Ratings

During the first half of 2006, the average credit quality of global structured securities increased. While the upgrade rate declined and the downgrade rate increased to a certain extent, overall credit performance was comparable to that of the past several semiannual periods. Despite its decline, the upgrade rate for global structured securities was about 2.3x the downgrade rate during the first half of 2006. This positive trend was visible across all sectors, but it was most noticeable in global CMBS and RMBS, as well as in certain global ABS ratings.

Among the sectors riding the positive credit wave, CMBS has prospered the most, benefiting from healthy commercial real estate fundamentals. Global RMBS ratings remained solid, yet the upgrade rate for this asset class has declined significantly. Global CDO performance continues to improve, but the upgrade and downgrade rates for this sector were more balanced in the first half of this year than in previous periods. CDOs continue to benefit from the good performance of corporate and structured securities. Among the subsectors, transactions backed by credit cards and auto loan ABS and prime jumbo and second-lien RMBS have experienced increases in credit quality, as have high-yield CBOs and CLOs, synthetic emerging market CDOs, and recent-vintage CDOs of ABS. The significant increase in tobacco ABS rating activity was due to defeasance. On the other hand, certain ABS asset types, such as aircraft and manufactured housing, as well as early-vintage CDOs of ABS with high concentrations of poor performing ABS asset types, have experienced declines in credit quality.

The following key trends were observed in the first half of 2006:

• Global structured securities continued to exhibit positive credit behavior, significantly reversing the trend of declining credit quality noted in early 2001 through late 2003;
• Overall, about 4.2% of global structured securities experienced rating transitions during the first half of 2006, compared with 5.3% in the second half of 2005 and 4.5% in the first half of 2005;
• While the global CMBS continued to perform well, CMBS and RMBS combined attained the majority of the upgrades;
• Credit quality improved among U.S. and European CMBS, resulting in upgrade rates of 7.29% and 5.6%, respectively;
• The aircraft, manufactured housing, early-vintage CDO of ABS, synthetic investment-grade corporate CDO, and single-issue synthetic sectors accounted for most of the downgrades;
• Overall, the upgrade rate was 2.94% during the first half of 2006, versus 4.25% in the second half of 2005. In other words, 2.94% of outstanding ratings were raised during the recent time period, suggesting a decline from the second half of 2005;
• The downgrade rate was 1.26% for global structured finance securities during the first half of this year, up from a rate of 1.06% during the second half of 2005;
• Defaults and near-defaults during the first six months came primarily from securities that were rated 'BB' or lower at the beginning of 2006;
• Structured finance credit spreads have continued to decline, suggesting the market's anticipation of positive credit trends in near future; and
• At the end of the first half of 2006, securities with ratings on CreditWatch negative included a significant number of synthetic corporate investment-grade CDOs, early-vintage CDOs of ABS, and subprime RMBS, highlighting the forward-looking aspect of a CreditWatch placement. Comparatively, securities with ratings on CreditWatch positive included auto loan ABS and high-yield CBOs.

This report documents the long-term rating performance of global structured securities rated by Standard & Poor's Ratings Services in the first six months of 2006. It also highlights changes in credit quality trends of global structured securities on a 12-month trailing basis for the period between January 1995 and June 2006. Generally, a rating transition is associated with a time period in which a rating on a security is measured, such as the first half of 2006. The rating on a security at the beginning and end of this period is used to calculate transition rates. This report includes several summary tables that highlight the solid credit performance of structured securities during the first half of 2006.

Chart 1 shows the percentage of ratings outstanding for each sector and region out of the total universe of outstanding ratings (about 51,000) as of Jan. 1, 2006. Table 1 shows the actual number of ratings outstanding at the beginning of 2006 for each sector and region, and it provides additional insight into the rating transition rates during the first half of the year. Overall, the improving credit quality during the first half of 2006 was relatively significant.

