NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed all rated classes of Arbor Realty Mortgage Securities Series 2005-1, Ltd. / LLC (ARMSS 2005-1) reflecting Fitch's base case loss expectation of 42.8%. 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
ARMSS 2005-1 is a CRE collateralized debt obligation (CDO) managed by Arbor Realty Collateral Management, LLC (Arbor). As of the August 2013 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: whole loans/A-notes (50%), B-notes (29%), mezzanine debt (12%), preferred equity (5%), and cash (5%). Approximately 12% of the pool is currently defaulted while a further 38% are considered loans of concern. Fitch expects significant losses on many of the assets as they are highly leveraged subordinate positions.
The CDO exited its reinvestment period in April 2011. Total paydown to class A-1 from loan payoffs scheduled amortization and asset sales since last review was minimal at $5.7 million. Realized losses totaled approximately $8 million over the same period. The CDO is slightly under collateralized by approximately $5 million. As of the August 2013 trustee report, all par value and interest coverage test were in compliance.
Under Fitch's methodology, approximately 78.4% 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 11.7% from, generally, year-end 2012 or trailing 12 months 1Q 2013. Recoveries are average at 45.5%.
The largest component of Fitch's base case loss expectation is a B-note (6.2% of the pool) secured by a 43-story office building located in downtown St. Louis, MO. The loan transferred to special servicing in August 2012 due to imminent default. A subsequent loan restructure, which closed in November 2012, eliminated amortization payments and provided an interest rate reduction, among other terms. Fitch modeled a full loss in its base case scenario on this overleveraged position.
The next largest component of Fitch's base case loss expectation is a preferred equity position (4.7% of the pool) on an over 150 property multifamily property portfolio located across nine states. As of Dec. 31, 2012, occupancy was 85%. In early 2013, the senior debt was modified into an A/B note structure and transferred out of special servicing. Fitch modeled a full loss in its base case scenario on this overleveraged position.
The 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 tests to project future default levels for the underlying portfolio. 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 the various defaults 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 are generally consistent with the ratings listed below.
The Stable Outlook on class A-1 through C generally reflect the classes' seniority in the capital stack and expectation of continued further paydown over the near term. The Negative Outlook to class D reflects the potential for further negative credit migration of the underlying collateral.
The ratings for classes E 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 the collateral continues to repay at or near par, class A-1 may be upgraded. The junior classes are subject to further downgrade should realized losses begin to increase.
Fitch affirms and revises the Rating Outlook for the following classes as indicated:
--$111.7 million class A-1 at 'BBBsf'; Outlook Stable;
--$40.4 million class A-2 at 'BBBsf'; Outlook Stable;
--$57 million class B at 'BBsf'; Outlook Stable;
--$22.5 million class C at 'Bsf; Outlook Stable;
--$7.7 million class D at 'Bsf'; Outlook to Negative from Stable;
--$6.8 million class E at 'CCCsf'; RE 0%;
--$13.3 million class F at 'CCCsf'; RE 0%;
--$9.9 million class G at 'CCCsf'; RE 0%;
--$13.5 million class H at 'CCCsf'; RE 0%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'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);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 25, 2013);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012),
--'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 Floating-Rate Transactions
Global Rating Criteria for Structured Finance CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Global Criteria for Cash Flow Analysis in CDOs
Structured Finance Recovery Estimates for Distressed Securities