NEW YORK--()--Fitch Ratings has affirmed all classes of Nomura CRE CDO 2007-2, Ltd. /LLC (Nomura 2007-2) reflecting Fitch's base case loss expectation of 34.2%. 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 the latest rating action and as of the September 2012 trustee report, the transaction has paid down by $8 million (0.7% of the original deal balance) and has realized losses of approximately $79 million as a result of two loans paying off in full and four loans disposed of with losses. The disposed loans had a weighted average loss rate of 56%. The asset manager added 18 new assets with built par of approximately $1.9 million. The percentage of defaulted assets and Fitch Loans of Concern have decreased to 36.3% and 11.1%, respectively, compared to 47.4% and 21.1% at the latest rating action. The Fitch derived weighted average rating of the rated securities has improved to 'B-/CCC+' from 'CC'. One additional loan (11.7% of current pool) was removed at a 99% recovery subsequent to the September 2012 trustee report.
Nomura 2007-2 is a commercial CRE CDO managed by C-III Investment Management LLC. The transaction has a five-year reinvestment period that ends in February 2013. As of the September 2012 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: whole loans/A-note (71.3%), B-notes (13.6%), commercial mortgage-backed securities (CMBS: 8.2%), CRE CDO (4.4%), CRE mezzanine loans (2.2%), and principal cash (0.3%).
As of the September 2012 trustee report, all overcollateralization ratios have breached their covenants. Classes D and below are not receiving any interest payments. Interest is being capitalized on these classes; total capitalized interest to date is $13.5 million.
Fitch was notified by the asset manager of its proposal to replace the banking institution for the CDO's eligible accounts to Citibank, N.A. from Bank of America. Citibank N.A. is currently rated 'A/F1' by Fitch and according to Fitch's criteria, 'Counterparty Criteria for Structured Finance Transactions,' dated May 30, 2012, satisfies Fitch's eligibility criteria for the Nomura 2007-2 transaction. The agency would not expect to downgrade or withdraw the note ratings of the transaction as a result of the replacement.
Under Fitch's methodology, approximately 70% 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 7.7% from, generally, either year end 2011 or trailing 12-month second quarter 2012. Fitch estimates recoveries to be 51.1%.
The largest component of Fitch's base case loss expectation is a B-note (6.6%) secured by a portfolio of 20 office properties located in Washington, D.C. and Seattle, WA. The senior loan and B-note were both transferred to special servicing in April 2010 for imminent default. The borrower and the special servicer have negotiated a modification whereby the asset manager expects no interest payments to the B-note during the extension period. Fitch modeled a full loss on this B-note position.
The next largest component of Fitch's base case loss expectation is a whole loan (8.5%) secured by a 347,972 square foot (sf) office property located in San Diego, CA. The asset is real-estate owned (REO) as of December 2011. The property is under contract for sale with a closing date expected prior to the end of the year. Fitch modeled a term default with a substantial loss in its base case scenario.
The third largest component of Fitch's base case loss expectation is a whole loan (3%) secured by a 287,070 sf retail property located in Cleveland, OH. The loan defaulted during the first half of 2010 when the borrower ceased making debt service payments. As of March 2012, the property was 43% occupied. The property lost its anchor grocery tenant in December 2006. Since the property has a 30-year TIF obligation and no leasing traction, the asset manager expects no recovery. Fitch modeled a full loss.
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 and A-R are generally consistent with the ratings listed below.
The ratings for classes A-2 through O 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 has affirmed the following classes:
--$452.7 million class A-1 at 'CCCsf'; RE 100%;
--$72.1 million class A-R at 'CCCsf'; RE 100%;
--$60.7 million class A-2 at 'CCCsf'; RE 15%;
--$70.5 million class B at 'CCCsf'; RE 0%;
--$26.6 million class C at 'CCCsf'; RE 0%;
--$27.8 million class D at 'CCsf'; RE 0%;
--$21 million class E at 'CCsf'; RE 0%;
--$22.3 million class F at 'CCsf'; RE 0%;
--$25.8 million class G at 'Csf'; RE 0%;
--$21 million class H at 'Csf'; RE 0%;
--$26.4 million class J at 'Csf'; RE 0%;
--$25.2 million class K at 'Csf'; RE 0%;
--$9.9 million Class L at 'Csf'; RE 0%;
--$6.5 million Class M at 'Csf'; RE 0%;
--$9.5 million Class N at 'Csf'; RE 0%;
--$15.7 million Class O 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 Cash Flow Analysis in CDOs' (Sept. 13, 2012);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 3, 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:
Global Structured Finance Rating Criteria
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
Global Rating Criteria for Structured Finance CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Structured Finance Recovery Estimates for Distressed Securities