Fitch Affirms Six Classes of Two Taberna Europe CDOs

Fitch Ratings has affirmed the ratings on all classes of notes from two European collateralized debt obligations (CDOs) as follows:

Taberna Europe CDO I P.L.C. (Taberna Europe I)

--EUR263,003,220 class A1 notes at 'Bsf'; Outlook revised to Stable from Negative;

--EUR90,500,000 class A2 notes at 'CCsf';

--EUR50,458,989 class B notes at 'Csf';

--EUR31,908,129 class C notes at 'Csf';

--EUR35,096,098 class D notes at 'Csf';

--EUR25,436,946 class E notes at 'Csf'.

Taberna Europe CDO II P.L.C. (Taberna Europe II)

--EUR404,389,005 class A1 notes at 'CCCsf';

--EUR95,000,000 class A2 notes at 'CCsf'.

KEY RATING DRIVERS

The affirmations for the notes at their current ratings reflect no major changes in the portfolio since last review. In Taberna Europe I, the credit quality of the collateral has remained relatively stable since last review. In this transaction, 16% of the portfolio upgraded versus 13% downgraded. However, the magnitude of downgrades was slightly higher than the upgrades. In this portfolio, 45% of total notional value of EUR503 million as of the November 2014 trustee report is publicly rated, 24% is assigned credit opinions and the remainder of the portfolio is defaulted. At this review, 33.5% of the portfolio is rated or carries a credit opinion-equivalent of investment grade versus 32.9% at last review.

In Taberna Europe II, the percentages of upgrades and downgrades were comparable to Taberna Europe I, however, the magnitude of downgrades was slightly higher than Taberna Europe I resulting in slight deterioration of the credit quality. In this transaction, 44% of the current portfolio notional value of EUR676 million as of the November 2014 trustee report is publicly rated, 33% is assigned credit opinions and remainder of the portfolio is defaulted. At this review, 34.3% of the portfolio is rated or carries a credit opinion-equivalent of investment grade same as last review.

The paydown in Taberna Europe I was significantly higher than Taberna Europe II. The senior note in Taberna Europe I benefited from capital structure deleveraging, receiving EUR28.2 million in principal amortization over the last year. The improved credit enhancements were partially offset by the adverse selection as 88.8% of portfolio amortization came from underlying assets with investment grade ratings. In Taberna Europe I, the class A1 note received only EUR0.3 million from partial collateral redemption.

The percentages of distressed assets that are currently not paying interest are 21% and 19%, in Taberna Europe I and Taberna Europe II, respectively. The high percentage of non-performing assets, combined with sizeable out-of-the money interest rate swaps, and a fixed schedule of substantial structuring and placement fees continue to contribute to the high risk of interest shortfall in both transactions. The structuring fee, due and deferred collateral management fee in the interest waterfall are paid senior to the interest due on the non-deferrable classes.

While class A1 notes continue to face a risk of an interest shortfall, the analysis considered past history of full or partial structuring fee waivers and deferrals of management fees. The decision to waive or defer these fees is made separately for each payment period; therefore, no certainty exists that this will continue in the future. However, in Taberna Europe I, the structuring fee will no longer be due after May 2015. In addition, interest rate swap notional will continue to step down. Combined with the paydowns received by the class A1 since last review, these mitigating factors support a revision in the Outlook to Stable from Negative. Fitch does not assign outlooks to notes rated below 'Bsf'; however, the current ratings on the non-deferrable classes in both transactions appropriately reflect the risk.

The portfolios in both transactions are comprised primarily of senior unsecured, subordinate debt, and Trust Preferred Securities (TruPS) issued by Real Estate Investment Trusts (REITs), and make up 66% of the portfolio in Taberna Europe I and 47% in Taberna Europe II. The remaining exposure consists of securities issued by financial companies, commercial mortgage backed securities, and commercial real estate debt.

This review was conducted under the analytical framework described in the reports 'Global Rating Criteria for Structured Finance CDOs', and 'Global Rating Criteria for Corporate CDOs'. The transactions were analyzed within the framework of Fitch Portfolio Credit Model (PCM), and for each transaction, the PCM rating loss rates for various rating stresses were compared to the notes' credit enhancement levels. The transactions were not analyzed within a cash flow model framework, as the impact of structural features and excess spread was determined to be minimal in the context of these CDO ratings. Fitch also considered additional qualitative factors in its analysis to conclude the rating actions for the rated notes.

RATING SENSITIVITIES

The non-deferrable classes in each of these two transactions could experience interest shortfalls and be downgraded to 'Dsf' as described above.

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);

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

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 13, 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

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=924456

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