Fitch Downgrades 5 Classes of Notes Issued by C-BASS IV, Ltd./Corp.

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded five classes of notes issued by C-BASS IV, Ltd./Corp. (C-BASS IV). The details of the rating actions follow at the end of this press release.

Due to the concentrated nature of the portfolio, Fitch's analysis was primarily based on the comparison of the portion of the portfolio considered performing (assets with a Fitch-derived rating in the 'B' category and higher) and outstanding tranche balances. Specifically, $15.2 million of the notional balance of the performing assets covers the combined balance of $2.7 million of class B-1 and B-2 (collectively, class B) notes 5.7 times. Despite this high coverage ratio, Fitch also considered the possibility of a future interest shortfall for class B, which is rated to the probability of receiving timely interest and ultimate principal repayment.

A substantial portion of the interest proceeds on the most recent payment date in October was used to pay the hedge counterparty, and more than half of the interest due to class B was paid out of principal proceeds. The strike rate under the interest rate swap in C-Bass IV is 5.8% and the notional, at $33.8 million as of Oct. 1, is scheduled to increase to $49.2 million by January 2010 before it starts to slowly step down. The current notional is significantly higher than the notional of fixed rate assets in the portfolio net of fixed coupon liabilities.

Despite a large paydown of $9.5 million to class B on the last payment date and corresponding reduction of interest due on the future payment dates, in Fitch's opinion, the use of principal proceeds to pay a portion of class B interest may continue, as long as the hedge remains out of the money. In evaluating class B's ability to receive timely interest in the future, Fitch analyzed the ability of the performing portion of the portfolio to generate enough interest to cover the administrative expenses, management fees, and payment to the hedge counterparty. In Fitch's assessment, this ability is commensurate with the 'A' rating category.

In Fitch's opinion, there is a real possibility that timely interest payments to class B would have to be partially funded from the principal proceeds and therefore would depend on the timing of the amortization of the underlying assets. Given a high concentration and the barbell credit nature of the underlying portfolio, Fitch expects an uneven pace in the amortization of the underlying assets. Fitch has placed class B on Rating Watch Negative to reflect a high degree of uncertainty with respect to class B's future ability to receive timely interest.

In the event of the interest shortfall in any future periods, class B will be downgraded to a 'D' rating. In the event that class B receives its full interest due on the next payment date in January 2010 and remains outstanding after that payment date, the Rating Watch Negative status may be resolved if Fitch evaluates at that time that the risk of missing future interest payments for this class is remote.

Class C is rated to the ultimate receipt of interest and principal. Given the composition of the portfolio, the ratio of the performing assets to the notional balances of classes B and C, the likelihood of using principal proceeds to partially pay interest due on the notes, and potential swap payments, Fitch evaluates the risk associated with this class to be at the 'BBB' level. Given the uncertainty with respect to the potential use of principal to pay interest, described above, Fitch assigns a Negative Rating Outlook to this class.

The class B and C notes are assigned Loss Severity (LS) ratings of 'LS5'. The LS ratings indicate each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the base-case loss expectation for the collateral, as explained in 'Criteria for Structured Finance Loss Severity Ratings'. The LS rating should always be considered in conjunction with the probability of default for tranches.

Classes D-1 and D-2 are currently not receiving any interest payments. While they may eventually receive some payments, these notes are unlikely to be paid in full and are subsequently downgraded to 'C'.

C-BASS IV is a structured finance collateralized debt obligation (SF CDO) that closed on June 27, 2002. The portfolio is monitored by C-BASS Investment Management LLC. The portfolio is composed primarily of residential mortgage-backed securities (RMBS) 81.1% and CDOs 18.9%.

Fitch has taken various rating actions on the following classes of C-BASS IV, Ltd./Corp.:

--$1,765,006 class B-1 notes downgraded to 'A/LS5' from 'AAA'; Stable Outlook removed; placed on Rating Watch Negative;

--$980,559 class B-2 notes downgraded to 'A/LS5' from 'AAA'; Stable Outlook removed; placed on Rating Watch Negative;

--$5,025,875 class C Notes downgraded to 'BBB/LS5' from 'A'; Outlook revised to Negative from Stable;

--$2,215,759 class D-1 notes downgraded to 'C' from 'CCC';

--$12,775,223 class D-2 notes downgraded to 'C' from 'CCC'.

These rating actions reflect the application of Fitch's current criteria which are available at www.fitchratings.com and specifically include the following reports:

--'Global Structured Finance Rating Criteria' (Sept. 30, 2009);

--'Global Rating Criteria for Structured Finance CDOs' (Dec. 16, 2008);

--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009).

Additional information is available at www.fitchratings.com.

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