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Fitch Downgrades $1,199B from Blue Heron Funding VI, Ltd.; Two Classes Remain on Watch Negative
NEW YORK-(Business Wire)-May 6, 2008 - Fitch downgrades three classes of notes and one additional interest component, and affirms one class of notes issued by Blue Heron Funding VI, Ltd. (Blue Heron VI). Two classes of notes remain on Rating Watch Negative. The following rating actions are effective immediately:
—$1,068,898,656 class A-1 notes downgraded to 'BBB-' from 'AAA'; remains on Rating Watch Negative;
—$25,000,000 class A-2 notes downgraded to 'B' from 'AAA'; remains on Rating Watch Negative;
—EUR89,936,000 (USD equivalent $105,000,000) class B notes downgraded to 'C' from 'A'; removed from Rating Watch Negative;
—EUR89,936,000 (USD equivalent $105,000,000) class B additional interest component downgraded to 'C' from 'BBB-'; removed from Rating Watch Negative (interest only);
—$6,250,000 certificates affirmed at 'AAA' (principal only).
Blue Heron VI is a collateralized debt obligation (CDO) that closed on Dec. 21, 2005 and is managed by Brightwater Capital Management. Blue Heron VI's reinvestment period will end in May 2008. Blue Heron VI's portfolio contains approximately 28.5% subprime residential mortgage-backed securities (RMBS) bonds, 12.3% structured finance (SF) CDOs, and other structured finance assets. Subprime RMBS bonds of the 2005 and 2006 vintages account for approximately 4.7% and 3.7% of the portfolio, respectively. The SF CDO exposure includes SF CDOs originated in 2006 (4.5%) and 2007 (7.0%).
Fitch's rating actions reflect the significant collateral deterioration within the portfolio, specifically with regard to RMBS and SF CDOs with underlying exposure to subprime RMBS. Since the beginning of 2007, approximately 17.9% of the portfolio has been downgraded, with 8.7% of the portfolio currently on Rating Watch Negative. Approximately 13.2% of the portfolio is currently below investment grade.
As of the March 17, 2008 trustee report approximately $96.6 million (8.0%) of the portfolio, consisting of SF CDO and subprime RMBS assets, was considered to be defaulted. As a result of the collateral deterioration, Blue Heron VI is currently failing its classes A and B overcollateralization (OC) tests. The class A OC test failure resulted in the class B notes not receiving any interest proceeds at the last payment date on March 25, 2008.
The rating assigned to the certificates is based on the rating of the certificate protection assets, which are comprised of U.S. government-backed Resolution Funding Corp zero-coupon bonds.
The Rating Watch Negative reflects the continued credit deterioration in subprime RMBS and SF CDOs with underlying exposure to subprime RMBS. Additionally, Fitch is reviewing its SF CDO approach and will comment separately on any changes and potential rating impact at a later date.
The ratings of the classesA-1 and A-2 notes address the likelihood that investors will receive full and timely payments of interest, as per the transaction's governing documents, as well as the stated balance of principal by the legal final maturity date. The rating of the class B notes addresses the ultimate repayment of principal and the ultimate payment of interest at a rate equal to LIBOR by the legal final maturity date. The rating on the class B additional interest component addresses the ultimate payment of class B interest at a rate equal to 1.5% per annum. The rating on the certificates addresses the ultimate repayment of principal only by the legal final maturity 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.
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