

Japan 94%

AsiaPacific Structured Finance Upgrades by Region 2007ª

ª Data through Nov 30 CDO – Collateralized Debt Obligations SME – Small and mediumsized enterprize Source: Fitch

NonJapan Asia 50%

Japan 50%

AsiaPacific Structured Finance downgrades by Region – 2007ª

ª Data through Nov 30 CDO – Collateralized Debt Obligations Source: Fitch

Like other parts of the world, issuance in the Australian securitisation market in the second half of 2007 was significantly lower than the first half. To 30 June 2007, issuance volumes of AUD58bn looked set to make another record year, surpassing 2006 issuance volumes. Issuance in the period July to November was only AUD8.0bn, however. Not only was issuance down, but unlike recent years, almost all of the issuance was in Australian dollars, with European investors only reentering to buy small amounts in the latter part of the year. Due to the widening of spreads, new investors have also participated in Australian transactions. This is expected to continue. There were also a number of new issuers coming to market in 2007.

Economic growth has continued over the past year and unemployment has continued to fall. Inflation has fallen and is back within the Reserve Bank of Australia’s target band of 23%. Interest rate increases have continued in 2007 with the Reserve Bank of Australia lifting rates by 0.25% in August and November and another one expected in early

2008. Some lenders have passed on more than the official rate increases to borrowers due to the increased costs of funding. These increased costs have also caused some lenders to rationalise their product offering and some have even suspended further origination until the new year.

Fitch’s DINKUM Index, which tracks delinquencies, fell in the third quarter of 2007. This fall was partly due to seasonal factors and recent interest rate rises and expected further increases in petrol prices will likely reverse this trend in Q407/Q108. The divergence between low doc arrears and nonlow doc arrears has remained in 2007 and will continue in 2008. There are no expectations, though, that the anticipated increases would lead to downgrades in the mortgage insured transactions as current delinquency levels are still coming off a low base and 100% mortgage insurance is provided on the majority of transactions. Performance in the non mortgage insured RMBS transactions have continued to decrease during 2007 both in arrears and losses. Any further deterioration in performance could lead to potential downgrades in the lower rated notes.

Up to November 2007, Fitch did not issue any upgrades or downgrades for Australian RMBS, CMBS or ABS tranches.

n New Zealand Structured Finance

Ratings Outlook: Stable Asset Performance Outlook: Declining Fitch has a declining outlook for asset performance in New Zealand in 2008 due to a slowdown in property prices in that market. Despite the weaker property market, Fitch does not expect to downgrade any transactions.

The size of the market was similar in 2007 with only two issues to the end of November for a combined NZD445m compared with three deals totalling NZD440m to Q306. Fitch expects the New Zealand market to be smaller in 2008, like other markets.

n Japan Structured Finance

ABS

Ratings Outlook: Stable/Negative Asset Performance Outlook: Stable/Declining The ABS issuance volume showed a significant increase in the first three quarters of 2007, in part attributable to the increased incentive of deal disclosure due to the implementation of Basel II. However, the growth trends in the individual ABS sectors varied significantly. The key growth area was

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the trade receivable sector, primarily driven by several large deals, followed by the auto loan sector. On the other hand, the growth in the lease sector was marginal. Unlike Fitch’s expectations a year ago, there did not appear to be any contraction on the whole in the consumer finance sector. The agency noted only a limited number of new deals, the underlying loans of which were originated by consumer finance companies with a primary focus on unsecured consumer loans. This contraction was, however, compensated by originators covering a broader range of products such as shopping credit and credit card cashing.

