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Fitch downgrades seven classes of SVG Diamond Private Equity II

Fitch Ratings has downgraded seven classes of SVG Diamond Private Equity II and assigned rating outlooks to five classes, effective immediately.

They include:

• EUR55,000,000 class A-1 notes to A from AAA; outlook stable;
• USD71,600,000 class A-2 notes to A from AAA; outlook stable;
• EUR76,500,000 class B-1 notes to BB from AA; outlook stable;
• USD40,000,000 class B-2 notes to BB from AA; outlook stable;
• USD47,800,000 class C notes to B from A+; outlook stable;
• EUR43,000,000 class M-1 notes to CCC from BBB+;
• USD20,300,000 class M-2 notes to CCC from BBB+.

In addition, Fitch has removed all of the above classes from rating watch negative.

SVG II is a private equity collateralized fund obligation which invests either directly or indirectly in underlying buyout and venture private equity fund limited partnership interests. The CFO’s portfolio is diverse in terms of vintage, industry and fund managers.

The rating actions reflect Fitch’s expectation for losses in the underlying portfolio of SVG II due to the ongoing deterioration in the economic environment and Fitch’s assessment of the ability of the tranches to absorb additional losses if the current economic environment worsens.

In deriving its methodology for reviewing this transaction, Fitch took into account portfolio composition, vintage diversification, and used empirical data from venture capital and buyout valuation indices to derive its loss scenarios. In the 2000-2002 period, venture capital had significantly higher valuation increases and subsequent losses compared to buyout investments, primarily as a result of the boom in the technology sector. Leverage and valuations for buyout transactions increased significantly in the 2005-2007 period. Therefore, Fitch expects buyout investments to significantly under perform in the current environment in comparison to how the asset class performed in the 2000-2002 period, which had historically exhibited the worst valuation performance.

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