NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed 13 classes of Resource Real Estate Funding CDO 2007-1 Ltd./LLC (RRE 2007-1), reflecting Fitch's base case loss expectation of 36.9%. 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 79.3% of the collateral of the CDO. Approximately 74.9% of the pool are whole loans or A-notes and the remainder are preferred equity or mezzanine loans. Commercial mortgage backed securities (CMBS) represents 20.7% of the total collateral. Per the current trustee reporting, the transaction passes all interest coverage and overcollateralization tests.
Under Fitch's methodology, approximately 70.8% 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 47.9% reflecting the recovery expectations upon default of the CMBS tranches and real estate loans.
While the largest component of Fitch's base case loss expectation is the modeled losses on the CMBS collateral, the second largest component is an A-note (5.3%) secured by a 191 room hotel property in Los Angeles, CA. The hotel continues to undergo renovations which are being funded through a mezzanine loan. Fitch modeled a substantial loss in its base case scenario on this loan.
The next largest contributor to Fitch's base case loss expectation is a whole loan (8%) secured by a multifamily property located in Renton, WA. While occupancy at the property has improved, cash flow remains insufficient to cover debt service. Despite this, shortfalls have been funded by the borrower and the loan remains current. Fitch modeled a substantial loss in its base case scenario on this loan.
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 C generally pass the cash flow model at the ratings listed below. The Outlook remains Negative on classes A-1 through C due to continued uncertainty regarding the future cash flow from the several large assets.
The 'CCC' and 'CC' ratings for classes D through M 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 C notes may be subject to further downgrades if collateral performance deteriorates. The ratings on the class D through M notes may be subject to further downgrades as losses are realized. In addition, the transaction faces cash flow risk from the significant hedge in place.
Resource Real Estate, Inc. is the collateral asset manager for the transaction. The CDO's reinvestment period ended in June 2012.
Fitch has affirmed the following classes as indicated:
--$120 million class A-1 at 'BBBsf'; Outlook Negative;
--$57.5 million class A-2 at 'BBsf'; Outlook Negative;
--$15 million class B at 'Bsf'; Outlook Negative;
--$7 million class C at 'Bsf'; Outlook Negative;
--$26.8 million class D at 'CCCsf'; RE 100%;
--$11.9 million class E at 'CCCsf'; RE 100%;
--$5.4 million class F at 'CCCsf'; RE 100%;
--$5 million class G at 'CCCsf'; RE 25%;
--$625,000 class H at 'CCCsf'; RE 0%;
--$11.3 million class J at 'CCCsf'; RE 0%;
--$10 million class K at 'CCCsf'; RE 0%;
--$18.8 million class L at 'CCCsf'; RE 0%;
--$28.8 million class M at 'CCsf'; RE 0%.
Fitch previously withdrew its rating on class A-1R notes. Fitch does not rate the $41.3 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);
--'U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria' (Dec. 18, 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:
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
Global Structured Finance Rating Criteria
U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria
Global Rating Criteria for Structured Finance CDOs
Global Criteria for Cash Flow Analysis in CDOs