Fitch Affirms 7 Classes of Notes Issued by Blue Heron Funding II Ltd.

NEW YORK--()--Fitch Ratings has affirmed seven classes of notes issued by Blue Heron Funding II Ltd. (Blue Heron II), as follows:

--$133,651,451 class A notes at 'Csf';

--$17,205,585 class B notes at 'Csf';

--$34,409,633 class C notes at 'Csf';

--$22,947,538 class D notes at 'Csf';

--$19,103,328 class E notes at 'Csf';

--$19,103,328 class E Additional Interest at 'Csf';

--$3,986,875 Certificates at 'AAAsf'/Outlook Stable;

KEY RATING DRIVERS

The affirmations are due to the continued undercollateralization of the notes as well as the deleveraging of the capital structure being in line with Fitch's prior expectations.

Since Fitch's last rating action in December 2013, the portfolio balance has declined to $116.9 million from $143.9 million. The class A notes have amortized by 26.5 million. Writedowns in the portfolio have left the entire capital structure of Blue Heron II with negative credit enhancement (CE) levels. Principal proceeds have been needed intermittently to cover shortfalls in interest collections for accrued interest to the class A, B and C notes, which had also contributed to the erosion of CE.

The class A, B and C notes are rated to the timely receipt of interest and continue to receive accrued interest distributions, from a combination of interest and principal collections. The class D and E notes, and class E additional interest are no longer receiving interest distributions due to failing class A/B/C coverage tests.

The expected losses exceed the class A, B, C, D, E, and E Additional Interest's CE level and the probability of default was evaluated without factoring potential further losses from the currently performing collateral of each portfolio. In the absence of mitigating factors, these classes were affirmed at 'Csf'.

The certificates are rated to the ultimate receipt of principal, where coupon payments received in the interest waterfall are applied to reduce the outstanding rated balance. While these distributions are no longer being made due to failing coverage tests and are not expected to resume in the future, the principal of the certificates is protected by a Certificate Protection Asset, which is a zero-coupon bond with a face value of $6 million maturing in April 2030, that was issued by Resolution Funding Corporation, a U.S. government agency. As per the terms of the transaction, no party to the transaction other than the certificate-holders have claim against the Certificate Protection Asset. Therefore, the certificates are affirmed at 'AAAsf' and retain their Stable Outlook.

RATING SENSITIVITIES

The notes have limited sensitivity to further negative migration given their highly distressed rating levels. However, there is potential for non-deferrable classes to be downgraded to 'Dsf' should they experience any interest payment shortfalls.

This review was conducted under the framework described in the report 'Global Rating Criteria for Structured Finance CDOs' using the Structured Finance Portfolio Credit Model (SF PCM) for projecting future default levels for the underlying portfolio. These default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under various default timing and interest rate stress scenarios.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (Aug. 4, 2014);

--'Global Rating Criteria for Structured Finance CDOs' (July 16, 2014).

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389

Global Rating Criteria for Structured Finance CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751136

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=944116

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Contacts

Fitch Ratings
Primary Surveillance Analyst
Emmett O'Brien, +1-212-908-1648
Analyst
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 1004
or
Committee Chairperson
Alina Pak, CFA, +1-312-368-3184
Senior Director
or
Media Relations
Sendhil Selvaraj, +44 (0) 207 682 7218
sendhil.selvaraj@fitchratings.com

Contacts

Fitch Ratings
Primary Surveillance Analyst
Emmett O'Brien, +1-212-908-1648
Analyst
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 1004
or
Committee Chairperson
Alina Pak, CFA, +1-312-368-3184
Senior Director
or
Media Relations
Sendhil Selvaraj, +44 (0) 207 682 7218
sendhil.selvaraj@fitchratings.com