Despite a guaranty from Steadfast Insurance Company, the A tranche of a bond issued by the Belize Mortgage Co. has fallen victim to a cut in the sovereign's rating by Moody's Investors Service to B3' from B2' and a demotion in the sovereign's outlook to negative from stable. The agency last week downgraded the A tranche to Baa1' from A3' and the B tranche to B3' from B2.' Issued in April 2002, the bonds mature in 2012.

The last time Moody's cut the Belizean deal, the A tranche escaped unscathed. But the most recent downgrade had stretched the gap between the sovereign and the A tranche too wide. "An A3' might have been consistent with a B2' for the sovereign, but moving it to B3' on negative outlook pulled the rating down," said Christian Corcino, associate analyst at Moody's. He added that the rating on the A tranche is based on a mix of the Steadfast policy, the quality of the asset pool, and the guarantys provided by the Development Finance Corporation of Belize and the Government of Belize, which is the channel through which the sovereign downgrade has contaminated the deal.

The Steadfast guaranty did not extend to interest payments early on, as it covered $40 million, equal to the principal of the initial size of the A tranche. With amortization, coverage has effectively grown to include interest payments, but the policy is still not structured as a monoline full wrap, according to Corcino. Moody's does not have a published rating on Steadfast.

As for the third ingredient of the rating, the asset pool is performing "within expectations," Corcino added.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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