NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded one and affirmed 10 classes of Resource Real Estate Funding CDO 2006-1 Ltd./LLC (RRE 2006-1) reflecting Fitch's base case loss expectation of 48.2%. Fitch's performance expectation incorporates prospective views regarding commercial real estate market values and cash flow declines. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The performance of the transaction has been in line with expectations over the last year. Per Fitch categorizations, commercial real estate loans (CREL) comprise approximately 87.2% of the collateral of the CDO. Approximately 61.1% of the pool is comprised of whole loans or A-notes and the remainder of B-notes or mezzanine loans. Commercial mortgage backed securities (CMBS) represents 12.8% of the total collateral. Per the current trustee reporting, the transaction passes all interest coverage and overcollateralization tests.
Under Fitch's methodology, approximately 85.1% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch estimates that average recoveries will be 43.3% reflecting the recovery expectations upon default of the CMBS tranches and real estate loans.
The largest component of Fitch's base case loss expectation is a mezzanine loan (11.5%) secured by a portfolio of 12 luxury resorts and hotels consisting of 4,742 keys located in beachfront and waterfront locations, including Puerto Rico, Jamaica, Florida, Arizona, and California. Three of the hotels within the portfolio are located in Puerto Rico and contain a casino/gaming component. Performance overall is significantly below issuance expectations and the loan transferred to the special servicer in April 2012 in advance of its June 2012 maturity. The loan was modified in August 2012 to allow an extended maturity date while a long term modification was finalized. Fitch modeled a full loss in its base case scenario.
The second largest component is the modeled losses on the CMBS collateral.
The next largest contributor to Fitch's base case loss expectation is a whole loan (5.9%) secured by a multifamily property located in Las Vegas, NV. The borrower continues to have difficulty in increasing occupancy with credit worthy tenant due to market conditions. The loan was previously amended to extend the maturity.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions', which applies 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 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 generally pass the cash flow model above their current ratings. However, given uncertainty regarding the performance of several of the largest loans, an upgrade is not warranted at this time. The Stable Outlook on the classes A-1 through D reflects the classes' senior position in the capital structure and the substantial credit enhancement to the classes.
The 'CCC' and 'CC' ratings for classes E through K 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 the credit enhancement of each class.
The ratings on the class A-1 through D notes is expected to remain stable. However, the ratings on the class E through K notes may be subject to further downgrades as losses are realized.
Resource Real Estate, Inc. is the collateral asset manager for the transaction. The CDO's reinvestment period ended in August 2011.
Fitch has downgraded the following class as indicated:
--$14.7 million class J to 'CCsf' from 'CCCsf'; RE 0%.
Fitch has affirmed the following classes as indicated:
--$52.4 million class A-1 at 'Asf'; Outlook Stable;
--$5 million class A-2 FX at 'BBBsf'; Outlook Stable;
--$17.4 million class A-2 FL at 'BBBsf'; Outlook Stable;
--$13 million class C at 'BBsf'; Outlook Stable;
--$10 million class D at 'Bsf'; Outlook Stable;
--$13.7 million class E at 'CCCsf'; RE 100%;
--$14.6 million class F at 'CCCsf'; RE 100%;
--$17.3 million class G at 'CCCsf'; RE 25%;
--$12.9 million class H at 'CCCsf'; RE 0%;
--$28.5 million class K at 'CCsf'; RE 0%.
Fitch previously withdrew its ratings of class B following the full surrender of those certificates. Fitch does not rate the $36.3 million preferred shares.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Nov. 29, 2012);
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'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
Global Rating Criteria for Structured Finance CDOs
Global Criteria for Cash Flow Analysis in CDOs
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions