NEW YORK--()--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 26.7%. 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 transaction has exited its reinvestment period in May 2012. Since Fitch's last rating action, class A-1 has paid down by $79.2 million primarily due to the full payoff of two assets, the discounted sale of another asset, and the amortization of several other assets in the pool. The transaction has realized losses of $4.93 million due to the sale of one commercial real estate collateralized debt obligation (CRE CDO) bond at a significant discount to par. In addition, six assets were added resulting in built par of approximately $2.5 million.
As of the December 2012 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: CRE mezzanine debt (38.1%), corporate debt and real estate bank loans (20%), B-notes (14.8%), whole loans/A-notes (9.4%), CRE CDOs (7.8%), principal cash (1.2%), commercial mortgage-backed securities (CMBS; 4%), real estate investment trust debt (REIT; 3.2%),and residential mortgage-backed securities (RMBS; 1.5%). The CRE loan portion of the collateral is mostly comprised of subordinate debt (52.9% of the portfolio is either B notes or mezzanine debt). Fitch modeled significant losses upon default for these assets since they are generally highly leveraged debt classes. Two assets (1.8%) were reported as defaulted. The defaulted assets consist of a CMBS rake bond and mezzanine debt collateralized by the same asset. Fitch classified six additional assets (18.2%) as Loans of Concern.
Under Fitch's methodology, approximately 56.1% 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 5% from, generally, trailing 12-month third and fourth quarter 2012. Modeled recoveries average 55.9%.
Newcastle CDO IX is a CRE CDO managed by Newcastle Investment Corp. The CDO was originally issued as a $825 million CRE CDO; however, in April and September 2009, notes with a face amount of $64.525 million were surrendered to the trustee for cancellation, which has resulted in greater cushion to the overcollateralization (OC) ratios. As of the December 2012 trustee report, all OC and interest coverage tests were in compliance.
The largest component of Fitch's base case loss expectation is a mezzanine loan (4.7%) secured by an interest in a portfolio of golf courses located across the United States. The collateral was initially comprised of more than 170 leased, owned, and managed golf courses; however, multiple golf courses were released with the remaining collateral comprising 95 courses, as reported by the asset manager. The initial loan matured in July 2010 and the first mortgage was modified and granted forbearance until July 2012, which was subsequently extended further until December 2012. A cash flow sweep has currently been implemented with no made payments to the mezzanine debt. The CDO holds the first loss position in the loan capital structure. The loan remains of concern due to the unique nature of the collateral. Fitch modeled a term default and a full loss on this position.
The next largest component of Fitch's base case loss expectation is a mezzanine loan (3.3%) secured by an interest in a portfolio of 12 full service hotels totaling 4,718 keys located in Puerto Rico, Jamaica, and Florida. Performance has continually remained significantly below underwritten expectations at issuance. The property cash flow reported by the asset manager as of the trailing-12 months ended September 2012 still remains greater than 40% below peak property performance. Fitch modeled a term default and a full loss on this overleveraged position in its base case scenario.
The third largest component of Fitch's base case loss expectation is an A-note (7%) secured by the construction project of a super-regional mall and entertainment facility located in East Rutherford, New Jersey. The project's original business plan has stalled due to the economic downturn. In April 2011, a replacement developer was selected and negotiations to secure minimum financing to continue the construction of the project remain in progress. The loan remains of concern due to the unique nature of the collateral and the continued delay in completion of the project. 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 Rating Outlooks for classes B through G remain reflecting Fitch's expectation of further negative credit migration of the underlying collateral and the concentration of subordinate CRE loan positions in the portfolio.
The 'CCCsf' ratings for classes H through L are based upon a deterministic analysis that considers Fitch's base case expected loss 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 affirms the following classes as indicated:
--$300,313,292 class A-1 affirm at 'BBBsf'; Outlook Stable;
--$115,500,000 class A-2 affirm at 'BBsf'; Outlook Stable;
--$37,125,000 class B affirm at 'BBsf'; Outlook Negative;
--$24,750,000 class E affirm at 'BBsf'; Outlook Negative;
--$18,562,000 class F affirm at 'Bsf'; Outlook Negative;
--$11,262,000 class G affirm at 'Bsf'; Outlook Negative;
--$18,056,000 class H affirm at 'CCC'; RE 100%;
--$21,656,000 class J affirm at 'CCC'; RE 100%;
--$19,593,000 class K affirm at 'CCC'; RE 95%;
--$23,718,000 class L affirm at 'CCC'; RE 0%.
Class S has paid in full. Fitch has previously withdrawn the ratings on classes C and D. Fitch does not rate class M and 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' (June 6, 2012);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Nov. 29, 2012);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 3, 2012);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan
Global Rating Criteria for Structured Finance CDOs
Global Criteria for Cash Flow Analysis in CDOs