Fitch Upgrades 2 & Affirms 4 Classes of Waveland - INGOTS, Ltd.

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded two and affirmed four classes of notes issued by Waveland - INGOTS, Ltd. (Waveland). Rating Outlooks, Loss Severity (LS) Ratings, and Recovery Ratings (RR) have also been revised or maintained as follows:

--$4,486,790 class A-1 notes affirmed at 'AAAsf', LS to 'LS3' from 'LS2'; Outlook Stable;

--$11,315,123 class A-2 notes affirmed at 'AAAsf', LS to 'LS3' from 'LS2'; Outlook Stable;

--$14,500,000 class B-1 notes upgraded to 'Asf' from 'BBBsf'; LS to 'LS2' from 'LS3'; Outlook to Stable from Negative;

--$10,000,000 class B-2 notes upgraded to 'Asf' from 'BBBsf'; LS to 'LS2' from 'LS3'; Outlook to Stable from Negative;

--$34,148,681 class C-1 notes affirmed at 'Csf'; RR to 'RR3' from 'RR4';

--$2,514,201 class C-2 notes affirmed at 'Csf'; RR to 'RR3' from 'RR4'.

The affirmations of the class A-1 and A-2 (together, class A) notes, as well as the upgrades on the class B-1 and B-2 (together, class B) notes, are attributed primarily to the substantial increase in the credit enhancement (CE) to these notes, as a direct result of the rapid deleveraging of the capital structure from a combination of manager sales and repayment activity in the underlying portfolio. Fitch's analysis also reflects the improving credit profile of the underlying loan portfolio with no new defaults and a shorter remaining weighted average life (WAL).

Since Fitch's last rating action in April 2010, the portfolio has amortized down by approximately $64.9 million, leaving an outstanding portfolio balance of $68.3 million, or 19.5% of the initial portfolio size, as per the June 2011 trustee report. Over the last 15 months, the credit quality of the performing portfolio has slightly improved with the weighted average rating moving to 'B' from 'B/B-' and the exposure to defaulted issuers decreasing to 1.4% from 4.7%. The amount of performing assets Fitch considers rated 'CCC+' or below has decreased to 14.8% from 28.2%, over the same time period.

In evaluating the notes, Fitch focused on the analytical framework described in the reports 'Global Structured Finance Rating Criteria' and 'Global Rating Criteria for Corporate CDOs', using the Portfolio Credit Model (PCM) for projecting future default levels for the underlying portfolio. In this review, Fitch also conducted cash flow modeling analysis for the class A and class B notes to measure the breakeven levels generated by Fitch's cash flow model under the various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. Given the portfolio's short maturity profile, front, middle and back default timing stresses were applied over the first two years of the transaction's remaining life.

The affirmation of the class A notes and Stable Outlook reflects the significant amount of CE available to sufficiently protect the notes against any potential negative migration in the credit quality of the underlying pool and higher obligor concentration, resulting from future portfolio amortizations. To date, 94.4% of the class A notes' collective original balance has paid down, of which 23%, or $64.7 million, has paid down since Fitch's last rating action. As of the June 2011 payment date, approximately $15.8 million, or 5.6%, of the combined class A notes' original balance remains outstanding. Based on the maturity profile of the outstanding pool, Fitch expects the notes to be paid in full by the December 2012 payment date.

The Loss Severity (LS) Rating on the class A notes has been revised in view of the significant amortization on the notes, resulting in a smaller tranche size. As a consequence, the tranche can withstand fewer multiples of the mean expected portfolio loss. The LS rating indicates the 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 Fitch's 'Criteria for Structured Finance Loss Severity Ratings'. The LS rating should always be considered in conjunction with the notes' long-term credit rating. Fitch does not assign LS ratings to tranches rated 'CCC' or below.

The upgrades of the class B notes and revision of Outlook to Stable reflect the class' improved credit profile, with the amount of available CE increasing to approximately 41% from 21% at the last review. As the structural deleveraging continues, these already robust CE levels are expected to further strengthen. Although, the cash flow model analysis suggests that in some scenarios the notes are passing at higher ratings levels than 'Asf', the class B notes are susceptible to potential concentration risk, as only 40 obligors remain in the portfolio with the top obligor accounting for 6.4% and the top five obligors for 22.3% of the total portfolio. In addition to obligor concentration, the class B notes are not expected to begin to receive any principal repayments for another 18 months, until the class A notes are paid in full. Given these risks, Fitch believes that one rating category upgrade is appropriate for the class B notes at this point in time.

The affirmations of the class C-1 and C-2 (together, class C) notes at their current rating level indicate continued expectation of principal shortfall at stated maturity. Since the last review, the class C notes' subordination has declined as a result of net losses from the sale of credit risk and defaulted collateral. Currently, the notes are undercollateralized by approximately $8.6 million.

On a prorata basis, the class C notes are due to receive Basic Interest, Mezzanine Interest, Additional Interest and Contingent Interest from the interest waterfall. According to the rating definition, all but the Basic Interest is used to satisfy the rated principal balance. To date, the class C notes have not missed any payments of their Basic Interest amounts and Fitch expects the class to remain current in the foreseeable future. Mezzanine Interest, Additional Interest and Contingent Interest payments have not been made since the September 2008 payment date and are not expected to be made going forward.

Fitch has revised the Recovery Ratings for the class C notes in this rating review based on the total discounted future cash flows projected to be available to these bonds in a base-case default scenario. These projections have improved since Fitch's last rating action due to the stronger performance of the underlying portfolio, and now indicate cash flows representative of an 'RR3' (51% to 70% recoveries) for the notes, on Fitch's Recovery Rating scale. Recovery Ratings are designed to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities rated 'CCCsf' or below. For further detail on Recovery Ratings, please see Fitch's reports 'Global Surveillance Criteria for Corporate CDOs' and 'Criteria for Structured Finance Recovery Ratings'.

Waveland is a cash flow collateralized loan obligation (CLO), which closed on June 24, 2003 and is managed by Pacific Investment Management Company LLC (PIMCO). The five-year reinvestment period ended in June 2008. The portfolio is comprised of 96.4% senior secured loans and 3.6% senior unsecured collateral. The stated maturity of the transaction is in June 2015.

Additional information is available at 'www.fitchratings.com'.

The information used to assess these ratings was sourced from the asset manager, periodic trustee reports, note valuation reports, and the public domain.

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (Aug. 13, 2010);

--'Global Rating Criteria for Corporate CDOs' (Jul. 05, 2010);

--'Global Criteria for Cash Flow Analysis in CDOs' (Sep. 17, 2010);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Mar. 21, 2011);

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

--'Criteria for Structured Finance Recovery Ratings' (Aug .17, 2009).

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326

Global Rating Criteria for Corporate CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=537494

Global Criteria for Cash Flow Analysis in CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=557485

Criteria for Interest Rate Stresses in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605426

Criteria for Structured Finance Loss Severity Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=426038

Criteria for Structured Finance Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462434

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