Fitch Upgrades Two Distressed Classes of AMAC CDO
OREANDA-NEWS. Fitch Ratings has affirmed five classes and upgraded two distressed classes of AMAC CDO Funding I (AMAC CDO). A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Fitch's rating actions reflect the continued risk of insufficient interest and principal proceeds being available to pay the obligation due under the swaps and timely interest due on the senior classes. The CDO maintains a significant swap liability, which is senior in priority to the notes. Interest and principal generated by the CDO assets have been inadequate to cover the timely interest obligations on class A-2 and B, and an affiliate of the collateral asset manager, C-III Asset Management LLC, has been making interest advances, as required under the transaction documents.
Since the last rating action, the class A-1 notes have paid in full while class A-2 has received $41 million in pay down from the full payoff of four loans as well as scheduled amortization. As of the March 2016 trustee report, the balance of class A-2 is now only $8.9 million. All performing loans (96% of the pool) are scheduled to mature by January 2017.
The CDO remains under-collateralized by approximately $30 million; class F and below have negative credit enhancement. The highly concentrated CDO has only 13 loans remaining. Over 40% of the portfolio is considered either defaulted or a Fitch Loan of Concern; several loans are secured by properties that have upcoming roll and/or are leased to single tenants.
The asset manager reported that one loan ($2.5 million, 3% of the pool) paid off post the last trustee report and that two additional loans are expected to repay over the subsequent two payment periods. As such, Fitch expects principal to be available to cover the swap payment and timely interest as well as cover repayment of outstanding advances and some additional pay down to the senior classes over the next several months.
The affirmations at 'Bsf' and Stable Outlooks for classes A-2 and B reflect the underlying credit quality of the assets as well as Fitch's expectation that loans will repay in the next several months with principal available to cover the shortfalls. Should the loans default or extend beyond their scheduled maturities, Fitch expects that the advancing agent will continue to make interest advances for class A-2 and B while they remain outstanding. The 'CCCsf' ratings of classes C through D reflect the subordinate nature of the classes and lack of required advancing to these classes, which will require timely interest payment should they become the senior most class.
Fitch's base case loss expectation is 27.1%. Under Fitch's methodology, approximately 97.6% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Modeled recoveries are 72.2% reflecting the senior position of the majority of the debt (96.3% whole loans/A-notes).
The largest component of Fitch's base case loss is a whole loan (23%) secured by a 203,300 square foot (sf) office property located in Bethpage, NY. After a dip in occupancy to 60% early last year, the property has been released to 72%, as of year-end 2015. However, actual cash flow is expected to decrease significantly as the GSA will no longer be paying the above market amortized portion of the tenant improvement work in its monthly rent payment for 2017. The loan is scheduled to mature in May 2016. A potential loan extension is reportedly under discussion. Fitch modeled a substantial loss on this overleveraged loan in its base case scenario.
The next largest component of Fitch's base case loss expectation is a mezzanine loan (3.7%) backed by an interest in a 256,000 sf anchored retail center located in Monmouth Junction, NJ. The largest tenant is Home Depot. The loan transferred to special servicing after the grocery anchor vacated at lease expiration in July 2014. No recovery is expected on this subordinate interest.
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 (DSCR) tests to project future default levels for the underlying portfolio. Recoveries for the loan assets are based on stressed cash flows and Fitch's long-term capitalization rates. Cash flow modeling was not performed, as no material impact from the analysis was anticipated.
The ratings for classes E through F are based on a deterministic analysis that considers Fitch's base case loss expectation for the pool and the current percentage of defaulted assets and Fitch Loans of Concern factoring in anticipated recoveries relative to each classes credit enhancement.
Classes A-2 and B could be downgraded to 'Dsf' should they miss an interest payment. After the remaining swap obligations terminate in September 2016, classes A-2 through E, if still outstanding, could be subject to upgrade given that the risk of interest payment default will be lower. However, upgrades may be limited due to increasing pool concentration.
Distressed classes could be downgraded further should additional losses be realized.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has upgraded the following classes:
--$15.1 million class D-1 notes to 'CCCsf' from 'CCsf'; RE: 75%;
--$5.2 million class D-2 notes to 'CCCsf' from 'CCsf'; RE: 75%;
Fitch has affirmed the following classes and revised outlooks as indicated:
--$8.9 million Class A-2 notes at 'Bsf'; Outlook Stable;
--$20 million class B notes at 'Bsf'; Outlook to Stable from Negative;
--$15.1 million class C notes at 'CCCsf'; RE: 100%;
--$5.2 million class E notes at 'CCsf'; RE: 0%;
--$22.4 million class F notes at 'Csf'; RE: 0%.
Class A-1 has paid in full. Fitch does not rate the preferred shares.