Fitch Downgrades MSC 2006-SRR2; Removes from Watch Negative

NEW YORK - (BUSINESS WIRE) - Fitch Ratings has downgraded and removed from Rating Watch Negative 17 classes issued by MSC 2006-SRR2 as a result of significant negative credit migration of the commercial mortgage backed securities (CMBS) collateral within the reference portfolio. A complete list of rating actions follows at the end of this press release.

Since Fitch's last rating action in January 2009, approximately 65% of the portfolio has been downgraded, and 48.3% was placed on Rating Watch Negative. Approximately 93.3% of the portfolio has a Fitch derived rating below investment grade and 8.3% has a rating in the 'CCC' rating category or lower, compared to 1.7% and 0% at last review.

This transaction was analyzed under the framework described in the report 'Global Rating Criteria for Structured Finance CDOs' using the Portfolio Credit Model (PCM) for projecting future default levels for the underlying portfolio. The degree of correlated default risk of this reference collateral is high given the single sector CMBS and vintage concentrations. Further, in its review Fitch analyzed the structure's sensitivity to continued negative performance of CMBS, specifically regarding the likelihood of negative rating movement within the next one to two years for CMBS indicated by a Negative Outlook on a bond.

Fitch's loss expectation approximates the credit enhancement available to the class A-2 notes, indicating a real possibility for default. The class A-2 notes have been assigned a 'CCC' rating. For the class A-1 notes, the credit enhancement provided by the class A-2 notes and below is insufficient to warrant ratings for this class above the 'CCC' rating category.

Fitch's loss expectation exceeds the credit enhancement available to class B and all other junior classes. Given the high probability of default of the underlying assets and the expected limited recovery prospects upon default, class B through J have been assigned a 'CC' rating, indicating that default is probable.

For classes K through Q, Fitch assigned the ratings based on the amount of underlying assets experiencing interest shortfalls and assets with a Fitch derived rating of 'CC' or lower. These classes have been assigned a 'C' rating indicating that default is inevitable.

MSC 2006-SRR2 is a static synthetic CDO transaction issued in December 2006 that references a US$1.2 billion portfolio of CMBS securities. The reference portfolio is composed 66.7% CMBS assets from the 2006 vintage and 33.3% from the 2005 vintage. The transaction is designed to provide credit protection for realized losses on a reference portfolio through a credit default swap (CDS) between the issuer and the swap counterparty, Morgan Stanley Capital Services Inc. (MSCS). The swap counterparty guarantor is Morgan Stanley.

Proceeds from the securities are invested in a pool of highly rated eligible investments, which are currently held in a liquidity fund. Collateral market value risk is mitigated through a total return swap (TRS) agreement between the issuer and the TRS counterparty, MSCS.

Fitch has downgraded the following classes as indicated:

--$72,000,000 class A-1 notes to 'CCC' from 'BBB';

--$90,000,000 class A-2 notes to 'CCC' from 'BBB-';

--$38,400,000 class B notes to 'CC' from 'BB+';

--$28,200,000 class C notes to 'CC' from 'BB+';

--$12,600,000 class D notes to 'CC' from 'BB+';

--$14,800,000 class E notes to 'CC' from 'BB';

--$12,200,000 class F notes to 'CC' from 'BB';

--$11,610,000 class G notes to 'CC' from 'BB';

--$18,750,000 class H notes to 'CC' from 'BB-';

--$9,360,000 class J notes to 'CC' from 'B+';

--$16,080,000 class K notes to 'C' from 'B';

--$12,480,000 class L notes to 'C' from 'B';

--$6,510,000 class M notes to 'C' from 'CCC';

--$2,970,000 class N notes to 'C' from 'CCC';

--$5,040,000 class O notes to 'C' from 'CCC';

--$2,160,000 class P notes to 'C' from 'CCC';

--$1,320,000 class Q notes to 'C' from 'CCC.

In addition, classes A-1 through L have been removed from Rating Watch Negative.

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

--'Counterparty Criteria for Structured Finance Transactions' (Oct. 22, 2009);

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

--'Global Rating Criteria for Synthetic CDOs' (March 9, 2009);

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

Additional information is available at www.fitchratings.com.

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Fitch Ratings, New York
Karen Trebach, +1-212-908-0215
Jenny Story, +1-212-908-0302
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com