Fitch Upgrades Four Classes of N-Star VI
OREANDA-NEWS. Fitch Ratings has upgraded four and affirmed six classes of N-Star REL CDO VI, Ltd./LLC (N-Star VI). Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrades reflect increased credit enhancement as a result of asset repayments since the last rating action. Fitch's base case loss expectation increased to 55% of the current collateral balance, compared to 49.9% of the collateral balance at the last rating action, as the pool is becoming more concentrated with 17 assets remaining.
Since the last rating action and as of the latest April 2016 trustee report, principal paydowns to classes A-1 and A-R were $78.5 million, primarily from five assets repaying in full. The asset manager also indicated that the largest loan, Regatta Bay (15.2% of pool), repaid in full in May 2016, which is not yet reflected in the April trustee report. The combined percentage of defaulted assets and assets of concern has decreased to 36.7% from 54.9% at the last rating action. As of the April 2016 trustee report, all overcollateralization and interest coverage ratios were in compliance.
N-Star VI is collateralized by commercial real estate (CRE) loans, consisting of both senior and subordinate debt positions, as well as rated securities, consisting of CRE collateralized debt obligation (CDO) and commercial mortgage-backed securities (CMBS) bonds. As of the April 2016 trustee report and per Fitch categorization, the CDO was substantially invested as follows: whole loans/A-notes (24.8%), B-notes (21.8%), preferred equity (15.4%), mezzanine debt (12.9%), CRE CDOs (9.7%), CMBS (6.9%), and principal cash (8.5%).
Under Fitch's methodology, approximately 67.8% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. In this scenario, the modeled average cash flow decline is 10% from, generally, third-quarter 2015 and year-end (YE) 2015 cash flows. Modeled recoveries are 19% reflecting the junior position of the majority of the CRE loans.
The largest contributor to modeled losses is preferred equity (12% of pool) secured by an interest in a 400-unit multifamily property located in Ventura, CA. At the transaction's issuance, the property had approximately 20% of the units encumbered by a 20-year below-market-rate affordability restriction that expired in January 2007. The initial business plan was to renovate these units and lease them at higher rents; however, due to the economic downturn, the business plan was not realized. Northstar took a deed-in-lieu of foreclosure in February 2013. As of December 2015, the property was 96.9% occupied. A renovation program for the property has been launched on select units with approximately 10% of the total units having been renovated thus far. Fitch considers the CDO's position to be highly leveraged and modeled a full loss in its base case scenario. Approximately $70 million of debt is senior to the CDO's preferred equity position.
The second-largest contributor to modeled losses is a mezzanine loan (11.9%) secured by an interest in a 1,504-key hotel property located off the strip in Las Vegas, NV. In 2012, the sponsor acquired its own gaming license and terminated the casino lease with a third party operator. The sponsor has also expanded and renovated the casino area, added additional restaurants, and reconfigured existing floor plans. Overall property cash flow in 2015 remained flat compared to 2014, improving by 1.3%. Occupancy has declined slightly to 91.6% at YE 2015 from 93.7% at YE 2014. Fitch considers the CDO's position to be highly leveraged and modeled a full loss in its base case scenario. Approximately $1 billion of debt is senior to the CDO's mezzanine position.
The third-largest contributor to modeled losses is an A-note (9.6 %) secured by over 2,000 acres of land located in the Pocono Mountains of Pennsylvania. The borrower's initial business plan included the development of the site with retail and multifamily; however, the plan stalled due to the economic downturn. The loan, which is scheduled to mature in July 2016, has already been extended multiple times to allow the borrower additional time to complete the entitlement process and for the market to improve. The asset manager continues to discuss workout strategy with the borrower. Fitch modeled a significant loss under its base case stress scenario.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs', which applies stresses to property cash flows and debt service coverage ratio tests to project future default levels for the underlying portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. The default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under the various default timing and interest rate stress scenarios, as described in the report 'Global Rating Criteria for Structured Finance CDOs'. The breakeven rates for classes A-1, A-R, A-2 and B are generally consistent with the ratings assigned below.
The 'CCCsf' ratings for classes C through H are based upon a deterministic analysis that considers Fitch's base case loss expectation for the pool and the current percentage of defaulted assets and assets of concern, factoring in anticipated recoveries relative to each class' credit enhancement.
The Stable Rating Outlook on classes A-1, A-R, A-2, and B reflects increasing credit enhancement and expected continued paydowns. Further upgrades may be possible with further paydown and better than expected recoveries on the remaining assets. The distressed classes C through H may be subject to downgrade should loan performance decline and/or further losses be realized.
N-Star VI was initially issued as a $450 million CRE CDO managed by NS Advisors, LLC. The transaction had a five-year reinvestment period during which principal proceeds may be used to invest in substitute collateral that ended in June 2011. In November 2009, $8 million in notes was surrendered to the trustee for cancellation.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has upgraded and revised or assigned Rating Outlooks to the following classes as indicated:
--$39.7 million class A-1 to 'BBBsf' from 'BBsf; Outlook Stable;
--$15.9 million class A-R to 'BBBsf' from 'BBsf; Outlook Stable;
--$27.2 million class A-2 to 'Bsf' from 'BBsf; Outlook Stable;
--$21.8 million class B to 'Bsf' from 'CCCsf; Outlook Stable assigned.
In addition, Fitch has affirmed the following classes as indicated:
--$11.8 million class C at 'CCCsf'; RE 0%;
--$10 million class D at 'CCCsf'; RE 0%;
--$10.1 million class E at 'CCCsf'; RE 0%;
--$7.7 million class F at 'CCCsf'; RE 0%;
--$6.9 million class G at 'CCCsf'; RE 0%;
--$6.1 million class H at 'CCCsf'; RE 0%.
Fitch does not rate the Income notes.