NEW YORK--()--Fitch Ratings has affirmed seven and downgraded one class of Capmark VII-CRE, Ltd./Corp. (Capmark VII) reflecting Fitch's base case loss expectation of 24.6%. 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.
KEY RATING DRIVERS
Since Fitch's last rating action, the senior class, A-1, has paid in full while class A-2 has received minimal pay down of $2.3 million. A total of $133.5 million in pay down was received from the full payoff of six assets, the discounted payoff or sale of five other assets, scheduled amortization, the partial pay down of one loan, and interest diversion from the failure of coverage tests. Realized losses since last review total $21.1 million.
The portfolio is concentrated with only 18 assets remaining, four of which are cross collateralized. Current CDO collateral consists entirely of whole loans and A-notes. The current percentage of defaulted assets and loans of concern is 23.3% and 43.4%, respectively, compared to 19.6% and 23.4% at last review. Further, approximately 31% of the collateral, which is not currently defaulted, is scheduled to mature by April 2013.
Capmark VII is a commercial real estate (CRE) CDO managed by Urdang Capital Management, a real estate investment subsidiary of BNY Mellon Asset Management. As of the February 2013 trustee report, the transaction continues to fail all three of its principal coverage tests resulting in diverted interest to pay principal to A-2 and capitalized interest to classes C through K.
Under Fitch's methodology, approximately 94% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Modeled recoveries are above average at 73.8% based on the senior position of the collateral.
The largest component of Fitch's base case loss expectation is related to a defaulted whole loan (8% of the pool) secured by undeveloped land located adjacent to the Potomac River in Arlington, VA. Fitch modeled a significant loss on this loan in its base case scenario.
The next largest component of Fitch's base case loss expectation is related to a defaulted A-note (8.2%) secured by an office property located in Monterey, CA. The loan, which was formerly cross collateralized with two other loans, is not performing in line with expectations. As of September 2012, the property was 78% occupied. Further, an additional tenant (7.1% of NRA) reportedly vacated at year end 2012. Fitch modeled a significant loss on this loan 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 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 class A-2 are generally consistent with the rating assigned below. A Stable Outlook was assigned based on the class's senior position in the structure and cushion in the modeling.
The 'CCC' and below ratings for classes B 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 classes credit enhancement.
If CDO collateral recoveries are better than expected, Fitch may consider upgrades to the senior classes. However, upgrades will be limited as the pool becomes more concentrated given the risk of adverse selection and the risk of insufficient interest and principal proceeds to pay the timely interest due. While Fitch has modeled conservative loss expectations on the pool, unanticipated increases in defaulted loans and/or loss severity could result in downgrades.
Fitch affirms the following classes:
-- $167.7 million class A-2 at 'BBsf'; Outlook Stable;
-- $80 million class B at 'CCCsf'; RE 85%;
-- $30.9 million class C at 'CCsf'; RE 0%;
-- $7.8 million class E at 'Csf'; RE 0%;
-- $34.3 million class F at 'Csf'; RE 0%;
-- $13.3 million class G at 'Csf'; RE 0%;
-- $10.8 million class H at 'Csf'; RE 0%;
Fitch downgrades the following classes:
-- $7.8 million class D to 'Csf' from 'CCsf'; RE 0%;
Class A-1 has paid in full.
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 Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012);
-- 'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 25, 2013);
-- 'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18, 2011).
Applicable Criteria and Related Research
Global Structured Finance Rating Criteria
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan
Global Criteria for Cash Flow Analysis in CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Structured Finance Recovery Estimates for Distressed Securities