Fitch Affirms Newcastle CDO IX

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed all classes of Newcastle CDO IX Ltd./Newcastle CDO IX, LLC (collectively, Newcastle CDO IX) reflecting Fitch's base case loss expectation of 30.8%, an improvement from 36.2% at the last rating action. 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.

Since last rating action, nine assets were removed from the pool and 11 assets were added. Realized losses since Fitch's last rating action were approximately $5 million, while par building was approximately $8 million. In addition, the collateralized debt obligation (CDO) is holding approximately $66.3 million in principal cash.

As of the January 2012 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: commercial real estate (CRE) mezzanine debt (32.2%), real estate bank loans and corporate debt (19.5%), B-notes (14.4%), whole loan/A-note (9.1%), CRE CDOs (8.3%), principal cash (8.2%), commercial mortgage-backed securities (CMBS; 3.7%), real estate investment trust debt (REIT; 3.1%), and residential mortgage-backed securities (RMBS; 1.5%). The loan portion of the collateral (55.7%) is comprised of senior debt (9.1%) and subordinate debt (either B notes or mezzanine debt) (46.6%). Fitch modeled significant losses upon default for these assets since they are generally highly leveraged debt classes.

Three assets (5.3%) were defaulted or delinquent, including one B-note (3.6%), one mezzanine debt (1.5%), and one CMBS rake bond (0.2%). Fitch modeled significant to full losses on these assets. Fitch has also designated one mezzanine loan (4%) and two whole loans (0.5%) as Fitch Loans of Concern.

Newcastle CDO IX was issued as an $825 million CRE collateralized debt obligation (CDO) managed by Newcastle Investment Corp. 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 May 2012. In April and September 2009, notes with a face amount of $64,525,000 were surrendered to the trustee for cancellation, which has resulted in greater cushion to the overcollateralization (OC) ratios. All OC and interest coverage (IC) ratios have remained above their covenants, as of the January 2012 trustee report.

Under Fitch's methodology, approximately 63.9% 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 7.9% from, generally, trailing 12-month (TTM) second and third quarter 2011.

The largest component of Fitch's base case loss expectation is a mezzanine loan (3.1%) secured by interests in a portfolio of 12 full service hotels totaling 4,718 keys located in Puerto Rico, Jamaica, and Florida. Performance remains significantly below expectations at issuance. Fitch modeled a term default and full loss on this overleveraged position in its base case scenario.

The next largest component of Fitch's base case loss expectation is a mezzanine loan (4%) secured by interests in a portfolio of 100 public and private golf courses. The asset manager reported that TTM November 2011 net cash flow declined by 17% when compared to year-end 2010. Fitch modeled a term default with a significant loss in its base case scenario.

The third largest component of Fitch's base case loss expectation is an A-note (2.9%) secured by a construction project of a super regional mall and entertainment facility located in New Jersey, adjacent to the Metlife Stadium. In April 2011, a replacement developer was selected and was given until March 2012 to close with a commitment for senior debt financing. Fitch modeled a term default with a moderate loss 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 for the loan assets are based on stressed cash flows and Fitch's long-term capitalization rates. The structured finance bonds, real estate bank loans and corporate debt portion of the collateral were 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 Criteria for Cash Flow Analysis in CDOs'. Based on this analysis, the breakeven rates for classes A-1 through G are generally consistent with the ratings assigned below. The Rating Outlooks for classes A-1 and A-2 remain Stable reflecting the classes' senior position in the capital stack and positive cushion in cash flow modeling. The Outlook remains Negative for classes B through G reflecting Fitch's expectation of further negative credit migration of the underlying collateral.

The 'CCC' ratings for classes H through L 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.

Fitch affirms the following classes and revises Recovery Estimates (REs) as indicated:

--$33,540,000 class S at 'BBBsf', Outlook Stable;

--$379,500,000 class A-1 at 'BBBsf', Outlook Stable;

--$115,500,000 class A-2 at 'BBsf', Outlook Stable;

--$37,125,000 class B at 'BBsf', Outlook Negative;

--$24,750,000 class E at 'BBsf', Outlook Negative;

--$18,562,000 class F to 'Bsf', Outlook Negative;

--$11,262,000 class G to 'Bsf', Outlook Negative;

--$18,056,000 class H to 'CCCsf', RE to 100% from 25%;

--$21,656,000 class J to 'CCCsf', RE to 100% from 10%;

--$19,593,000 class K to 'CCCsf', RE to 35% from 10%;

--$23,718,000 class L to 'CCCsf', RE to 0% from 10%.

Fitch has previously withdrawn the ratings on classes C and D. Fitch does not rate the preferred shares.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (Aug. 4, 2011);

--' Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Dec. 1, 2011);

--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);

--'Global Rating Criteria for Structured Finance CDOs' (Oct. 6, 2011);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 21, 2011);

--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 16, 2011).

Applicable Criteria and Related Research:

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=657734

Global Criteria for Cash Flow Analysis in CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=650717

Global Rating Criteria for Structured Finance CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651560

Criteria for Interest Rate Stresses in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605426

Structured Finance Recovery Estimates for Distressed Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656557

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