Fitch Upgrades 1 and Affirms 6 Classes of RRE CDO 2006-1
KEY RATING DRIVERS
The upgrade reflects significant delevering of the capital structure and Fitch's base case loss expectation of 50.2%. Fitch's performance expectation incorporates prospective views regarding commercial real estate market values and cash flow declines. Since the February 2014 rating action, the class A-1 through D notes received \$55.6 million in pay down primarily from the full payoff of three loans. The CDO is over collateralized by \$15 million.
The portfolio is considered concentrated with only 15 assets remaining. Per Fitch categorizations, commercial real estate loans (CREL) comprise approximately 82.3% of the collateral of the CDO. Approximately 47.7% of the pool is comprised of whole loans or A-notes and the remainder of B-notes or mezzanine loans. Commercial mortgage backed securities (CMBS), which have an average Fitch derived rating of CCC, represent 17.7% of the total collateral. Per the January 20, 2015 trustee report, the transaction passes all interest coverage and overcollateralization tests.
Under Fitch's methodology, approximately 80.5% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch estimates that overall recoveries will average at 37.7%.
The largest component of Fitch's base case loss expectation is a mezzanine loan (17.7%) secured by a portfolio of eight luxury resorts and hotels consisting of 3,826 keys located in beachfront and waterfront locations, including Puerto Rico, Jamaica, and the United States. Four assets were sold since last review. The loan was modified in August 2012 to allow an extended maturity date while a long-term modification was finalized. Subsequently, the loan was modified twice in August 2014 to allow for the sale of the remaining properties and extend the maturity to May 2015. Fitch modeled a full loss in its base case scenario on this over leveraged position.
The second largest component to Fitch's base case loss expectation is a whole loan (12.8%) secured by a 163 room hotel located in Palm Springs, CA. The hotel underwent a \$17 million renovation and re-opened as Hard Rock Hotel Palm Springs in 2014. Fitch modeled a significant loss on this loan.
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 CRE loan portion of the collateral are based on stressed cash flows and Fitch's long-term capitalization rates. The non-CRE loan portion of the collateral was analyzed in the Portfolio Credit Model according to the 'Global Rating Criteria for Structured Finance CDOs'. The combined 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 D through G generally pass the cash flow model at the rating assigned below.
The 'CCC' and 'CC' ratings for classes H through K 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 the credit enhancement of each class.
The Positive Outlook on class E reflects the increasing credit enhancement and possibility for future upgrades should the remaining assets continue to exhibit stable performance as the portfolio delevers. The Stable Outlooks reflect sufficient credit enhancement and the respective classes' seniority in the liability structure. The distressed classes (those rated 'CCCsf' and below) are subject to further downgrades should further losses be realized.
Resource Real Estate, Inc. is the collateral asset manager for the transaction. The CDO's reinvestment period ended in August 2011. Portions of classes E and F were previously surrendered to the trustee for cancellation.
Fitch has upgraded the following class:
--\$9.1 million class D to 'BBBsf' from 'BBsf'; Outlook Stable.
Fitch has affirmed the following classes and revises Outlooks as indicated:
--\$13.7 million class E at 'BBsf'; Outlook to Positive from Stable;
--\$14.6 million class F at 'Bsf'; Outlook Stable;
--\$17.3 million class G at 'Bsf'; Outlook Stable;
--\$12.9 million class H at 'CCCsf'; RE 100%;
--\$14.7 million class J at 'CCsf'; RE 10%;
--\$28.5 million class K at 'CCsf'; RE 0%.
Fitch previously withdrew its ratings of class B following the full surrender of those certificates. Fitch does not rate the \$36.3 million preferred shares.