OREANDA-NEWS. June 04, 2015. Fitch Ratings has upgraded four and affirmed seven classes from CapitalSource Real Estate Loan Trust 2006-A (CapitalSource 2006-A). 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 ratings action commentary.

KEY RATING DRIVERS
The upgrade reflects a significant improvement in credit enhancement from asset repayments and from better recoveries on disposed assets than previously modeled at the last rating action. Fitch's base case loss expectation is 41.2% compared to 33.5% at the last rating action. Since the last rating action and as of the April 2015 trustee report, principal paydowns totaling \\$166.5 million paid off the remaining balance of class A-2A and a portion of classes A-1A, A-1R, and A-2B. Nine assets were repaid in full, while five assets realized losses totaling \\$6.9 million. As of the April 2015 trustee report, all overcollateralization and interest coverage ratios were in compliance.

CapitalSource 2006-A is primarily collateralized by senior commercial real estate (CRE) debt with 96.6% of the portfolio consisting of whole loans or A-notes as of the April 2015 trustee report and per Fitch categorizations. The remainder of the collateral pool consists of residential mortgage-backed securities bonds (2.4%) and a notes receivable asset (1%). The portfolio also comprises a high percentage of non-traditional property types, including loans secured by healthcare (25%), hotel (21.3%), and undeveloped land (20.4%). The weighted average Fitch-derived rating of the rated securities portion of the collateral has remained at 'B-/CCC+' since the last rating action. The combined percentage of defaulted assets and assets of concern has increased to 37.2% from 27.6% at the last rating action as the pool has become more concentrated.

Under Fitch's methodology, approximately 76.1% 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 7% from, generally, third-quarter 2014 and year-end 2014 cash flows. Modeled recoveries are average at 45.9%.

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 (15.9% of pool) secured by a 331-key boutique hotel property located in Atlantic City, NJ that does not have a gaming component. Property cash flow has been insufficient to support debt service over the past few years due to declining and unimproved performance and the drop in revenues across the overall Atlantic City market. The loan matures in October 2015. 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 (8.5%) 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 comprises 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 afterwards, the borrower agreed to transfer the property to the lender in lieu of foreclosure. A deed in lieu was completed in May 2013. The asset manager has engaged an external firm to provide consulting services and market feasibility studies are being updated and reviewed. 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 (7.5 %) 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 borrower continues to seek subdivision approval of the land parcels. The loan, which has a current maturity of July 2016, has been extended multiple times to allow for additional time to complete the entitlement process and to allow the market to improve. Fitch modeled a term default with a significant loss under its base case 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 collateralized debt obligation (CDO) under the various default timing and interest rate stress scenarios, as described in the report 'Global Rating Criteria for Structured Finance CDOs'. While the breakeven rates for classes A-1A, A-1R, A-2B, and B are generally above the ratings assigned below, the ratings reflect Fitch's concern about the concentration and volatility of non-traditional asset types.

The ratings for classes C 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.

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.

RATING SENSITIVITIES
The Positive Rating Outlooks on classes A-1A, A-1R, and A-2B reflect these classes' seniority, improving credit enhancement, and positive cushion in Fitch's modelling. The Stable Rating Outlook on class B reflects expected future paydown. The junior classes C through J may be subject to downgrade as losses are realized or if realized losses exceed Fitch's expectations.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

Fitch has upgraded the following classes as indicated:

--\\$10.2 million class A-1A to 'BBBsf' from 'BBsf'; Outlook Positive;
--\\$41.2 million class A-1R to 'BBBsf' from 'BBsf'; Outlook Positive;
--\\$90.7 million class A-2B to 'BBBsf' from 'BBsf'; Outlook Positive;
--\\$82.9 million class B to 'BBsf' from 'Bsf'; Outlook Stable.

Fitch has affirmed the following classes as indicated:

--\\$62.4 million class C at 'CCCsf'; RE 100%;
--\\$30.2 million class D at 'CCCsf'; RE 100%;
--\\$30.2 million class E at 'CCCsf'; RE 90%;
--\\$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.