Fitch Ratings upgraded two and downgraded five tranches across the Southern Pacific Financing transactions — the two upgrades were of the Class D and E in SPF 04-A and the downgrades were the Class D and E from SPF 05-B and the class C, D1 and E of SPF 06-A.

Barclays Capital analysts said that the arrears in all three transactions have been increasing, although in the case of SPF 04-A, the arrears are largely a result of de-leveraging of the pool, which, in actual terms means arrears have been falling.

Fitch mentions that in the other two transactions, the servicer has been taking an active role in selling repossessed properties. However, as a result of falling house market, loss levels are increasing across the transactions — a trend that is likely to continue.

Standard & Poor's also placed the Class D and E notes on watch negative in Southern Pacific's SPS 05-2 transaction because of a general deterioration in collateral performance, which has caused another U.K. nonconforming transaction to draw on its reserve fund.

S&P also downgraded the class E1c notes in the MARS 4 transaction. This transaction suffered from the Lehman Brothers bankruptcy where there is now no longer a fixed/floating swap or a Bank of England base rate swap.

With further weakening in collateral performance, there has been further reserve fund draws — leaving the reserve fund at 35.89% of its target balance.

"As the number of transactions drawing on their reserve fund draws increase, unsurprisingly we expect the deals with a lack of hedging arrangements to be most affected and will continue to draw on the reserve funds, as levels of excess spread get squeezed," Barclays analysts said. "Looking at the Bank of England Base Rate / Libor spread currently from Bloomberg, while the three-month Libor has reduced, it has taken its time to fall, hence transactions would have suffered a high period of stress depending on their payment dates and so we are likely to see further reserve fund draws."

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