Moody’s Investors Service yesterday downgraded three tranches from Caja Madrid's high LTV Spanish RMBS, Madrid RMBS II. The deal priced in December 2006 and by August last year, Caja Madrid reported it had tapped the securitization's reserve fund for €846 million ($1.32 billion), or 1.4% of its required amount.

Caja Madrid structured its Caja Madrid II deal with shorter write-off mechanisms to reduce the required credit enhancement. This made the principal and interest charged off greater than the approximately 70 basis points of spread provided by the swap.

Moody's said that the rating action was prompted by worse-than-expected collateral performance resulting in above market average delinquencies. Cumulative defaults are equal to 1.06% of the original balance, 90+ days delinquencies reached 1.7%of the current balance.

According to Moody's, excess spread has been insufficient to replenish the reserve fund to its required level for the last three interest payment dates. The affected tranches are the class C notes (downgraded to 'A2' from 'A1'), the class D tranche (downgraded to 'Baa3' from 'Baa2') and the class E notes (downgraded to 'Ba3' from 'Ba1'). Moody’s affirmed the ratings for class A1, A2 and A3 tranches.

According to Royal Bank of Scotland analysts, high LTV Spanish RMBS CDS spreads widened 45 basis points on the back of the news.

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