Table 1 Global SF First-Half 2006 Rating Transition By Region And Sector
Region/sector	Beginning No. of Ratings	Stable %	Upgrade %	Downgrade %	Near default %	Default %
U.S. ABS	3,799	93.13	4.03	2.84	0.42	0.95
U.S. CDO	5,223	96.61	1.57	1.82	0.06	0.15
U.S. CMBS	5,101	91.53	7.29	1.18	0.00	0.14
U.S. RMBS	26,766	97.84	1.64	0.51	0.00	0.07
U.S. single-issue synthetics	904	88.05	6.64	5.31	0.00	0.00
Euro. ABS	639	96.87	0.47	2.66	0.00	0.94
Euro. CDO	3,311	94.90	1.75	3.35	0.00	0.09
Euro. CMBS	589	94.23	5.60	0.17	0.00	0.00
Euro. RMBS	1,599	92.93	7.07	0.00	0.00	0.00
Euro. single-issue synthetics	292	98.29	1.03	0.68	0.00	0.00
Asia (non-Japan)	60	86.67	1.67	11.67	0.00	0.00
Australia/New Zealand	1,027	87.34	11.59	1.07	0.00	0.00
Canada	286	97.90	0.00	2.10	0.00	0.00
Japan	1,134	91.27	5.20	3.53	0.00	0.00
Latin America/emerging markets	126	99.21	0.79	0.00	0.00	0.00
Total	50,856	95.79	2.94	1.26	0.04	0.15
Notes: 1. 'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. 2. When ratings are withdrawn due to redemptions during the transition window, the last rating before withdrawal is used in the transition rate calculation. 3. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. 4. Downgrade rate includes near-defaults ('CC' or 'C') and defaults. Default rate includes near-defaults. 5. RMBS includes subprime mortgage transactions and ABS includes manufactured housing deals. 6. CDO includes cash, synthetic, and market value CDOs as well as leveraged funds.

Chart 2 shows how Standard & Poor's global structured finance ratings performed during the first half of 2006. It also illustrates the performance of the ratings from the combined regions and sectors during the previous semiannual periods. Chart 2 shows that 2.94% of the ratings on outstanding global securities rated by Standard & Poor's were raised and 1.26% were lowered during the first half. The upgrade rate of 2.94% for the period was lower than the rate of 4.25% during the second half of 2005, while the downgrade rate of 1.26% was a little higher than the rate of 1.06% in the previous six-month period, but still much lower than the downgrade rates reported during the six-month periods in 2002 and 2003.

Tables 2 and 3 show that the upgrade rate for U.S. ABS during the first half of 2006 was much higher than it was in previous semiannual periods. For example, 4.03% of outstanding U.S. ABS ratings were raised during the recent first half, which is much higher than 2.93% in the previous six months. Comparatively, 2.84% of U.S. ABS ratings were lowered during the first half, up from 0.56% in the previous six-month period. This increase in the downgrade rate, however, was attributed to a few ABS subsectors, as discussed below. In addition, 0.47% of European ABS ratings were raised in the first half, down from 1.37% in the second half of 2005. However, the European ABS downgrade rate during the first half of 2006 increased substantially to 2.66% from 0.34% in the second half of 2005. The ABS downgrade rate in the first half of 2006 was primarily driven by significant lowered ratings on aircraft, 12b-1, and manufactured housing transactions. European and U.S. CDO performance improved during the first half relative to recent periods, but several recent corporate credit events had an adverse impact on the rating behavior of certain synthetic CDOs. Furthermore, European RMBS continued to experience significant upgrades during the first half of 2006, while the U.S. RMBS upgrade percentage was lower than in previous periods. Both sectors reported minimal downgrades. Finally, U.S. and European CMBS transactions experienced significant upgrade rates of 7.29% and 5.6%, respectively, while their downgrade rates were lower than in the previous semiannual periods.

