NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed 11 classes of Gramercy Real Estate CDO 2005-1, Ltd./LLC (Gramercy 2005-1) reflecting Fitch's base case loss expectation of 25.2%. Fitch's performance expectation incorporates prospective views regarding commercial real estate market values and cash flow declines. A detailed list of rating actions follows at the end of this release.
Since last review, the CDO exited its reinvestment period. Six assets are no longer in the pool, including four CRE CDO securities sold at a loss; one mezzanine loan paid in full; and one real estate owned (REO) office property, which was exchanged for a performing office loan, as allowed under the transaction documents. While all overcollateralization tests are now passing, as of the June 2011 trustee report, the CDO was previously failing at least one test since March 2010 leading to the diversion of interest payments due on the junior classes to pay down class A-1. Total paydown to class A-1 from loan amortization, diverted interest, and asset sales since last review is $67.3 million. As of the June 2011 trustee report, principal proceeds of $39.9 million were available to further pay down the class A-1 notes at the next payment date.
Commercial real estate loans (CREL) comprise the majority of the collateral. Approximately 51% of the total collateral is whole loans or A-notes while 10% is B-notes and 5% mezzanine debt. Defaulted CREL assets have increased slightly to 10.7% from 10.3% while loans of concern increased to 21.8% from 19.3% at last review. CMBS represent 26.6% of the collateral. Since last review, the average Fitch derived rating for the underlying CMBS collateral declined to 'BB+/BB' from 'BBB-/BB+'.
Under Fitch's updated methodology, approximately 51.1% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch estimates that average recoveries will be 50.7%.
The largest component of Fitch's base case loss expectation is a mezzanine loan (3.7%) secured by ownership interests in a multifamily property located in New York, NY. The property contains over 11,000 residential units and approximately 120,000 square feet of office and retail space. The sponsors' plan was to convert the majority of rent controlled units to market rates; however, the plan has faced significant economic and legal hurdles. The loan became delinquent in January 2010. Fitch modeled no recovery on this highly leveraged mezzanine position.
The next largest component of Fitch's base case loss expectation is the modeled losses on the CMBS bond collateral.
The third largest component of Fitch's base case loss expectation is an REO land property (3.6%) located in Antioch, CA. The 2,115 acre land parcel loan defaulted in April 2009 with foreclosure completed in January 2010. The entitlement process continues and no lot sales are anticipated prior to late 2011. Fitch modeled a substantial loss on this property in its base case scenario.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions', which applies stresses to property cash flows and 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 credit enhancement to classes A-1 through F were then compared to the modeled expected losses, and determined to be consistent with the rating assigned below. Based on prior modeling results, no material impact was anticipated from cash flow modeling the transaction. The Rating Outlooks for classes A-1 through D are revised to Stable from Negative reflecting the paydown of the senior notes. Class E and F maintain a Negative Rating Outlook reflecting Fitch's expectation of further potential negative credit migration of the underlying collateral.
The 'CCC' and below ratings for classes G 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 each class' credit enhancement. These classes were assigned Recovery Ratings (RR) in order to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities.
Gramercy 2005-1 is a commercial real estate (CRE) CDO managed by GKK Manager LLC (GKKM), an affiliate of Gramercy Capital Corp.
Fitch has affirmed, and revised Outlooks and Recovery Ratings, to the following classes, as indicated:
--$429,770,447 class A-1 at 'BBBsf'; Outlook to Stable from Negative;
--$57,000,000 class A-2 at 'BBsf'; Outlook to Stable from Negative;
--$102,500,000 class B at 'BBsf'; Outlook to Stable from Negative;
--$ 47,000,000 class C at 'Bsf'; Outlook to Stable from Negative;
--$ 12,500,000 class D at 'Bsf'; Outlook to Stable from Negative;
--$ 16,000,000 class E at 'Bsf'; Outlook Negative;
--$ 16,000,000 class F at 'Bsf'; Outlook Negative;
--$ 18,500,000 class G at 'CCCsf/RR1' from 'CCCsf/RR6';
--$ 28,000,000 class H at 'CCCsf/RR6';
--$ 49,500,000 class J at 'CCsf/RR6';
--$ 35,000,000 class K at 'CCsf/RR6'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 13, 2010);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Dec. 2, 2010);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 15, 2010);
--'Criteria for Structured Finance Recovery Ratings' (July 12, 2011);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 17, 2010);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Feb. 17, 2010).
Applicable Criteria and Related Research:
Criteria for Interest Rate Stresses in Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605426
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646569
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=579165
Global Rating Criteria for Structured Finance CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564895
Criteria for Structured Finance Recovery Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=644902
Global Criteria for Cash Flow Analysis in CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=557485
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