DBRS Confirms MAVIII Class 12A Notes at AA (high) (sf), Removes from Under Review with Developing Implications

DBRS has today confirmed the AA (high) (sf) rating of the Class 12A Notes issued by Master Asset Vehicle III (MAVIII) and removed the rating from Under Review with Developing Implications, where it was placed on September 7, 2010.

The September 7, 2010, rating action was based on several significant issues outstanding with QSPE-XCD Trust (the Trust), including:

(1) Whether Xceed Mortgage Corporation (XMC) made a material change to its credit and collections policies without the consent of the appropriate parties.

(2) Whether an amortization event and/or suspension event under the transaction documents should have occurred in May 2008.

(3) Whether mortgages that were renewed met the eligibility criteria in the transaction documents.

(4) The possible reduction of the cash collateral account by $10 million.

As the Class 12A Notes have exposure to the most senior class of notes issued by the Trust (the XCD Senior Note), the issues above could potentially affect the credit quality of the Class 12A Notes.

Since September 7, 2010, DBRS has become aware of material developments with respect to points (2) and (3) above.

With respect to point (2), notwithstanding the fact that certain parties claimed an amortization event should have occurred in May 2008, on December 14, 2010, the administrative agent of the Trust, TAO Admin Corp., delivered notice of an amortization event to XMC under Section 7.1(k) of the mortgage purchase agreement (the occurrence of more than one suspension event (defined as a three-month average default ratio greater than 5%) within any 12-month period) and declared the amortization date to be December 17, 2010. The occurrence of an amortization event will cause several changes in the administration of the Trust, including: (i) the priority of payments will change to sequential pay from pro rata and (ii) excess spread will be trapped and used to repay XCD Senior Note principal. As a result, the credit enhancement for the XCD Senior Note will increase as principal is repaid over time.

With respect to point (3), DBRS has been informed by XMC that in some instances XMC did not follow all of the eligibility criteria applicable to the origination of new mortgages when processing renewals. As a result of the amortization event, the renewal of mortgages will no longer be permitted. To account for possible adverse selection in renewals since January 2009, DBRS modeled several stress scenarios on the underlying mortgages. The stress scenarios assumed the reduction of the cash account by $10 million as described in (4) above. In addition, the stress scenarios assumed an increased default frequency for certain mortgages due to the inability of XMC to offer renewals at maturity (mortgage balloon risk).

The principal balance of the XCD Senior Note as of November 17, 2010, was $259,454,162, and approximately 8.4% of the XCD Senior Note ($21,682,570) was funded in MAVIII Class 12.

Credit enhancement for the XCD Senior Note is provided through a combination of subordination, a cash account and excess spread. In addition to the XCD Senior Note enhancement, the Class 12A Notes benefit from subordination through unrated MAVIII Class 12B Notes, equal to $14,012,617, or 10.4%, as of October 27, 2010. The principal balance of the unrated Class 12B Notes represents 64.6% of the XCD Senior Note funded amount in MAVIII Class 12.

Based on the results of the stress scenario, DBRS has concluded that the increase in enhancement for the XCD Senior Note that will occur over time as a result of amortization, combined with the subordination from the unrated Class 12B Notes, is sufficient to confirm the Class 12A Notes rating at AA (high) (sf).

DBRS will continue to monitor the performance of the Trust and the potential impact on the MAVIII Class 12A Notes and will release more information as appropriate.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Canadian Structured Credit Transactions, Canadian Structured Credit Surveillance, CMBS Rating Methodology, CMBS Global Surveillance and Canadian RMBS Methodology, which can be found on our website under Methodologies.