Fitch Downgrades FMC Real Estate CDO 2005-1; Assigns Outlooks, LS & RR Ratings

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded all classes of FMC Real Estate CDO 2005-1 Ltd. (FMC 2005-1) reflecting Fitch's base case loss expectation of 39.7%. Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. A detailed list of rating actions follows at the end of this release.

The transaction is collateralized by both senior and subordinate commercial real estate (CRE) debt: 43.4% are either whole loans or A-notes and 54.3% are either B-notes or mezzanine loans. Fitch expects significant losses upon default for the subordinate positions since they are generally highly leveraged debt classes. Further, eight loans (27.8%) are currently defaulted and two loans (6.8%) are considered Fitch Loans of Concern. Fitch expects partial to full losses on the delinquent assets and Loans of Concern.

FMC 2005-1 is a $439.4 million CRE collateralized debt obligation (CDO) managed by SCFFI GP LLC, an affiliate of Five Mile Capital. The transaction has a five-year reinvestment period during which principal proceeds may be used to invest in substitute collateral. The reinvestment period ends in August 2010.

As of the February 2010 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: CRE whole loans/A-notes (43.4%), mezzanine loans (31.2%), and B-notes (23.2%). All overcollateralization and interest coverage (IC) ratios have remained above their covenants as of the February 2010 trustee report, despite the CDO's above-average default rate.

Under Fitch's updated methodology, approximately 65.2% 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 11.8% from the most recent available cash flows (generally from third or fourth quarter 2009). Fitch estimates that recoveries will average 39.2% in the base case.

The largest component of Fitch's base case loss expectation is a mezzanine loan (6.1%) secured by ownership interests in a portfolio of five resort hotels, with a total of 3,287 rooms. The properties are located in Wailea, Hawaii; La Quinta, California; Phoenix, Arizona; Miami, Florida; and Berkeley, California. The portfolio's performance has been adversely affected by the recent economic downturn, and the mezzanine position is highly leveraged. As such, Fitch modeled a term default with a substantial loss in its base case scenario.

The next largest component of Fitch's base case loss expectation is a whole loan (7.7%) secured by three single-tenant office/industrial buildings located in North San Jose, CA. One tenant, who had occupied 33% of total portfolio net rentable area, recently vacated at the expiration of its lease. Consequently, two of the buildings are now vacant, while the other is occupied by one tenant through 2015. Fitch modeled a term default with a partial loss as a result of the portfolio's weak overall current occupancy rate of 29%.

The third largest component of Fitch's base case loss expectation is a defaulted B-note (4.4%) secured by approximately 18 acres of land located in Las Vegas, Nevada. The property is located on Las Vegas Boulevard, in close proximity to several popular hotel/casinos. The land is currently improved with a variety of commercial buildings, including a limited-service hotel, restaurants and retail space. The sponsor's original plan was to redevelop the site into an Elvis Presley themed hotel/casino. The plan stalled amid the economic downturn, and the loan defaulted in January 2009. Fitch modeled a complete loss on this subordinate position.

This transaction was analyzed according to 'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs,' which applies stresses to property cash flows and uses debt service coverage ratio (DSCR) 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 Criteria for Cash Flow Analysis in CDOs.' Based on this analysis, the credit characteristics of classes A-1 and A-2 are generally consistent with the 'BBB' rating category. The credit characteristics of class B are generally consistent with the 'BB' rating category, and the credit characteristics of class C are generally consistent with the 'B' rating category.

The ratings for classes D through H are based on a deterministic analysis, which 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 class' credit enhancement.

Based on this analysis, classes D through F are consistent with the 'CCC' rating category, meaning default is a real possibility. Fitch's base case loss expectation of 39.7% exceeds these classes' respective current credit enhancement levels. The ratings for classes G and H are deemed to be consistent with the 'CC' rating category, meaning default appears probable given that these classes' credit enhancement levels are below the total losses expected from the currently defaulted assets and Loans of Concern in the pool.

Classes A through C were assigned a Negative Outlook reflecting Fitch's expectation of further negative credit migration of the underlying collateral. These classes were also assigned Loss Severity (LS) ratings ranging from 'LS4' to 'LS5' indicating each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the expected loss for the collateral under the 'B' stress. LS ratings should always be considered in conjunction with probability of default indicated by a class' long-term credit rating. Fitch does not assign Outlooks or LS ratings to classes rated 'CCC' or lower.

Classes D through H were assigned Recovery Ratings (RR) to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities. Recovery Ratings are calculated using Fitch's cash flow model and incorporate Fitch's current 'B' stress expectation for default and recovery rates (65.2% and 39.2%, respectively), the 'B' stress USD LIBOR up-stress, and a 24-month recovery lag. All modeled distributions are discounted at 10% to arrive at a present value and compared to the class' tranche size to determine a Recovery Rating. The assumptions for the 'B' stress USD LIBOR up-stress scenario are found in Fitch's report, 'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Feb. 17, 2010), available on Fitch's web site at 'www.fitchratings.com'.

The assignment of 'RR4' to class D reflects modeled recoveries of 50% of its outstanding balance. The expected recovery proceeds are broken down as follows:

-- Present value of expected principal recoveries ($12.1 million);

-- Present value of expected interest payments ($5 million);

-- Total present value of recoveries ($17.1 million);

-- Sum of undiscounted recoveries ($29.3 million).

Classes E through H are assigned a Recovery Rating of 'RR6' as the present value of the recoveries in each case is less than 10% of each class's principal balance.

Fitch has downgraded, assigned LS and RR ratings and Outlooks to the following classes as indicated:

-- $131,825,000 class A-1 to 'BBB/LS4' from 'AAA'; Outlook Negative;

-- $43,941,000 class A-2 to 'BBB/LS5' from 'AAA'; Outlook Negative;

-- $43,941,000 class B to 'BB/LS5' from 'AA'; Outlook Negative;

-- $49,434,000 class C to 'B/LS5' from 'A'; Outlook Negative;

-- $34,055,000 class D to 'CCC/RR4' from 'BBB+';

-- $13,182,000 class E to 'CCC/RR6' from 'BBB';

-- $21,970,000 class F to 'CCC/RR6' from 'BBB-';

-- $35,153,000 class G to 'CC/RR6' from 'B';

-- $12,084,000 class H to 'CC/RR6' from 'B'.

Additionally, all classes are removed from Rating Watch Negative.

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:

-- 'Global Structured Finance Rating Criteria' (Sept. 30, 2009);

-- 'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs' (Nov. 9, 2009);

-- 'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009);

-- 'Criteria for Structure Finance Recovery Ratings' (Aug. 17, 2009);

-- 'Global Criteria for Cash Flow Analysis in CDOs' (Nov. 9, 2009).

Additional information is available at 'www.fitchratings.com'.

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