Fitch Affirms Bluegrass ABS CDO III, Ltd.

NEW YORK -- Fitch has affirmed all classes of notes issued by Bluegrass ABS CDO III, Ltd. (Bluegrass III). The following rating actions are effective immediately:

--$280,000,000 class A-1 notes affirm at 'AAA';

--$49,000,000 class A-2 notes affirm at 'AAA';

--$27,000,000 class B notes affirm at 'AA';

--$13,000,000 class C notes affirm at 'A';

--$6,625,000 class D-1 notes affirm at 'BBB' and removed from Rating Watch Negative;

--$3,312,500 class D-2 notes affirm at 'BBB' and removed from Rating Watch Negative;

--$5,280,665 combination securities affirm at 'BBB-' and removed from Rating Watch Negative.

Bluegrass III is a collateralized debt obligation (CDO) that closed on Sept. 15, 2004 and is managed by Invesco Institutional N.A. Inc (INVESCO). As of July 31, 2007, the Bluegrass III portfolio was composed of approximately 61.0% residential mortgage-backed securities (RMBS), 20.6% asset-backed securities (ABS), 11.2% commercial mortgage-backed securities (CMBS) and 7.2% CDO. Subprime RMBS and home equity loan backed ABS collectively comprise 48.9% of the portfolio, with the exposure to 2005-2007 vintage subprime RMBS limited to approximately 18.5% of the portfolio. Bluegrass III is approaching the end of its reinvestment period in September 2007 and currently has approximately $36.1 million of principal proceeds that may be reinvested or distributed to the senior noteholders at the next payment date.

On July 23, Fitch placed the class D-1, D-2, and combination notes on Rating Watch Negative, primarily due to negative rating actions on the underlying collateral since Fitch's last rating affirmations on Jan. 19, 2007. Approximately 8.4% of the portfolio has been downgraded by Fitch, Moody's, or S&P since this last review, with the majority of these actions occurring within the last three months. The downgrades have primarily been confined to subprime RMBS bonds issued between 2004 and 2006. As a result, the Fitch weighted average rating factor of the portfolio has deteriorated to 4.9 ('BBB/BBB-') as of July 31, 2007 from 4.1 ('BBB/BBB-') as of the Dec. 7, 2006 trustee report.

These rating affirmations are the result of Fitch's full rating review process, which consists of a discussion with the asset manager, analysis of the portfolio assets, modelling the projected cash flows in the CDO waterfall and a credit committee. Fitch discussed with INVESCO its view of the existing portfolio, expected recovery for potentially distressed assets, and its investment strategy for the deal as it exits its reinvestment period. Since Fitch's last review, the balance in the principal collection account has grown to $36.1 million from $6.0 million. Fitch's asset analysis included recent revisions to its modelling assumptions, including the treatment of bonds on Rating Watch and applying additional default probabilities for 2005, 2006 and 2007 vintage subprime RMBS assets. Additionally, the transaction cash flows were modelled under Fitch's standard stress scenarios, as well as additional stresses on the potential application of the $36.1 million in the principal collection account. In one scenario the principal collection balance was used to start paying down senior notes in September while in another scenario the principal collection balance was assumed to be reinvested in subprime RMBS bonds rated 'BB' and earning no interest. In all scenarios the notes pass at Fitch's rating stresses corresponding to the current ratings.

As of July 31, 2007, the class A/B, class C, and class D overcollateralization ratios have declined to 111.5%, 107.6% and 104.8%, respectively, from 112.6%, 108.6% and 105.6 as of Dec 7, 2006. The class A/B, class C, class D interest coverage ratios have improved to 136.6%, 130.9% and 126.4% from 130.5%, 125.1% and 120.5. All coverage tests remain in compliance.

Class D-1 and D-2 continued to build their credit enhancement as a result of class D-1 and D-2 priority redemption payments of $750,000 per year. As a result of these payments, class D-1 and D-2 have paid down to 82.8% of their original balances. Preference shares continue to receive interest distributions, thereby helping the combination notes to receive payments in excess of the rated 2% coupon.

The ratings of the class A-1, A-2 and B notes address the likelihood that investors will receive full and timely payments of interest, as per the governing documents, as well as the stated balance of principal by the legal final maturity date. The ratings of the class C, D-1 and D-2 notes address the likelihood that investors will receive ultimate and compensating interest payments, as per the governing documents, as well as the stated balance of principal by the legal final maturity date. The rating of the combination securities addresses the likelihood that investors will receive the combination security notional balance as well as ultimate payments resulting in a 2% coupon.

Fitch will continue to monitor and review this transaction for future rating adjustments. Additional deal information and historical data are available on the Derivative Fitch web site at www.derivativefitch.com. For more information on the Fitch VECTOR Model, see 'Global Rating Criteria for Collateralised Debt Obligations,' dated Oct. 18, 2006 and also available at www.derivativefitch.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.