NEW YORK--()--Fitch Ratings has downgraded four classes and affirmed five classes of Arbor Realty Mortgage Securities Series 2005-1, Ltd./LLC (ARMSS 2005-1) reflecting Fitch's base case loss expectation of 41.7%. 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 downgrades to classes C through F reflect Fitch's increased base case expected loss of 41.7% from 37.8% at last review. ARMSS 2005-1 is a CRE collateralized debt obligation (CDO) managed by Arbor Realty Collateral Management, LLC (Arbor). As of the August 2012 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: whole loans/A-notes (53%), B-notes (28%), mezzanine debt (12%), preferred equity (5%), CMBS (2%), and cash (0.5%). Approximately 3.8% of the pool is currently defaulted while a further 37.9% are considered assets of concern.
The CDO exited its reinvestment period in April 2011. Since Fitch's last rating action, class A-1 has been paid down by $44 million primarily due to the full payoff or removal at par of four CDO assets, and the discounted payoff of another asset. Realized losses over the last year have totaled $5.8 million. The combined total of defaulted assets and assets of concern is 41.7% compared to 30.2% at last rating action. As of the August 2012 trustee report, all par value and interest coverage tests were in compliance.
Under Fitch's methodology, approximately 77.5% 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 8.5% from, generally, year-end 2011 or trailing 12-month first quarter 2012. Modeled recoveries are better than average at 46.2% due to the significant percentage of senior debt.
The largest component of Fitch's base case loss expectation is a B-note (6% of the pool) secured by a 43-story office building located in downtown St. Louis, MO. The loan transferred to special servicing in August 2012 due to imminent default. Loan resolution discussions are ongoing. Fitch modeled a full loss in its base case scenario on this overleveraged position.
The next largest component of Fitch's base case loss expectation is a preferred equity position (4.6% of the pool) on a 230-property multifamily portfolio located across 10 states. As of Dec. 31, 2011, occupancy was 83%. The senior debt is currently in special servicing. Fitch modeled a full loss in its base case scenario on this overleveraged position.
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 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'. The breakeven rates for classes A-1 through D are generally consistent with the ratings listed below.
The Stable Outlooks on classes A-1 through D generally reflect the classes' cushion in the modeling.
The ratings for classes E through H 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.
Fitch downgrades the following classes as indicated:
--$22.5 million class C to 'Bsf' from 'BBsf'; Outlook to Stable from Negative;
--$7.7 million class D to 'Bsf' from 'BBsf'; Outlook to Stable from Negative;
--$6.8 million class E to 'CCCsf' from 'BBsf'; RE 0%;
--$13.3 million class F to 'CCCsf' from 'Bsf'; RE 0%.
Fitch affirms the following classes as indicated:
--$117.5 million class A-1 at 'BBBsf'; Outlook Stable;
--$40.4 million class A-2 at 'BBBsf'; Outlook Stable;
--$57 million class B at 'BBsf'; Outlook Stable;
--$9.9 million class G at 'CCCsf'; RE 0%
--$13.5 million class H at 'CCCsf'; 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 Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012);
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 16, 2011).
Applicable Criteria and Related Research:
Structured Finance Recovery Estimates for Distressed Securities
Criteria for Interest Rate Stresses in Structured Finance Transactions
Global Criteria for Cash Flow Analysis in CDOs
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
Global Structured Finance Rating Criteria