Consumer loan originators, especially those which can be classified as in the former group above, are experiencing further unprecedented increases in default rates and excess payment refund claims (“Kabarai Seikyu”), which has been exacerbated following the Supreme Court rulings regarding excess payment refund claims in 2006 and 2007. The amended Money Lending Business Law, which comes into effect in December 2007, will lower the interest upper limit from 29.2% to between 15% and 20%, eliminating so called “gray zone” interest within two and a half years from the effective date. This law also caps the cumulative loan balance of individuals, which will legally be required to be monitored by lenders at the time of the loan origination. In response to these environmental changes, some lenders have started to tighten their origination criteria, and it is therefore reasonable to assume that parts of the existing individual obligors would not be able to increase their loan balance. These factors have affected the pool performance in consumer finance ABS; however, the outstanding deals could largely withstand such stress to date, primarily due to the increased credit enhancement caused by early or scheduled amortisation and/or performance driven reserves. Negative rating actions cannot be ruled out in some deals should the pace of further credit deterioration of the underlying loans significantly surpass the pace of the increase in the credit enhancement.

CMBS

Ratings Outlook: Stable Asset Performance: Stable The Japanese commercial real estate investment market is still active while some nonrecourse lenders are becoming a little bit more cautious. A significant increase can be expected in CMBS issuance this year, reflecting securitisation of loan assets by many loan originators by the end of this year. Earlier this year, more nonJapanese investors played an important role in the market, but after the US subprime issue arose, the CMBS market returned

to a more domestic role. Fitch anticipates the record pace issuance observed in Q407 will not be extended and there will be slower market activity in early 2008. General commercial real estate market condition is still in good shape and, therefore, robust issuance activity will once again be seen some time in late 2008.

RMBS

Ratings Outlook: Stable Asset Performance: Stable Although RMBS remains the largest sector in the Japanese SF market, in Q107 to Q307 the issuance volume declined by 40% to JPY2,782bn, compared to the same period in 2006. The huge drop in volume is primarily attributed to the decrease in the issue sizes by Japanese mega banks and the Japan Housing Finance Agency (JHF, formerly known as Government Housing Loan Corporation), which are regular issuers with approximately 80% combined share in volume in the Japanese RMBS market for the period as was the case last year. Although RMBS issuance volume has in general declined both in number and volume, there were more transactions backed by investment condominiums and also a few new types of transactions, such as CMO or RMBS by a regional bank guaranteed by JHF. Although the market has been occupied by a few large issuers in terms of volume, there are various smallticket transactions. Fitch expects this trend to continue.

Summary Rating Actions Fitch upgraded 38 tranches (five ABS, two of them twice, and 33 CMBS, seven of them twice) and downgraded one ABS tranche in the first 11 months of 2007. Despite the unfavourable environment in the consumer finance ABS as described above, there was only one downgrade in ABS. Fitch experienced more upgrades in ABS as the credit enhancement levels increased. The CMBS sector recorded 33 tranche upgrades. Credit enhancement levels increased due to early redemptions. Active trades in the real estate market contributed to earlier collateral disposals and in turn the prepayment of the underlying nonrecourse loans. In the RMBS sector, pool performances of the existing deals have been stable.

n NonJapan Asia Structured Finance

Summary During 2007 the rated crossborder transactions have demonstrated stable performance across all asset classes in Asia exJapan, with the exception of ABS Global trade finance securitisation where the ‘B’ rated tranche was downgraded to ‘CCC’ in November.

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Following the unfavourable market conditions in the second half of 2007, Fitch expects that the two main Asian cross border securitisation countries, Singapore and South Korea, will take the lead to re emerge in the regional market in 2008. Singapore REITs will continue to benefit from the growing property market, while South Korea may see more tailormade ABS and RMBS coming to the market. For the other Asian countries, domestic issuance will prevail with Taiwan issuing RMBS and credit card transactions. Downward pressure on the asset performance of consumer finance ABS transactions in Thailand may persist. For India, a high degree of rating stability is expected, though the delinquency rate of personal loan portfolios may increase.

Taiwan

Ratings Outlook: Stable Asset Performance Outlook: Stable Consumer asset performance has shown signs of stability in 2007 after the credit deterioration in 2006. Looking forward, consumer assets as well as corporate and property assets should remain stable in 2008. Political uncertainty will continue as a presidential election will be held in March 2008. Nonetheless, it is not expected to have any major impact on asset performance. Another area to watch is the likely change of structured notes’ withholding tax rate, which will be increased from a universal rate of 6% to 10% for individual investors and 25% for institutional investors. This may affect investors’ interests and originators’ incentives in structured finance products.

New issuance volume for 2008 is mainly expected to come from RMBS and potentially a couple of credit card transactions. The main incentive for RMBS is that some banks need to offload their mortgage portfolios, which are approaching 30% of their deposits and financial debentures, a limit set by Banking Law. It must be noted that the subprime turmoil in the US has affected domestic Taiwanese investors’ confidence in RMBS products and it may take longer and be more expensive to place RMBS notes in the market.

Singapore

Ratings Outlook: Stable Asset Performance Outlook: Stable Singapore’s property assets continued to show strong performance during 2007, supported by rising property prices, rental rates and high occupancy levels across all property types, as well as the sound economic fundamentals. Fitch expects the property sector to continue its positive trend into 2008.

In 2007, there were three CMBS transactions and two progress payment transactions. Most of the CMBS were issued at ‘AAA’ and the assets had a stable performance in terms of occupancy levels, rental rates and debt service coverage ratios. For progress payment transactions, both transactions were rated ‘AAA’ and their asset performance remained stable in 2007. The outlook is expected to be stable for the performance of rated CMBS and progress payment transactions in 2008.

For the REIT market, the active issuers of CMBS in Singapore, more property acquisitions will be seen as the listed REITs continue to pursue yield attractive properties. The leverage of the REITs will be increased subsequently.

South Korea (Korea)

Ratings Outlook: Stable Asset Performance Outlook: Stable The asset performance of ABS and RMBS in 2007 remained stable, mainly due to the improved underwriting criteria of the consumer finance companies, supported by a strong credit bureau system and the Korean government’s stringent LTV restrictions in mortgage lending.

Towards the end of 2007, some ABS and RMBS prospects have been put on hold either because issuers wish to develop tailoredmade mortgage products to be securitised or because pricing terms were too volatile to go to the market.

Thailand

Ratings Outlook: Stable/Negative Asset Performance Outlook: Declining Asset performance of consumer finance ABS transactions in 2007 has been negatively affected by a prolonged political instability, which weakened consumer confidence and the general economic condition. This was witnessed by an increase in delinquency in auto loan transactions and a lower payment rate and purchase rate in credit card transactions. Although the political situation is expected to improve somewhat after the election in December 2007, the high oil price and sluggish domestic demand, if persisting, are likely to continue to put downward pressure on the asset performance of consumer finance ABS transactions.

New issuance volume slowed down in 2007 due to slow loan growth and the delay of the Government Housing Bank’s RMBS transaction. New issuance volume for 2008 is expected to come from consumer finance assets, including auto loans, personal loans

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and Government Housing Bank’s residential mortgages.

India

(National Scale Ratings only) Ratings Outlook: Stable Asset Performance Outlook: Stable/Declining In 2007, the Indian SF market remained completely domestic, and ratings assigned by Fitch were all on the national rating scale. The agency expects the market to continue to be dominated by domestic securitisation transactions for the foreseeable future. However, some efforts to access the international capital markets for securitisation are expected in 2008. Dominant asset classes are ABS (two wheelers, commercial vehicles and personal loans), NPA securitisations, RMBS and single loan sell downs (SLSD). SLSDs are securitisations of single loans extended to corporates, where the loan is assigned to an SPV and the SPV issues passthrough certificates, which are backed by loan receivables. The issuance volume by number of transactions is significant in India, with more than 300 transactions coming to market in 2007. Issuance volume is expected to grow, to meet the funding requirement of banks and non banking financial companies. Still remarkably absent

from the market are the public sector banks controlling the majority of the banking assets, hence further potential for market growth exists. The implementation of Basel II is likely to work as a catalyst in prompting the large public sector banks to enter into the SF market.

Indian transactions continued to perform satisfactorily in 2007. Transactions backed by auto loan receivables and home loans experienced the lowest delinquencies, while twowheeler loans and personal loans saw increasing delinquencies. Fitch monitors 198 transactions and there were 13 upgrades and no downgrades for the first 11 months in 2007. For 2008, Fitch expects a high degree of rating stability for Indian SF transactions. The agency expects personal loan portfolios to experience increased delinquencies in 2008. However, Fitch expects the financial structure of these transactions to be able to withstand these increasing delinquencies and hence their performance is expected to be largely stable in 2008. The rating of SLSDs is directly linked to the ratings of the underlying corporates and since these transactions are concentrated to a large extent in a few sectors (real estate and nonbank financial companies), rating performance will depend on the general performance of these sectors.

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2008 Emerging Markets Outlook Table 2008 outlook

Market sector Asset class Asset performance Ratings 2008 areas to watch Emerging markets

Latin America – future flow

Improving Positive The credit quality of the future flow segment will continue to improve as the sovereign and corporate environments improve

Latin America – existing assets

Stable Stable The collateral for existing asset transactions in most Latin countries should perform well as the overall credit environment continues to improve throughout the region. Contamination from the subprime mortgage market in the US is not expected to effect existing asset performance in Latin America.

EMEA Emerging Markets

General – future flow Stable/Declining Stable/Negative Coverage ratios probably to deteriorate slightly to moderately

General – existing assets44

Stable/Declining Stable/Negative EM economies increasingly exposed to liquidity crunch, with some likely negative effects on banking system and property markets

Russia – existing assets

Stable/Declining Stable/Negative Weaker environment, but strong pent up demand and strong financials will support portfolio performance

United Arab Emirates – CMBS

Stable/Improving Stable Continued oil strength and infrastructure needs likely to strengthen outlook for property developments

Kazakhstan – existing assets

Stable/Declining Stable/Negative Banks and economy are very vulnerable, but cashrich government provides silverlining

Turkey – future flows Stable/Declining Stable/Negative Securitisation plans in standby. Strong potential in 2008, but fractured politics + refinancing needs make risky background

Source: Fitch

n Emerging Market Structured Finance

Latin America Structured Finance

Ratings Outlook: Future Flow: Positive; Existing Assets: Stable Asset Performance Outlook: Future Flow: Improving; Existing Assets: Stable The credit markets in Latin America, which have been positive since the end of 2002, only continued their upward ascent in 2007. While in past years future flows comprised nearly all of crossborder structured transactions, 2007 was marked by the successful placement of various asset classes. Issuances securitising existing assets, infrastructure projects and real estate became a viable alternative to the traditional future flow structure. Despite the challenges presented by global credit markets beginning in Q307, issuance in the structured cross

border market grew yoy and total 2007 issuance (for the year to endNovember) surpassed USD4bn.

The evolution of the crossborder structured market began in earnest in the Q406. During this period, six structured transactions were placed amounting to approximately USD1.4bn. Of these transactions, many represented milestones in the development of this sector. Successful transactions included: an auto loan transaction denominated in local currency, a Mexican RMBS transaction sold internationally and a real estatebacked development loan. In addition, the low interest rates and high global liquidity at the time made speculativegrade transactions viable in the market. Two of the six transactions were rated subinvestment grade.

2007 issuance capitalised and expanded on the diversity of the prior year. RMBS issuance in the international market was seen both from Mexican and Panamanian originators. The Mexican housing market, which provided the backdrop for a majority of the securitisations placed locally within Mexico in 2006 and 2007, also bore fruit to international

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securitisations of construction bridgeloans. Additionally, transactions backed by airport revenues, real estate and infrastructure were all successfully closed in 2007. Continuing the 2006 trend, two transactions with subinvestment grade ratings were issued this year.

Despite a decline in their popularity, future flow transactions rebounded in 2007 and represented nearly 60% of the total issuance volume. However, a majority of these issuances were the refinancing of existing future flow debt, and all were issued by repeat originators. The improving credit quality of Latin American sovereigns has reduced the need for future flow products, which are designed primarily to mitigate sovereign risk. If, however, the global liquidity crunch persists throughout 2008, future flow transactions might once again be the option of choice for subinvestment grade issuers that wish to gain access to international market.

The relative health of the sovereign environment is a powerful backdrop for most SF transactions, since issuers are directly and indirectly influenced by sovereign actions, as well as general economic, social or political issues. Negative actions in 2007 were tied to political risks that resulted in a downgrade to Ecuador and the assignment of a negative outlook to Venezuela. Despite these outliers, Latin American sovereign indicators improved and/or remained stable throughout 2007. Upgrades were assigned to Brazil, Colombia, Mexico and Uruguay, while outlooks were revised upwards for Bolivia, Chile, the Dominican Republic, Costa Rica and Peru.

Credit quality and the performance of existing asset transactions remained stable this past year, despite the turmoil in the US subprime market. Fitch conducted a review of its entire Latin American RMBS portfolio and concluded that transaction performance did not demonstrate any correlation to the US market. The underlying assets in these transactions remain fundamentally different in Latin America as compared to the US. In Mexico, for example, exotic mortgage products such as ARMs do not exist. Loans are fixed rate, buyers have substantially more equity in their property, property markets remain sound and full borrower documentation is typically required. Also Latin American countries are at a very early stage of their development in terms of the availability of consumer credit and thus the amount of consumer debt held by individuals as a percentage of their income is lower. Although this trend seems to be changing current overall leverage remains relatively low. Fitch expects existing asset securitisations to continue their stable performance and anticipates additional

issuances backed by residential mortgages, auto loans, and consumer loans and credit cards.

Credit quality across outstanding future flow transactions improved further as low interest rates, overall global liquidity and a generally healthy economy allowed companies to continue to solidify their balance sheets. In addition, future flow structures benefited from strong corporate export flows and stable to improving sovereign environments. Considering the improved environments across the region, Fitch envisions existing and future securitisations to continue performing in line with expectations.

2007 saw increased growth in local capital markets throughout various Latin American countries. This is a direct result of the overall improving sovereign environments, the growing liquidity of local pension funds and the growing sophistication of the local investor base. Mexican RMBS issuance continues to attract the interest of foreign investors, bankers and issuers. Local market placement of structured transactions in Latin America far exceeded the volume placed internationally. Fitch expects to continue to see this trend continue, along with marked growth in the Mexican market as well as other Latin American markets, including Brazil and Argentina, in 2008 and beyond.

Emerging EMEA Structured Finance

Ratings Outlook: Stable/Negative (except UAE CMBS: Stable) Asset Performance Outlook: Stable/Declining (except UAE CMBS: Stable/Improving) The overall performance in the first three quarters of 2007 across emerging EMEA has been stable. The only rating actions other than affirmations consisted of upgrades of two transactions due to upgrades of underlying dependent ratings. Fitch upgraded the notes of Russia International Card Finance following the upgrade of the Issuer Default Rating (IDR) and the resulting change in the going concern assessment of JSCB Rosbank and JCS United Card Services, the originator and processor/servicer. The agency upgraded the notes of Solidarity Trust Services and revised the Outlook to Positive from Stable to reflect a corresponding rating action on the IDR of the Islamic Development Bank, which fully supports the notes.

Emerging securitisation markets in the Europe, Middle East and Africa region were exposed in 2007 to much of the same risk that affected the overall capital markets after the summer. Liquidity has been scarce in foreign currency, putting some pressure on

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banks and corporates, which are exposed to dollar or euro refinancing risk. At the same time, access to funds via the interbank market has become pricier and financial institutions across the EMEA region, and particularly in Russia and former CIS countries, have had varying degrees of success in securing cheap funding in this way.

From a macro perspective, the economies in the region have continued to outperform, and the impact of the liquidity crunch on growth has, so far, been limited. Moreover, growth in oil and commodity exporting countries – which are a substantial subset of the group – has been underpinned by unabated increases in prices.

With the caveat of possible lags in the available data, performance in asset markets has also remained fairly strong, with property prices in particular remaining strong – if perhaps less exuberant – across the region. Delinquency and default rates remain negligible across asset classes and geography.

Securitisation transactions rated by Fitch in the EMEA region have performed strongly, with current overcollateralisation and credit enhancement levels generally above target levels and other ratios performing in line with expectations at the time of rating.

In 2008, and assuming that investor appetite recovers sometime during the first three quarters of the year, Fitch expects a continuation of a stable environment. Delinquency and default data should deteriorate slightly, but remain in line with the agency’s underlying base case estimations. To counter this, Fitch also expects further improvements in the application of origination and underwriting policies by banks and other originators in emerging markets, which should ensure that healthy asset portfolios can continue to be securitised.

The region’s downside risk is exogenous, namely that emerging market and structured investors remain risk averse, and the crossborder market stays closed, in which case a negative feedback loop could affect banking systems and borrowers in emerging markets, via lower credit availability and GDP growth and higher inflation and unemployment.

In terms of asset classes, Fitch expects existing asset securitisations to continue to gain prominence at the expense of future flow deals. Mortgage transactions are expected to lead the market in 2008, as pentup housing demand in the CEE region remains high and commercial projects in the Gulf continue gathering pace. The agency also expects an increase in the number of jurisdictions with securitisation flow, including countries in CEE, such as Bulgaria, Romania, Croatia, Poland and Hungary, as well as in the MEA region, such as Saudi Arabia, Qatar, Abu Dhabi, Oman and possibly some African commodity exporters.

EMEA 18%

Latin America 82%

Emerging Market Structured Finance Upgrades by Region – 2007ª

ª Data through Nov 30 Source: Fitch

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n Appendix 1 Historical Ratings Performance – Update

U.S. Structured Finance Upgrades and Downgrades (Years Ended Dec. 31)

Total tranches outstanding (%)

Upgrades Downgrades Total tranches outstanding Upgrades Downgrades Difference (%)

2007 a ABS 195 44 5,640 3.5 0.8 2.7 RMBS 527 3,727 47,818 1.1 7.8 (6.7) CMBS 784 67 7,110 11.0 0.9 10.1 Total 1,506 3,838 60,568 2.5 6.3 (3.9) 2006 ABS 203 77 5,666 3.6 1.4 2.2 RMBS 1,059 499 41,994 2.5 1.2 1.3 CMBS 1,751 50 6,360 27.5 0.8 26.7 Total 3,013 626 54,020 5.6 1.2 4.4 2005 ABS 179 217 5,598 3.2 3.9 (0.7) RMBS 963 572 30,581 3.1 1.9 1.3 CMBS 850 77 5,509 15.4 1.4 14.0 Total 1,992 866 41,688 4.8 2.1 2.7 a Data through Nov 30 Source: Fitch

European Structured Finance Upgrades and Downgrades (Years Ended Dec. 31)



2007 a ABS 29 13 528 5.5 2.5 3.0 RMBS 227 6 3,268 6.9 0.2 6.8 CMBS 59 10 1,095 5.4 0.9 4.5 Total 315 29 4,891 6.4 0.6 5.8 2006 ABS 15 29 554 2.7 5.2 (2.5) RMBS 211 5 2,726 7.7 0.2 7.6 CMBS 58 14 932 6.2 1.5 4.7 Total 284 48 4,212 6.7 1.1 5.6 2005 ABS 39 14 463 8.4 3.0 5.4 RMBS 86 7 1,785 4.8 0.4 4.4 CMBS 54 9 534 10.1 1.7 8.4 Total 178 30 2,782 6.4 1.1 5.3 a Data through Nov 30 Source: Fitch

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Global CDO Upgrades and Downgrades (Years Ended Dec. 31)



2007 a U.S. CDOs 215 1,006 4,423 4.9 22.7 (17.9) Europe CDOs 83 153 2,373 3.5 6.4 (2.9) AsiaPacific CDOs 4 58 214 1.9 27.1 (25.2) Total 302 1,217 7,010 4.3 17.4 (13.1) 2006 U.S. CDOs 317 108 3,790 8.4 2.8 2.0 Europe CDOs 202 89 2,209 9.1 4.0 5.1 AsiaPacific CDOs 4 8 153 Total 519 205 6,152 8.4 3.3 5.1 2005 U.S. CDOs 199 125 2,952 6.7 4.2 2.5 Europe CDOs 273 15 1,733 15.8 0.9 14.9 AsiaPacific CDOs 2 0 57 3.5 0.0 3.5 Total 472 140 4,742 10.0 3.0 7.0 a Data through Nov 30 source: Fitch

Asia/Pacific Structured Finance Upgrades and Downgrades (Years Ended Dec. 31)



2007 a Australia 0 0 491 0.0 0.0 0.0 New Zealand 3 0 44 6.8 0.0 6.8 Japan 47 1 444 10.6 0.2 10.4 NonJapan Asia 1 1 234 0.0 0.4 (0.4) Total 50 2 1,213 4.1 0.2 4.0 2006 Australia 17 0 474 3.6 0.0 3.6 New Zealand 6 0 38 15.8 0.0 15.8 Japan 38 0 424 9.0 0.0 9.0 NonJapan Asia 2 0 162 1.2 0.0 1.2 Total 63 0 1,098 5.7 0.0 5.7 a Data through Nov 30 Source: Fitch

Emerging Market Structured Finance Upgrades and Downgrades (Years Ended Dec. 31)



2007 a Latin America 18 0 85 21.2 0.0 21.2 EMEA 4 0 51 7.8 0.0 7.8 Total 22 0 136 16.2 0.0 16.2 2006 Latin America 40 2 134 29.9 1.5 28.4 EMEA 6 0 33 18.2 0.0 18.2 Total 46 2 167 27.5 1.2 26.3 2005 Latin America 6 10 91 6.6 11.0 (4.4) EMEA 1 1 9 11.1 11.1 0.0 Total 7 11 100 7.0 11.0 (4.0) a Data through Nov 30 Source: Fitch

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n Appendix 2 Ratings Performance Ratios

Upgrade to Downgrade Ratios – Through November 30 2005 2006 2007

United States Assetbacked securities 0.6 1.9 4.4 Residential mortgage 1.5 2.2 0.1 Commercial mortgage 10.6 40.1 11.7

Europe Assetbacked securities 2.5 0.5 2.2 Residential mortgage 11.6 38.2 37.8 Commercial mortgage 5.8 3.1 5.9

Global CDOs US CDOs 1.5 2.8 0.2 EU CDOs 16.3 2.0 0.5 AsiaPacific CDOs – 0.6 0.1

AsiaPacific Australia 11.0 – – New Zealand – – – Japan – – 47.0 NonJapan Asia – – 0.0

Emerging Markets Latin America 0.4 19.0 – EMEA 1.0 – –

Global structured finance 2.4 4.4 0.4 Source: Fitch Ratings

Upgrade to Downgrade Ratios – Through End of Year 2005 2006 2007 a

United States Assetbacked securities 0.8 2.6 4.4 Residential mortgage 1.7 2.1 0.1 Commercial mortgage 11.0 35.0 11.7

Europe Assetbacked securities 2.8 0.5 2.2 Residential mortgage 12.1 42.2 37.8 Commercial mortgage 6.0 4.1 5.9

Global CDOs US CDOs 1.6 2.9 0.2 EU CDOs 18.2 2.3 0.5 AsiaPacific CDOs – 0.5 0.1

AsiaPacific Australia 11.0 – – New Zealand – – – Japan – – 47.0 NonJapan Asia – – 0.0

Emerging Markets Latin America 0.6 20.0 – EMEA 1.0 – –

Global structured finance 2.6 4.5 0.4 a Data through Nov 30 Source: Fitch Ratings

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n Appendix 3 Distressed Recovery Ratings

Number of Classes Outstanding a by Sector and Distressed Recovery Rating Distressed recovery rating

Section Sector DR1 DR2 DR3 DR4 DR5 DR6 Grand total United States Assetbacked securities 29 19 24 14 11 144 241

Commercial mortgage 32 13 13 8 13 37 116 Residential mortgage 92 208 118 124 230 444 1,216

U.S. total 153 240 155 146 254 625 1,573 Europe ABS 1 1

Commercial mortgage 1 3 4 Residential mortgage 1 1 2

Europe total 0 2 3 0 1 1 7 Global CDOs total 26 24 24 29 41 54 198 Emerging markets 2 2 Grand total 179 266 182 175 298 680 1,780 a Outstanding as of 30 Nov 2007 Source: Fitch

Number of Classes Outstanding a by Current Rating and Distressed Recovery Rating Current rating DR1 DR2 DR3 DR4 DR5 DR6 Grand total B 29 9 4 42 B 54 31 1 1 87 CCC+ 2 2 4 CCC 80 148 49 15 12 6 310 CCC 1 1 2 CC 8 44 90 50 21 4 217 C 6 31 38 108 265 670 1,118 Grand total 179 266 182 175 298 680 1,780 a Outstanding as of 30 Nov 2007 Source: Fitch

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n Appendix 4

European Structured Finance Current a Rating Outlooks Rating alert ABS Residential mortgage Commercial mortgage Rating outlook stable 457 2,889 1,036 Rating outlook positive 19 323 46 Rating outlook negative 35 56 13 Rating watch positive 7 Rating watch negative 10 a As of 30 Nov 07 Source: Fitch

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n Contributors

Economics London Brian Coulton +44 20 7862 4097 [email protected]

Credit Policy New York London Ian Rasmussen Christopher Thorpe +1 212 908 0232 +44 20 7862 4121 [email protected] [email protected]

US ABS New York New York Chicago Kevin D’Albert John H Bella, Jr. Ravi R. Gupta +1 212 908 0823 +1 212 908 0243 +1 312.368.2058 [email protected] [email protected] [email protected]

US RMBS New York New York New York Suzanne Mistretta Grant Bailey Vincent Barberio +1 212 908 0639 +1 212 908 0544 +1 2129080505 [email protected] [email protected] [email protected]

US CMBS New York Chicago Mary MacNeill Lauren Cerda +1 212 908 0785 + 1 312 606 2317 [email protected] [email protected]

Global CDO and Credit Derivatives London New York Hong Kong Jeffery Cromartie April Kabahar Rachel Hardee +44 20 7664 0072 +1 212 908 0245 +852 2263 9918 [email protected] [email protected] [email protected]

European ABS London London Philip Walsh Vas Kosseris +44 207 417 3556 +44 20 7417 4389 [email protected] [email protected]

European RMBS and CMBS London London RMBS London CMBS Andy Brewer Stuart Jennings Rodney Pelletier +44 20 7417 3481 +44 20 7417 6271 +44 20 7417 6252 [email protected] [email protected] [email protected]

Asia Pacific Structured Finance Sydney Tokyo Hong Kong Ben McCarthy Atsushi Kuroda Stan Ho +61 2 8256 0388 +81 3 3288 2692 +852 2263 9668 [email protected] [email protected] [email protected]

Emerging Markets Structured Finance Chicago London Latin America Europe, Middle East, Africa Greg Kabance Jaime Sanz +1 312 368 2052 +44 20 7682 7279 [email protected] [email protected]

mailto:[email protected]





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Copyright © 2008 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004. Telephone: 18007534824, (212) 9080500. Fax: (212) 4804435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided “as is” without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the taxexempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

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