Fitch Upgrades 3 Classes of Sargas CLO II Ltd./LLC

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded three classes of notes issued by Sargas CLO II, Ltd./LLC (Sargas CLO II) as follows:

--$5,638,660 class C notes to 'AAAsf' from 'Asf'; Outlook Stable;

--$16,113,528 class D notes to 'AAsf' from 'BBsf'; Outlook Stable;

--$19,199,097 class E notes to 'BBsf' from 'Bsf'; Outlook to Stable from Negative.

The upgrades reflect the significant amortization that has occurred since Fitch's last rating action in conjunction with the relatively stable performance of the underlying loan portfolio.

Since Fitch's last rating action in December 2010, the capital structure has been amortized by over $93 million, including the payment-in-full of the class A-2 and class B notes. The class C notes are now the senior-most class and have been repaid about 83.4% of their initial par balance to date. The continued amortization of the liabilities has led to increased credit enhancement levels for all remaining classes of notes. Additionally, the underlying portfolio has not experienced any new defaults since Fitch's last rating action and the average credit quality of the performing assets has remained fairly stable over this time, though still in the 'B-/CCC+' range.

Fitch notes that the rapid pace of loan repayments in the portfolio has inevitably led to increased obligor concentration, as only 12 performing obligors remain. Although exposure to 'CCC' assets is relatively high at 47% of the performing portfolio, this actually represents an improvement from a level of 53.6% at the last rating action.

Fitch believes that important mitigants to the high obligor concentration at this time are the degree of available subordination for each tranche, in addition to the fact that all remaining performing loans are senior secured and would therefore be expected to generate relatively high recoveries in the event of a default. Even under severely stressed scenarios of high defaults and well below-average recoveries, Fitch would expect the class C and class D notes to be repaid. The class E notes will rely on a degree of continued performance in the underlying portfolio, but Fitch believes their credit quality has improved due to the increase in relative subordination available. In addition to the upgrade, Fitch has revised the Outlook on the class E notes to Stable.

Fitch currently considers the remaining portfolio to consist of approximately $62.6 million of senior secured loans from 12 obligors (the performing portfolio) and three defaulted loans totaling $6.9 million of par from two obligors. Additionally, the asset manager has informed Fitch of the sale at par of a $3.6 million loan after the record date for the Oct. 31, 2011 trustee report, which is the latest report available to Fitch. These sales proceeds should be available for distribution at the next payment date in January 2012.

This review was conducted under the framework described in the report 'Global Rating Criteria for Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting future default and recovery levels for the underlying portfolio. These default and recovery levels were then utilized in Fitch's cash flow model under various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. While Fitch's cash flow analysis indicates higher passing rating levels for the class D and class E notes, the extent of the upgrades captures the improvements in credit enhancement while accounting for the profile of the remaining portfolio.

Sargas CLO II is a collateralized debt obligation (CDO) that closed on Aug. 16, 2006 and was originally named De Meer Middle Market CLO 2006-1 Ltd./LLC. In December 2010 management duties of the transaction were purchased by Fortress Investment Group from Pangaea Asset Management, the prior manager. The transaction's substitution period ended in March 2009.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

The information used to assess these ratings was sourced from the asset manager, periodic servicer reports, note valuation reports, and the public domain.

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (Aug. 4, 2011);

--'Global Rating Criteria for Corporate CDOs' (Aug. 10, 2011);

--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 21, 2011).

Applicable Criteria and Related Research:

Global Criteria for Cash Flow Analysis in CDOshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=650717

Criteria for Interest Rate Stresses in Structured Finance Transactionshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605426

Global Structured Finance Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646569

Global Rating Criteria for Corporate CDOshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=641789

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch RatingsPrimary AnalystRobert Rhein, +1-312-606-2314DirectorFitch, Inc.70 West Madison StreetChicago, IL 60602orCommittee ChairpersonDerek Miller, +1-312-368-2076Senior DirectororMedia RelationsSandro Scenga, +1-212-908-0278 (New York)[email protected]

Source: Fitch Ratings

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