U.S. RMBS trouble is brewing for Bermuda-based Taberna Capital Management.

The CDO manager, which has issued nine CDOs backed primarily by REITs since its inception in 2005, has been hit with a cluster of negative rating actions. The growing turmoil in the REIT market is the catalyst for the trouble, rating agency sources said.

Credit quality has deteriorated rapidly for a number of residential mortgage REITs, finance companies specializing in residential mortgage lending and homebuilders underlying these CDOs, according to Fitch Ratings.

Meanwhile, Moody's Investors Service issued a release earlier this month that it would be reviewing 18 trust preferred CDOs with direct exposure to mortgage companies under financial distress. The exposure of these CDOs ranges from just under 3% to 19% of the underlying collateral with the largest exposure in REIT trust preferred CDOs, the rating agency said.

"We are looking closely into those CDOs, given what has happened in the market and the uncertainties and liquidity issues that have popped up specifically with mortgage REITs," said James Brennan, vice president in the structured finance group at Moody's.

Indeed, American Home Mortgage and HomeBanc Mortgage Corp., which filed for Chapter 11 on Aug. 6 and Aug. 10, respectively, were two of the REITs that backed Taberna Preferred Funding II. The deal, first issued in June 2005 and arranged by Merrill Lynch, had three classes of notes put on rating watch negative, affecting approximately $84.3 million.

That was not the only Taberna deal to face rating watch negative as a result of REIT exposure. "All of the transactions [that were put on rating watch negative or downgraded] have had exposure to at least one REIT that has filed for bankruptcy protection and/or missed a trust preferred security dividend payment," Nathan Flanders, senior director at Derivative Fitch said, noting that these are viewed as defaulted securities.

Fitch also placed two classes of notes issued by Taberna Preferred Funding III on rating watch negative as well as one class of notes issued by Taberna Preferred Funding IV, three classes of notes issued by Taberna Preferred Funding V and four classes of notes issued by Taberna Preferred Funding VI. All of the rating actions affected tranches rated BBB' through BB.'

And the remainder of the portfolio of those CDOs has experienced negative credit migration as REITs more generally come under both "credit and liquidity pressures," Flanders said.

Moody's last week also placed the ratings of all four classes of notes issued by Taberna Preferred Funding II that it currently rates on review for a possible downgrade as well as three classes of notes issued by Taberna Preferred Funding III and two classes of notes issued by Taberna Preferred Funding IV. These ratings ranged from Aaa' to Aa2.'

While Taberna's CDOs were the only ones put on watch for a downgrade by Moody's, Fitch also downgraded the ratings of the two junior most classes of notes issued by Kodiak CDO I to BB' from BBB' and B+' from BB+,' and placed them on rating watch negative. Flanders also noted that Fitch is currently watching other transactions with similar types of exposure.

Calls to Taberna Capital Management were forwarded to investor relations, which did not return phone calls by press time.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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