A recently-proposed re-hedging of one of the euro-denominated portfolio assets of CRE CDO Glastonbury Finance 2007-1 will not in itself impact the ratings of the transaction's notes, according to Fitch. The related FX option of the CMBS asset expired earlier this month, with Glastonbury now expected to receive the settlement proceeds.

Fitch notes the FX option's expiry date approximately matched the expected maturity of the asset. The underlying loan of this asset is now not expected to repay on its expected maturity and may well extend through to its final legal maturity in February 2012. The manager thus proposed to use the expired FX option's settlement proceeds to enter into an FX option for the asset through to the asset's final legal maturity.

The expired FX option's settlement proceeds are expected to be sufficient to hedge only around 22% of the asset's current principal amount, which has amortised to 78.2% of its original balance. This is in contradiction to the transaction documents, which state that 25% of the principal amount at the time of acquisition should be hedged for euro-denominated portfolio assets. But, in Fitch's view, the increased risk to the transaction from the FX option not meeting 25% of the asset's original principal amount is not significant enough to impact the ratings of Glastonbury's notes.

Glastonbury Finance was launched in March 2007 by Eurohypo Asset Management. It was the first sterling-denominated CRE CDO and is backed by European CMBS - two thirds of which are UK deals and one third of which are European deals.