NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed all rated classes of Arbor Realty Mortgage Securities Series 2004-1, Ltd. / LLC (ARMSS 2004-1) reflecting Fitch's base case loss expectation of 61.6%. 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
ARMSS 2004-1 is a CRE collateralized debt obligation (CDO) managed by Arbor Realty Collateral Management, LLC (Arbor). As of the July 2013 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: B-notes (55%), whole loans/A-notes (21%), preferred equity (15%), mezzanine debt (8%), and cash (2%). Approximately 11.7% of the pool is currently defaulted while a further 51.7% 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 2009. Total paydown to class A-1 from loan payoffs scheduled amortization and asset sales since last review was minimal at $9.8 million. Realized losses totaled more than $15 million over the same period. The CDO is currently under collateralized by approximately $23 million. As of the July 2013 trustee report, all par value and interest coverage test were in compliance.
Under Fitch's methodology, approximately 89.7% 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 6.4% from, generally, year-end 2012 or trailing 12 months 1Q 2013. Recoveries are below average at 31.3% due to the high percentage of subordinate debt.
The largest component of Fitch's base case loss expectation is a preferred equity position (13.1% 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 next largest component of Fitch's base case loss expectation is related to an A-note and B-note (10.9%) secured by a portfolio of five full and limited service hotels located in Daytona Beach, FL. The portfolio was previously in bankruptcy, and an Arbor affiliate took title to the properties in February 2011. While new management has been installed at the properties, it is expected to take time for performance at all five properties to stabilize. A sixth poorly performing hotel was sold in December 2012 with proceeds applied to the senior debt. Fitch modeled a term default and a substantial loss on these loan interests in its base case scenario.
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 and B are generally consistent with the ratings listed below.
The Stable Outlook on class A generally reflects the class's seniority in the capital stack and expectation of continued further paydown over the near term. The Negative Outlook to class B reflects the potential for further negative credit migration of the underlying collateral.
The ratings for classes C and D 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, classes may be upgraded. The junior classes are subject to further downgrade should realized losses begin to increase.
Fitch affirms the following classes:
--$65.5 million class A at 'BBBsf'; Outlook Stable;
--$51.6 million class B at 'Bsf'; Outlook Negative;
--$27.6 million class C at 'CCCsf'; RE 10%;
--$11.2 million class D 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