Fitch Upgrades 2 & Affirms 2 Classes of Emporia Preferred Funding II, Ltd./Corp

NEW YORK--()--Fitch Ratings has upgraded two and affirmed two classes of notes issued by Emporia Preferred Funding II, Ltd./Corp. (Emporia II). Fitch also revised the Rating Outlook on two classes of notes as follows:

--$8,177,267 class B notes upgraded to 'AAAsf' from 'AAsf'; Outlook Stable;

--$22,000,000 class C notes upgraded to 'AAsf' from 'Asf'; Outlook Stable;

--$22,000,000 class D notes affirmed at 'BBsf'; Outlook to Stable from Positive;

--$14,500,000 class E notes affirmed at 'Bsf'; Outlook to Stable from Positive.

Classes A-1, A-2, and A-3 (collectively, the class A notes) were paid in full (PIF) on July 18, 2014.

Fitch does not rate the preference shares.

KEY RATING DRIVERS

The upgrades reflect the increasing levels of credit enhancement following the amortization of the underlying loan portfolio. Since the last review in January 2014, the transaction has received approximately $93.1 million in principal proceeds and paid the class A notes in full and approximately $21.8 million of the class B notes. The transaction continues to have ample cushion in all its overcollateralization (OC) and interest coverage (IC) tests according to the November 2014 trustee report.

Fitch currently considers 6.4% of the assets to be rated 'CCC+' or below in the performing portfolio versus 6.9% at the last review, and the weighted average rating factor of the performing portfolio has improved to 'B+/B' from 'B/B-'. According to the trustee report, there are two defaulted obligors in the portfolio totaling approximately $1.3 million in par and the weighted average spread (WAS) declined to 3.8% from 4.3% in the last review. Additionally, Fitch's analysis focused on a performing portfolio balance of $77.9 million held across 23 obligors.

RATING SENSITIVITIES

The ratings of the notes may be sensitive to the following: asset defaults, portfolio migration, including assets being downgraded to 'CCC', or portions of the portfolio being placed on Rating Watch Negative or Outlook Negative, OC or IC test breaches.

Emporia II is a cash flow collateralized loan obligation (CLO) that closed on June 21, 2006 and is managed by Ivy Hill Asset Management, a portfolio management company of Ares Capital Corporation. Emporia II has a portfolio primarily composed of U.S. middle market loans, approximately 90.5% of which are senior secured positions and approximately 9.5% of which are subordinated loans and structured finance assets. The transaction exited its reinvestment period in July 2012.

This review was conducted under the framework described in the report 'Global Rating Criteria for Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting future default and recovery levels for the underlying portfolio. These default and recovery levels were then utilized in Fitch's cash flow model under various default timing and interest rate stress scenarios. The cash flow model was customized to reflect the CLO's structural features.

While Fitch's cash flow analysis indicates higher passing rating levels for the class C, D and E notes, in all 12 interest rate and default timing scenarios, the current ratings appropriately reflect the risk profile of the remaining portfolio. The class D and E notes remain subordinate to more senior classes and are the most susceptible to portfolio concentration risks and the tightening of the WAS.

The ratings of the B, C, D, and E notes are not expected to experience rating volatility in the near term, supporting their Stable Outlook.

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

The information used to assess these ratings was sourced from the asset manager, periodic servicer reports, note valuation reports, and the public domain.

Applicable Criteria & Related Research:

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

--'Global Rating Criteria for Corporate CDOs' (July 25, 2014);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 23, 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 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 Corporate CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753057

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=958915

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Contacts

Fitch Ratings
Primary Surveillance Analyst
Felix Chen
Associate Director
+1-212-908-9154
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Alina Pak, CFA
Senior Director
+1-312-368-3184
or
Media Relations
Sandro Scenga, +1 212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Surveillance Analyst
Felix Chen
Associate Director
+1-212-908-9154
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Alina Pak, CFA
Senior Director
+1-312-368-3184
or
Media Relations
Sandro Scenga, +1 212-908-0278
New York
sandro.scenga@fitchratings.com