NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed all classes of Newcastle CDO VIII 1, Ltd./Newcastle CDO VIII 2, Ltd./ Newcastle CDO VIII, LLC (collectively, Newcastle CDO VIII) reflecting Fitch's base case loss expectation of 32.9%. 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 Fitch's last rating action, classes I-A and I-AR have paid down by $55.2 million primarily due to the full payoff of one asset, the discounted sale of another asset, and the amortization of several other assets in the pool. The transaction has realized losses of $17 million due to the sale of one commercial real estate collateralized debt obligation (CRE CDO) bond at a significant discount to par. Fitch has incorporated this loss into the ratings assigned.
As of the December 2012 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: CRE mezzanine debt (37.5%), real estate bank loans and corporate debt (22.5%), commercial mortgage-backed securities (CMBS: 16.3%), residential mortgage-backed securities (RMBS: 8.3%), CRE CDOs (7.7%), CRE B-notes (6.7%), and principal cash (1%). The CRE loan portion of the collateral (44.2%) is comprised entirely of subordinate debt (either mezzanine loans or B-notes). Fitch modeled significant to full losses upon default of these assets, since they are generally highly leveraged debt classes. Three assets (3%) were reported as defaulted, which include two CMBS bonds (2.4%) and one RMBS bond (0.6%). Fitch classified three additional assets (7.9%) as Loans of Concern.
Under Fitch's methodology, approximately 55.2% 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 at 40.3%.
Newcastle CDO VIII is a CRE CDO managed by Newcastle Investment Corp. The CDO exited its reinvestment period in November 2011. The CDO was originally issued as a $950 million CRE CDO; however, in April and September 2009, notes with a face amount totaling $80.19 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 (4.4%) 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 next largest component of Fitch's base case loss expectation is a mezzanine loan (3.9%) secured by an interest in a portfolio of six office properties totaling greater than 3.5 million square feet located across four cities: Chicago, Dallas, Denver, and Atlanta. As of September 2012, the portfolio occupancy was 87% with a diverse rent roll containing over 200 tenants. Net-operating income (NOI), as reported by the asset manager, has been on the decline over the past two years. For the first nine months of 2012, the annualized NOI declined 4% when compared to year-end (YE) 2011 and 11% when compared to YE 2010. The annualized NOI for the first nine months of 2012 is 16% below the budget for 2012. The CDO holds the second loss position in the loan capital structure. 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 a mezzanine loan (2.9%) 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 payments made 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.
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 I-A through III are generally consistent with the ratings assigned below. The Rating Outlooks for classes I-A and I-AR remain Stable reflecting these classes' senior position in the capital stack. The Rating Outlook for class I-B through III remains Negative 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 on classes V through XII 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:
-- $408,422,142 class I-A at 'BBsf'; Outlook Stable;
-- $52,984,494 class I-AR at 'BBsf'; Outlook Stable;
-- $38,000,000 class I-B at 'BBsf'; Outlook Negative;
-- $42,750,000 class II at 'BBsf'; Outlook Negative;
-- $42,750,000 class III at 'Bsf'; Outlook Negative;
-- $28,500,000 class V at 'CCCsf'; RE 0%;
-- $22,562,500 class VIII at 'CCCsf'; RE 0%;
-- $6,000,000 class IX-FL at 'CCCsf'; RE 0%;
-- $7,600,000 class IX-FX at 'CCCsf'; RE 0%;
-- $18,650,000 class X at 'CCCsf'; RE 0%;
-- $24,125,000 class XI at 'CCCsf'; RE 0%;
-- $28,500,000 class XII at 'CCCsf'; RE 0%.
Class S has paid in full. Fitch previously withdrew the ratings on classes IV, VI, and VII. 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' (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 Criteria for Cash Flow Analysis in CDOs
Global Rating Criteria for Structured Finance CDOs
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan
Global Structured Finance Rating Criteria