Fitch Places AB SCDO Series 2007-1 and 2007-7 on Rating Watch Negative

2008-05-14 23:48:58 -

- Fitch Ratings has today placed the following two classes of notes on Rating Watch Negative:

AB SCDO Series 2007-1

--US$20,000,000 class IVA secured floating rate notes due 2014, 'BBB+' Rating Watch Negative.

AB SCDO Series 2007-7

--US$30,000,000 class IVA secured floating rate notes due 2014, 'BBB+' Rating Watch Negative.

The Rating Watch Negative placements reflect Fitch's view on the credit risk of the rated notes following the release of its new Corporate CDO rating Criteria.

Key drivers of these transactions credit risk are:

--Portfolio credit risk with an average portfolio quality 'BBB', with 11.5% of the portfolio rated below investment grade.

--Portfolio migration risk with 10.7% of the portfolio on Watch Negative and 34.3% of the portfolio with a Negative Outlook.

--Industry concentration of 53.3% in the three largest, made up of 36.5% in banking & finance, 10.6% in telecommunications and 6.3% in building & materials.

--Credit enhancement for both classes has deteriorated from 3.5% at closing to 2.8%.

Given Fitch's view of concentration and the current credit quality of the portfolio, the credit enhancement level is not sufficient to justify the current rating of these notes.

Resolution of the Rating Watch Negative status will incorporate any changes made to the portfolio or the transaction along with additional portfolio migration. If there are no significant changes prior to the resolution of the Rating Watch Negative status, the class IVA notes from both series will likely be downgraded to the 'B' category.

Both AB SCDO 2007-1 and AB SCDO 2007-7 are partially funded synthetic collateralized debt obligations (CDOs) referencing the same portfolio of primarily investment grade corporate obligations. The portfolio maximum notional amount is US$10 billion. At close, proceeds from the issuance of the notes were used to collateralise credit default swaps (CDS) between the issuer and Morgan Stanley Capital Services Inc., the CDS counterparty (guaranteed by Morgan Stanley, rated 'AA-/F1+' Outlook Negative by Fitch). The portfolio is managed by AllianceBernstein L.P.

Fitch released updated criteria on April 30, 2008 for Corporate CDOs and, at that time, noted it would be reviewing its ratings accordingly to establish consistency for existing and new transactions. As part of this review, Fitch makes standard adjustments for any names on Rating Watch Negative or with a Negative Outlook, reducing such ratings for default analysis purposes by two and one notch, respectively. Fitch has noted its review will be focused first on ratings most exposed to risks it has highlighted in its updated criteria. Committees are also reviewing transactions that are least impacted by the new criteria and/or portfolio migration. Resolution of these Rating Watches will depend on the plans managers/arrangers may choose to execute and communicate to address these concerns.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
Derek Miller, +1-312-368-2076 (Chicago)
Kevin Kendra, +1-212-908-0760 (New York)
Sandro Scenga, +1-212-908-0278
(Media Relations, New York)