NEW YORK (Business Wire) -- Fitch Ratings has downgraded seven classes of notes issued by Blue Heron Funding II Ltd. (Blue Heron II). These rating actions are the result of Fitch's review process and are effective immediately:
--$632,677,697 class A notes downgraded to 'B' from 'AAA', removed from Rating Watch Negative;
--$17,205,585 class B notes downgraded to 'CCC' from 'AAA', removed from Rating Watch Negative;
--$34,409,633 class C notes downgraded to 'CC' from 'AAA', removed from Rating Watch Negative;
--$20,846,732 class D notes downgraded to 'C' from 'AA-', removed from Rating Watch Negative;
--$15,824,813 class E notes downgraded to 'C' from 'BBB-', removed from Rating Watch Negative;
--$20,000,000 class E Additional Interest (interest only) downgraded to 'C' from 'BB+';
--$3,986,875 Certificates (principal only) affirmed at 'AAA'.
Fitch's rating actions reflect the collateral deterioration within the portfolio, specifically subprime RMBS, and SF CDOs with underlying exposure to subprime RMBS.
Blue Heron II is a collateralized debt obligation (CDO) that closed on Dec. 22, 2005 and is managed by Westdeutsche Landesbank Girozentrale, New York Branch. Presently, 12.7% of the portfolio is comprised of 2005 and 2006 vintage U.S. subprime residential mortgage-backed securities (RMBS) and 12% consists of 2005, 2006, and 2007 vintage U.S. structured finance (SF) CDOs. Additionally, 44.4% of the portfolio is comprised of commercial mortgage-backed securities (CMBS), 9% consists of non-SF CDOs, and a small percentage of the portfolio is comprised of prime RMBS and commercial asset-backed securities (ABS).
Since the last rating action in December 2006, approximately 20% of the portfolio has been downgraded with an additional 9.7% of the portfolio currently on Rating Watch Negative. Approximately 17% of the portfolio is now rated below investment grade, of which 12.8% is rated 'CCC+' and below. The negative credit migration experienced since the last review has resulted in the Weighted Average Rating Factor deteriorating to 5.60 ('BBB/BBB-') from 0.43 ('AAA/AA+') during the last review, breaching its covenant of 2.33 ('A/A-'), as of the latest trustee report dated July 15, 2008.
The collateral deterioration has caused each of the overcollateralization (OC) ratios to fall below 100% and fail their respective test levels. As of the latest trustee report, the class A/B/C OC ratio was 92.2% and the class D OC ratio was 89.5%, versus triggers of 102.5% and 100.5%, respectively. Class A, B, and C are receiving interest payments and all other interest and principal proceeds are then used to redeem class A principal due to coverage test failures. Fitch expect class C to continue to receive timely interest payments with little prospect of any principal recovery. Class D, E and the certificates are currently not receiving interest or principal payments.
The principal of the certificates is protected by a Certificate Protection Asset, a zero coupon bond with a face value of $6,000,000 and a maturity date of April 2030 issued by the Resolution Funding Corporation, a U.S. government agency. As per the terms of the transaction, the senior note holders, the asset manager, the hedge counterparties, or any other party other than the certificate holders, have no claim against the Certificate Protection Asset.
The ratings on the classes A, B and C notes address the timely payment of interest and the ultimate repayment of principal by the stated maturity date as per the transaction's governing documents. The rating on the class D notes addresses the ultimate repayment of principal and the ultimate payment of interest by the stated maturity date as per the transaction's governing documents. The rating on the class E notes addresses the ultimate repayment of principal and the ultimate payment of interest at a rate equal to LIBOR by the stated maturity date as per the transaction's governing documents. The rating on the class E additional interest addresses the ultimate payment of class E interest at a rate equal to 2.4% per annum on the outstanding rated balance of the class E notes by the stated maturity date as per the transaction's governing documents. The rating on the certificates addresses the ultimate repayment of principal only by the stated maturity date as per the transaction's governing documents.
Fitch is reviewing its SF CDO approach and will comment separately on any changes and potential rating impact at a later date.
Fitch will continue to monitor and review this transaction for future rating adjustments. Additional transaction information and historical data are available on the Fitch Ratings web site at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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 Ratings
Brian Vorderbrueggen, 212-908-9102, New York
Alina Pak, 312-368-3184, Chicago
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Media Relations:
Sandro Scenga, 212-908-0278, New York
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