Table 2 Global SF Semiannual Rating Transition By Region And Sector
Second-half 2002 through first-half 2006
	Upgrade %
Region/sector	2H02	1H03	2H03	1H04	2H04	1H05	2H05	1H06
U.S. ABS	0.59	1.04	1.39	1.21	0.46	1.99	2.93	4.03
U.S. CDO	0.31	0.57	0.64	0.41	1.55	2.13	1.45	1.57
U.S. CMBS	2.64	2.37	6.46	4.43	8.81	5.67	14.86	7.29
U.S. RMBS	3.49	4.72	7.08	6.69	3.97	3.96	3.36	1.64
U.S. single-issue synthetics	0.18	1.11	0.14	2.73	0.59	4.93	5.88	6.64
Euro. ABS	0.56	0.46	0.42	1.35	0.54	1.01	1.37	0.47
Euro. CDO	0.00	0.39	5.75	1.89	3.40	2.85	1.02	1.75
Euro. CMBS	1.47	4.53	2.47	3.13	5.12	3.49	3.67	5.60
Euro. RMBS	2.96	1.72	3.57	1.67	2.22	3.03	2.83	7.07
Euro. single-issue synthetics	0.57	5.21	2.00	1.14	0.38	1.45	2.75	1.03
Asia (non-Japan)	8.33	0.00	0.00	0.00	0.00	6.67	7.27	1.67
Australia/New Zealand	0.21	0.54	2.11	0.41	0.98	2.39	1.39	11.59
Canada	3.59	0.00	8.29	3.02	4.84	7.17	7.35	0.00
Japan	1.72	1.98	3.91	2.47	4.01	5.36	4.30	5.20
Latin America/emerging markets	1.10	0.00	11.96	1.96	6.54	6.19	9.57	0.79
Total	2.10	2.75	4.77	4.08	3.60	3.65	4.25	2.94
Notes: 1. 'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. 2. When ratings are withdrawn due to redemptions during the transition window, the last rating before withdrawal is used in the transition rate calculation. 3. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. 4. Downgrade rate includes near-defaults ('CC' or 'C') and defaults. Default rate includes near-defaults. 5. RMBS includes subprime mortgage transactions and ABS includes manufactured housing deals. 6. CDO includes cash, synthetic, and market value CDOs as well as leveraged funds.

Table 3 Global SF Semiannual Rating Transition By Region And Sector
Second-half 2002 through first-half 2006
	Downgrade %
Region/Sector	2H02	1H03	2H03	1H04	2H04	1H05	2H05	1H06
U.S. ABS	5.35	15.28	12.94	5.99	5.72	1.37	0.56	2.84
U.S. CDO	6.55	6.49	4.90	1.93	1.92	1.44	2.54	1.82
U.S. CMBS	3.41	4.41	3.35	2.53	2.04	1.40	1.09	1.18
U.S. RMBS	0.67	0.52	0.35	0.14	0.31	0.33	0.31	0.51
U.S. single-issue synthetics	21.15	6.17	8.39	3.39	8.15	5.04	3.51	5.31
Euro. ABS	5.29	12.13	2.75	7.72	3.62	1.52	0.34	2.66
Euro. CDO	11.59	10.42	6.58	4.01	1.86	0.78	4.10	3.35
Euro. CMBS	0.49	2.64	2.12	2.85	2.16	0.93	1.22	0.17
Euro. RMBS	0.63	0.34	0.00	0.00	0.00	0.00	0.29	0.00
Euro. single-issue synthetics	18.86	5.21	6.40	1.52	8.37	5.07	0.69	0.68
Asia (non-Japan)	12.50	0.00	0.00	0.00	2.56	0.00	7.27	11.67
Australia/New Zealand	0.83	1.99	0.81	1.50	0.12	1.14	0.96	1.07
Canada	4.19	0.56	4.15	0.00	0.00	0.00	0.00	2.10
Japan	0.69	1.48	0.20	1.97	0.00	0.22	2.36	3.53
Latin America/emerging markets	18.68	18.18	1.09	0.00	0.00	0.00	0.87	0.00
Total	3.80	4.97	3.68	1.90	1.73	0.87	1.06	1.26
Notes: 1. 'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. 2. When ratings are withdrawn due to redemptions during the transition window, the last rating before withdrawal is used in the transition rate calculation. 3. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. 4. Downgrade rate includes near-defaults ('CC' or 'C') and defaults. Default rate includes near-defaults. 5. RMBS includes subprime mortgage transactions and ABS includes manufactured housing deals. 6. CDO includes cash, synthetic, and market-value CDOs as well as leveraged funds.

