NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded one, downgraded two, and affirmed eight classes of RFC CDO 2006-1, Ltd./LLC (RFC 2006-1) reflecting Fitch's base case loss expectation of 66.4%. Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines, and factors in concerns regarding the outsourced third party management of the collateralized debt obligation (CDO). A detailed list of rating actions follows at the end of this release.
The upgrade to class A-1 reflects an increase in credit enhancement due to significant paydowns since the last rating action. The transaction has paid down by $131.8 million (22% of the original transaction balance) since the last rating action, totaling $347.5 million (58%) since issuance. The paydowns were due to asset repayments, asset disposals, and interest diversion as a result of the failure of all overcollateralization (OC) tests. Five loans and one commercial mortgage-backed security (CMBS) bond paid off in full. In addition, approximately $22.8 million is currently held as principal cash. The Stable Outlook on class A-1 reflects the class' senior position in the capital stack.
Since Fitch's last rating action and as of the September 2012 trustee report, two CMBS bonds and one mezzanine loan have realized losses totaling $27.2 million. Defaulted assets and Fitch Loans of Concern have increased to 52.1% and 15.3%, respectively, compared to 31.9% and 11.4%, respectively, at the last rating action. The weighted average rating of the CMBS bonds has remained the same at 'CCC+/CCC'.
As of the September 2012 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: 39.5% whole loan/A-notes, 27.8% CMBS, 21.4% mezzanine loans, 9.7% principal cash, and 1.6% B-notes.
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. In this scenario, the modeled average cash flow decline is 10.5% from, generally, third-quarter 2012. Fitch estimates that average recoveries will be low at 17.5%.
The largest component of Fitch's base case loss expectation is the modeled loss on the CMBS portion of the collateral (27.8% of the pool), where the majority of the ratings are speculative grade.
The second largest component of Fitch's base case loss expectation is a whole loan (15%) secured by a 72-room boutique hotel located in the Times Square area of New York City. Performance has improved since the last rating action, but remains significantly below underwritten expectations. Fitch modeled a significant loss in its base case scenario.
The third largest component of Fitch's base case loss expectation is a mezzanine position (8.6%) secured by interests in a 575-room full-service hotel located in Tucson, Arizona. Fitch modeled a full loss on this highly-leveraged position in its base case scenario.
This transaction was analyzed according to '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 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 CMBS bonds were analyzed in Fitch's Portfolio Credit Model according to 'Global Rating Criteria for Structured Finance CDOs'.
The ratings for classes A-2 through K 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, as well as the likelihood for OC tests to cure.
RFC 2006-1 is a commercial real estate CDO. The transaction exited its reinvestment period in April 2011. The CDO's asset manager is Realty Finance Corp. (RFC). As stated in a public press release in February 2011, RFC entered into an agreement to outsource its asset management functions for the CDO to Waldron H. Rand & Company, P.C. (Waldron). Waldron is an accounting firm with real estate experience and its capabilities are consistent with the current ratings assigned to the notes of the transaction. The transaction was formerly known as CBRE Realty Finance CDO 2006-1, Ltd./LLC.
Fitch has upgraded the following class:
--$27.5 million class A-1 to 'BBsf' from 'Bsf'; Outlook Stable.
Fitch has downgraded the following classes:
--$9 million class E to 'Csf' from 'CCsf'; RE 0%;
--$10.5 million class F to 'Csf' from 'CCsf'; RE 0%.
Fitch has affirmed the following classes:
--$33 million class A-2 at 'CCCsf'; RE 100%;
--$34.5 million class B at 'CCCsf'; RE 100%;
--$15 million class C at 'CCCsf'; RE 15%;
--$13.5 million class D at 'CCsf'; RE 0%;
--$13.5 million class G at 'Csf'; RE 0%;
--$4.5 million class H at 'Csf'; RE 0%;
--$24 million class J at 'Csf'; RE 0%;
--$20.3 million class K at 'Csf'; RE 0%.
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' (June 6, 2012);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Dec. 1, 2011);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 6, 2011).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Global Rating Criteria for Structured Finance CDOs
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions