The healthcare securitization deal, Craegmoor Funding No.2, had its class M and B notes downgraded last week and it faces an uphill battle to save the underlying ratings on its triple-A notes.

Fitch Ratings downgraded the class M notes to BBB-' from A-' and class B notes to BB-' from BB+.' It has affirmed the class A notes at AAA.' Fitch is retaining the rating watch negative on the class M notes and the class B notes. The class A1 and A2 notes benefit from an unconditional and irrevocable guaranty from MBIA Assurance. The underlying rating of A' has been placed on ratings watch negative.

The downgrades resulted from the continued deterioration of the transaction's financial performance combined with its restructuring, which was announced last month.

Since the restructuring was disclosed, Fitch analysts said they have met with Craegmoor's management to gain an understanding of how the issuer plans to improve performance but management refused to provide Fitch with a forecast. "The agency is concerned that failure to remedy borrower event default as envisioned by the original documentation and temporary adjustments to financial covenants increase the risk to the mezzanine and junior notes," explained James Martin at Fitch.

These deals are proposed and rated on the concept that upon the breach of a financial covenant, either the breach will be remedied by an injection of equity and, if it isn't, there will be an appointment of an administrator receiver. "Even though there was equity injected in the deal, it was not the amount required by the documentations," Martin said. "We are concerned that the financial covenant has not been remedied and that the structure is not doing what was intended by our analysis at the close of the deal."

Martin said that in the case of this Craegmoor deal, it's not just the breach of the financial covenant that is of concern, but also that the temporary adjustments made change the structuring of the deal, creating a high level of uncertainty.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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