Overall, the results for the first half of 2006 suggest that stability was consistent with rating levels--securities with higher ratings tended to be more stable, and securities with lower ratings tended to be less stable. In other words, in the first half of 2006, global structured securities with lower ratings experienced higher downgrade percentages, except those in the 'BBB' rating category (see chart 3 and table 4). For example, the downgrade rate was 0.36% for 'AAA', 1.18% for 'AA', 1.20% for 'A', 1.16% for 'BBB', 1.62% for 'BB', and 2.76% for 'B' rated securities. With respect to upgrades, the relationship between ratings and upgrade rates was positively correlated during the first half. For example, 'AA' rated global structured securities experienced an upgrade rate of 4.91%, while 'A' and 'BBB' rated securities experienced upgrade rates of 4.09% and 3.60%, respectively. For 'BB' and 'B' ratings (speculative-grade), the upgrade rates were 2.68% and 1.65%, respectively.

Table 4 Global SF First-Half 2006 Transition By Rating
Rating at beginning of year	Beginning no. of ratings	Stable %	Upgrade %	Downgrade %	Near default %	Default %
AAA	11,773	99.64	0.00	0.36	0.00	0.00
AA	10,268	93.91	4.91	1.18	0.00	0.00
A	10,123	94.72	4.09	1.20	0.00	0.00
BBB	10,909	95.24	3.60	1.16	0.00	0.00
BB	4,693	95.70	2.68	1.62	0.00	0.11
B	2,702	95.37	1.85	2.78	0.11	0.26
CCC or lower	297	73.74	3.37	22.90	5.39	17.51
Total	50,856	95.79	2.94	1.26	0.04	0.15
Notes: 1. 'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. 2. When ratings are withdrawn due to redemptions during the transition window, the last rating before withdrawal is used in the transition rate calculation. 3. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. 4. Downgrade rate includes near-defaults ('CC' or 'C') and defaults. Default rate includes near-defaults.

Chart 4 documents the upgrade and downgrade rates for each rating category in each sector during the first half of 2006. Overall, the results show that the solid first half of 2006 performance was observed across all rating categories in the ABS, CMBS, and RMBS sectors. Chart 5 combines the stability and default rates across rating categories during the first half of 2006, and it illustrates that less-stable rating categories tend to experience higher default rates. Finally, chart 6 highlights the magnitude (in notches) of the rating transitions experienced by structured securities during the first half of 2006. For example, about 45% of upgraded securities and about 32% of downgraded securities experienced only a one-notch rating change during the period. Additionally, about 20% of upgraded securities and 16% of downgraded securities experienced transitions of three notches or more.

Table 5 illustrates the impact of the year of issuance on credit performance during the first half of this year. For example, the transactions still outstanding in 2006 that were originated between 1995 and 2002 exhibited weak credit performance during this period. Additionally, deals issued in 1998 experienced a default rate of 1.46% during the first half of this year, the highest default rate of any issuance year.

Table 5 Global SF First-Half 2006 Rating Transition By Issuance Year (Vintage)
Issuance year	Beginning No. of ratings	Stable %	Upgrade %	Downgrade %	Near default %	Default %
Pre-1990	270	100.00	0.00	0.00	0.00	0.00
1990	42	100.00	0.00	0.00	0.00	0.00
1991	56	100.00	0.00	0.00	0.00	0.00
1992	112	99.11	0.00	0.89	0.00	0.00
1993	166	100.00	0.00	0.00	0.00	0.00
1994	131	96.95	1.53	1.53	0.00	0.00
1995	158	91.14	0.63	8.23	0.00	0.00
1996	272	92.65	2.57	4.78	0.00	0.00
1997	493	94.12	1.62	4.26	0.20	1.42
1998	752	90.82	4.79	4.39	0.27	1.46
1999	1,013	85.88	11.75	2.37	0.59	1.09
2000	1,373	89.88	7.57	2.55	0.44	1.31
2001	2,591	91.08	5.56	3.36	0.04	0.66
2002	5,034	91.28	6.26	2.46	0.06	0.24
2003	8,469	95.01	4.45	0.54	0.00	0.01
2004	12,889	96.79	2.48	0.73	0.00	0.01
2005	17,035	98.74	0.38	0.88	0.00	0.00
All	50,856	95.79	2.94	1.26	0.04	0.15
Notes: 1. 'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. 2. When ratings are withdrawn due to redemptions during the transition window, the last rating before withdrawal is used in the transition rate calculation. 3. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. 4. Downgrade rate includes near-defaults ('CC' or 'C') and defaults. Default rate includes near-defaults.

Table 6 presents the credit performance of global structured securities by subsector. It shows that the majority of the upgrades and downgrades in the first six months were initiated on only a handful of asset types. Specifically, the high downgrade rates involved the following asset categories: 12b-1 ABS (45%), aircraft (13.24%), manufactured housing (23.34%), synthetic corporate investment-grade CDOs (7.22%), and CDOs of ABS (1.81%). On the other hand, several other asset types experienced notable upgrade percentages during the period: CMBS (6.95%), auto loans (5.4%), credit cards (2.36%), RMBS prime jumbo (4.02%) and second-lien (3.62%), high-yield CBOs (5.1%), and synthetic emerging market CDOs (14.63%).

While some of the upgrade activity in the first half was due to performance, all of the raised tobacco bond ratings resulted from defeasance. Other subsectors either experienced modest rating transitions (included in table 6) or did not experience any rating transitions during the period (excluded from table 6). For example, auto loan ABS is included in table 6 because 5.4% of these ratings were raised, while subsectors that maintained a 100% stability rate during the six-month period are not included. In addition, several asset types experienced significant upgrade rates or number of upgrades during the period, but the upgrade percentages were less noteworthy because of the small or large number of rated securities in each sector, respectively. Charts 7 and 8 illustrate the downgrade rate and rating change severity of the various subsectors during the first half of 2006. Manufactured housing, 12b-1, aircraft, and tobacco bonds stand out in all of these exhibits.

Subsectors	Beginning no. of Ratings	Stable %	Upgrade %	Downgrade %	Near Default %	Default %
ABS 12b-1	40	42.50	12.50	45.00	32.50	40.00
ABS aircraft	68	86.76	0.00	13.24	0.00	7.35
ABS auto lease	80	98.75	0.00	1.25	0.00	0.00
ABS auto loans	833	94.60	5.40	0.00	0.00	0.00
ABS credit card	933	97.53	2.36	0.11	0.00	0.00
ABS commercial other	62	90.32	1.61	8.06	0.00	0.00
ABS consumer other	276	97.83	2.17	0.00	0.00	0.00
ABS equipment	317	97.48	2.52	0.00	0.00	0.00
ABS new assets	226	96.02	3.54	0.44	0.00	0.44
ABS future flow	144	98.61	0.00	1.39	0.00	0.00
ABS man. housing	377	76.66	0.00	23.34	0.80	5.04
ABS RV loans	31	96.77	0.00	3.23	0.00	3.23
ABS small bus. loans	125	98.40	1.60	0.00	0.00	0.00
ABS timeshare	63	95.24	4.76	0.00	0.00	0.00
ABS tobacco	372	79.57	20.43	0.00	0.00	0.00
CDO CF arb. corp. high-yield CBO	412	92.96	5.10	1.94	0.00	0.97
CDO CF arb. corp. high-yield CLO	1,725	99.77	0.23	0.00	0.00	0.00
CDO CF arb. corp. inv.-grade CBO	68	97.06	0.00	2.94	0.00	0.00
CDO CF CDO of ABS	1,600	96.69	1.50	1.81	0.19	0.19
CDO CF CDO of CDO	135	97.78	2.22	0.00	0.00	0.00
CDO CF retranche	82	96.34	1.22	2.44	0.00	0.00
CDO CF other	161	95.03	3.11	1.86	0.00	1.86