Fitch Upgrades Four Classes of CapitalSource 2006-A
OREANDA-NEWS. Fitch Ratings has upgraded four and affirmed seven classes of CapitalSource Real Estate Loan Trust 2006-A (CapitalSource 2006-A). Fitch's performance expectation incorporates prospective views regarding commercial real estate (CRE) 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 50.3% of the current collateral balance, compared to 41.2% of the collateral balance at the last rating action, as the pool is becoming more concentrated with 23 assets remaining.
Since the last rating action and as of the April 2016 trustee report, principal paydowns to classes A-1A and A-1R were $86.1 million, primarily from six assets repaying in full. The asset manager indicated one additional loan, Springhill Suites (1.9% of pool), repaid in full in May 2016, which is not yet reflected in the latest April trustee report. The percentage of defaulted loans and Loans of Concern increased to 4.6% and 43.2%, respectively, compared to 0% and 37.2% at the last rating action. As of the April 2016 trustee report, all overcollateralization and interest coverage ratios were in compliance.
CapitalSource 2006-A is primarily collateralized by senior CRE debt with 97.7% of the portfolio consisting of whole loans or A-notes as of the April 2016 trustee report and per Fitch categorizations. The remainder of the collateral pool consists of residential mortgage-backed securities bonds (2.3%). The portfolio also holds a high percentage of non-traditional property types, including loans secured by healthcare (28.6%), hotels (25.4%), and undeveloped land (24.3%).
Under Fitch's methodology, approximately 79.6% 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 2015 cash flows. Modeled recoveries are 36.8%.
The three largest contributors to modeled losses have remained the same since the last rating action.
The largest contributor to modeled losses is a whole loan (18.9% of pool) secured by a 331-key boutique hotel property without a gaming component located in Atlantic City, NJ. Property cash flow remains negative as performance continues to suffer from the challenged Atlantic City market. The sponsor continues to pursue the passage of a small-casino bill in order to develop a casino component at the property. The loan has been modified to allow the deferral of monthly debt service payments and furniture, fixture and equipment payments through July 2016. This deferral period has been extended multiple times since July 2013. Fitch modeled a term default with a significant loss under its base case scenario.
The next largest contributor to modeled losses is an A-note (10.1%) secured by over 6,000 acres of land located in Edgewater and New Smyrna Beach, FL. The borrower's initial business plan was to develop single-family homes and commercial space; however, the plan stalled during the market downturn in 2008. The land is heavily forested and consists of wetlands; therefore, only a portion of the land is developable. Debt service on this loan was previously funded with revenue from timber operations at the property and through timber reserves transferred as debt service reserves. These reserves were depleted in 2012, and shortly afterward, the borrower agreed to transfer the property to the lender in lieu of foreclosure. A deed in lieu was completed in May 2013. The loan was recently extended for an additional year to May 2017 in order to continue obtaining permits and entitlements for development. Fitch modeled a term default with a significant loss under its base case scenario.
The third largest contributor to modeled losses is an A-note (9 %) 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 because of 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 to allow 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-1A, A-1R, A-2B, B and C are generally consistent with the ratings assigned below.
The ratings for classes D through J 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 Outlook on classes A-1A, A-1R, A-2B, B and C reflects increasing credit enhancement and expected continued paydowns. Further upgrades may be possible with continued paydown and better than expected recoveries on the remaining assets. The distressed classes D through J may be subject to downgrade should loan performance decline and/or further losses be realized.
CapitalSource 2006-A was initially issued as a $1.3 billion revolving CRE CDO managed by CapitalSource Finance, LLC (CapitalSource), a subsidiary of CapitalSource, Inc. In 2010, NS Advisors II, LLC (NS Advisors II) became the delegated collateral manager for the CDO under the delegation provisions of the indenture. All collateral manager responsibilities and fees have been delegated to NS Advisors II. In addition, an amendment to the servicing agreement replaced the special servicer of the CDO with NS Servicing, LLC (NS Servicing). NS Servicing assumed all rights, interests, duties, and obligations as special servicer under the servicing agreement previously held by CapitalSource.
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 on the following classes as indicated:
--$4 million class A-1A to 'Asf' from 'BBBsf'; Outlook Stable;
--$16.2 million class A-1R to 'Asf' from 'BBBsf'; Outlook Stable;
--$35.7 million class A-2B to 'Asf' from 'BBBsf'; Outlook Stable;
--$62.4 million class C to 'Bsf' from 'CCCsf'; Outlook Stable assigned.
In addition, Fitch has affirmed the following classes as indicated:
--$82.9 million class B at 'BBsf'; Outlook Stable;
--$30.2 million class D at 'CCCsf'; RE 0%;
--$30.2 million class E at 'CCCsf'; RE 0%;
--$26.7 million class F at 'CCsf'; RE 0%;
--$33.2 million class G at 'CCsf'; RE 0%;
--$31.2 million class H at 'Csf'; RE 0%;
--$47.5 million class J at 'Csf'; RE 0%.
Class A-2A has paid in full. Fitch does not rate the preferred shares.