OREANDA-NEWS. Fitch Ratings has upgraded Pallas CDO II B.V., as follows:

Class A-1-a (ISIN XS0268818209): upgraded to 'BBBsf' from 'BBB-sf'; Outlook Stable
Class A-1-d (ISIN XS0271520669): upgraded to 'BBBsf' from 'BBB-sf'; Outlook Stable
Class A-2 (ISINXS0268904546): upgraded to 'BBsf' from 'B+sf'; Outlook Stable
Class B (ISINXS0268818548): upgraded to 'B+sf' from 'B-sf'; Outlook Stable
Class C (ISIN XS0268818894): upgraded to 'B-sf' from 'CCCsf'; Outlook Stable
Class D-1-a (ISIN XS0268819199): upgraded to 'CCCsf' from 'CCsf'
Class D-1-b (ISIN XS0268819272): upgraded to 'CCCsf' from 'CCsf

Pallas CDO II BV is a cash arbitrage securitisation of structured finance assets. The performing portfolio is concentrated in RMBS assets and CMBS.

KEY RATING DRIVERS
The upgrades reflect the improved portfolio quality as a result of active trading, as well as increased credit enhancement due to deleveraging and par building. Since the last review, the transaction has cured its par value tests and reinvestment test, enabling the manager to actively trade the underlying portfolio on a maintain or improve basis. Sales and paydowns of portfolio assets have exceeded EUR200m, of which around EUR150m was used to purchase new assets and around EUR40m was used for the amortisation of the class A-1 notes.

Active trading has resulted in a more diversified portfolio of improved credit quality. European peripheral assets have been replaced by post-crisis CLO and CMBS notes, as well as non-conforming RMBS assets. This has contributed to the improved weighted average rating, which is now 'BBB-'/'BB+', compared with 'BB+'/'BB' at the last review. The portfolio currently consists of 107 assets from 86 issuers, compared with 103 assets from 85 issuers at the past year, increasing the single obligor exposure to 3.4% from 2.9%, but marginally decreasing the top 10 obligor exposure.

Purchased assets included many recently originated transactions, such as post crisis CLO and CMBS notes. Close to 30% of the current portfolio was originated after 2011, whereas the exposure to assets originated before 2006 has decreased to 26% from 52%. Shifts in sector distribution, as classified by Fitch, have been less pronounced. RMBS remains the largest sector with 53%, down from 63%, followed by CMBS with 26.4%, up from 24.4% and corporate CDOs with 15.0%, up from 12.3%. In addition, consumer ABS assets were added, making up to 4.8% of the portfolio, as well as one leveraged loan.

Credit enhancement has increased throughout the capital structure. For the class A1 notes, credit enhancement has increased to 39.6% from 34.3% and to 22.0% from 19.4% for the class A2 notes. The increase was less pronounced for the junior class D notes for which credit enhancement only increased by 20bps.

The senior notes' ratings are constrained by the transaction's structure, which triggers an event of default in the case of non-payment of interest on class B notes.

RATING SENSITIVITIES
In its stress tests Fitch found that reducing the recovery rate by 25% would not affect the notes' ratings, but increasing the default rate by 25% could lead to the downgrade of all but the class B notes by up to two notches.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

The majority of the underlying assets have ratings or credit opinions from Fitch and/or other Nationally Recognised Statistical Rating Organisations and/or European Securities and Markets Authority registered rating agencies. Fitch has relied on the practices of the relevant Fitch groups and/or other rating agencies to assess the asset portfolio information.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable

SOURCES OF INFORMATION
The information below was used in the analysis.
Loan-by-loan data provided by The Bank of New York Mellon as at 06 July 2015
Transaction reporting provided by The Bank of New York Mellon as at 06 July 2015.