Fitch Ratings has affirmed the ratings for four classes of notes issued by Pacific Bay CDO and placed one class on Rating Watch Positive as follows: -- $66,560,963 class A-2 notes at 'Dsf'; placed on Rating Watch Positive; -- $40,114,810 class B notes at 'Dsf'; -- $7,976,312 class C notes at 'Csf'; -- $17,000,000 preference shares at 'Csf'. Key Rating Drivers In a release on January 14 , Fitch noted that the affirmations of the class A-2 and B notes reflect the fact that both of these non- deferrable classes continue to experience interest shortfalls. Pacific Bay entered an event of default (EOD) in December 2008 when the senior overcollateralization ratio fell below 100 percent and subsequently accelerated beginning with the May 2009 payment date. As a result, all of the rated classes junior to the A-1 notes have been cut off from receiving any interest or principal proceeds. Since Fitch's last annual review in January 2013 , however, the $24.6 million outstanding balance of the class A-1 notes has been paid in full (PIF) and the class A-2 notes have become the senior most class in the capital structure. On the November 2013 payment date, the class A-2 notes received approximately $1.3 million in distributions toward the repayment of previously defaulted interest amounts. Although this has led to an increase in the credit enhancement (CE) available to these notes and they are now able to pass the 'CCCsf' rating loss rate (RLR) projected by Fitch's Structured Finance Portfolio Credit Model (SF PCM), an additional $2.6 million of the previously defaulted interest due on the class A-2 notes remains outstanding. As such, these notes are still considered to be in default. Nevertheless, Fitch has placed the class A-2 notes on a Positive Watch to reflect the agency's expectation for these notes becoming current on their interest payments, including a full repayment of the remaining previously defaulted interest amounts, on the next semi-annual payment date in May 2014 . The class B notes are projected to remain in default until the balance of the class A-2 notes is paid in full. For the class C notes and the preference shares, the deferrable classes, default continues to appear inevitable prior to or at maturity. Although the class C notes' current CE level has increased slightly over the last 12-months due to deleveraging, it remains significantly below the amount of expected losses from the distressed and defaulted collateral (rated 'CCsf' and lower) in the underlying portfolio. The preference shares have not received any distributions over the last year and are not expected to going forward as they remain undercollaterlized. Rating Sensitivities Pacific Bay has limited sensitivity to further negative migration given the distressed ratings of the notes. However, there is a potential for classes rated 'Csf' to be downgraded to 'Dsf' should they experience any payment default provided by the transaction's governing documents. This review was conducted under the framework described in the report titled 'Global Rating Criteria for Structured Finance CDOs' using the SF PCM to project future loss levels for the underlying portfolio. A cash flow model framework was not used in the review of this transaction, as due to the acceleration, the impact of structural features was considered to be minimal. Instead, for classes rated above 'Dsf', Fitch compared the respective CE levels of the notes to the expected losses from the distressed and defaulted assets in the portfolio. Pacific Bay is a cash flow structured finance collateralized debt obligation (SF CDO) that closed on November 4, 2003 . The portfolio is monitored by Pacific Investment Management Company LLC . (PIMCO). As per the November 2013 Trustee report, the portfolio is composed of 81.6 percent residential mortgage-backed securities, 13.9 percent corporate bonds, 2.9 percent asset-backed securities, and 1.6 percent commercial mortgage-backed securities, primarily from 1998 through 2005 vintage transactions. Additional information is available at 'fitchratings.com '. Applicable Criteria and Related Research : --'Global Structured Finance Rating Criteria' ( May 24 , 2013); --'Global Rating Criteria for Structured Finance CDOs' ( September 12 , 2013). Applicable Criteria and Related Research : Global Structured Finance Rating Criteria http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=708661 Global Rating Criteria for Structured Finance CDOs http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=718027 Additional Disclosure Solicitation Status http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=814470 ((Comments on this story may be sent to email@example.com ))
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