Fitch Affirms $70.8MM from Dutch Hill Funding II Ltd.

July 18, 2008 1:27 PM EDT

NEW YORK--(BUSINESS WIRE)--

Fitch affirms 1 and removes one class of notes issued by Dutch Hill Funding II Ltd. (Dutch Hill II) from Rating Watch Negative. The following rating actions are effective immediately:

--$70,795,099 class A-1 affirmed at 'AA' and removed from Rating Watch Negative;

    --$21,200,000 class A-2 remains at 'A', Rating Watch Negative;

    --$64,400,000 class B remains at 'BB', Rating Watch Negative;

    --$32,035,070 class C remains at 'B', Rating Watch Negative;

    --$16,629,036 class D-1 remains at 'C';

    --$13,206,619 class D-2 remains at 'C';

    --$13,508,056 class D-3 remains at 'C'.

Dutch Hill II is a cash flow mezzanine structured finance collateralized debt obligation (CDO) that closed on May 2, 2007 and is managed by TCW Investment Management Company. In addition to the $400.8 million cash and synthetic portfolio, the issuer has purchased credit protection (initiated short contracts) on $253.9 million residential mortgage backed securities (RMBS). Short contracts were used to purchase protection on mezzanine tranches of RMBS issued by the same issuer as junior tranches that are held in cash or synthetic form. Dutch Hill II has a three-year limited substitution period during which only collateral sale proceeds may be reinvested.

This affirmation is the result of a Rating Watch review that Fitch conducted to resolve the Rating Watch Negative status of all rated notes of Dutch Hill II. In October 2007, Fitch placed all of the classes of notes on Rating Watch Negative due to exposure to subprime RMBS and structured finance collateralized debt obligations (SF CDOs) issued between 2005 and 2007. Subsequently, in November 2007, all classes were downgraded and remained on Rating Watch Negative. Fitch maintained the Rating Watch Negative status on this transaction in part because of the amount of the portfolio that was on Rating Watch Negative as well as the short contracts that serve as protection to a large portion of the portfolio.

At this time, Fitch affirmed the class A-1 notes due to the significant delevering of this class primarily through principal proceeds received by Dutch Hill II as a result of the termination of portions the aforementioned short portfolio. Additionally, some principal payments received from assets in the long portfolio have been distributed as principal distributions to the class A-1 holders. On the May 15, 2008 distribution date, class A-1 noteholders received more than $77.6 million which was more than half of the then outstanding balance of $148.4 million. As of the trustee report dated June 15, there is approximately $24.7 million of principal proceeds in the collection account, which will be used to pay principal to the class A-1 notes on the next payment date, Aug. 15, 2008. As part of Fitch's analysis, the portfolio management strategy was discussed with the asset manager. The manager had indicated that assets in the short portfolio would continue to be terminated when possible and any further principal proceeds received over the remainder of the due period will also be paid to the class A-1 notes.

Due to the variability in future liquidations of the short portfolio and future defaults and potential negative credit migration in the long portfolio, classes A-2, B, C remain on Rating Watch Negative.

The ratings of the class A-1, A-2 and B notes address the likelihood that investors will receive full and timely payments of interest, as per the governing documents, as well as the stated balance of principal by the legal final maturity date. The ratings of the class C Loans, C, D-1, D-2 and D-3 notes address the likelihood that investors will receive ultimate and compensating interest payments, as per the governing documents, as well as the stated balance of principal by the legal final maturity date.

Fitch will continue to monitor and review this transaction for future rating adjustments. Additional transaction information and historical data are available on the Fitch Ratings web site at www.fitchratings.com.

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.

Source: Fitch Ratings

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