NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded one and affirmed nine classes of Arbor Realty Mortgage Securities Series 2006-1, Ltd. / LLC (ARMSS 2006-1) reflecting Fitch's base case loss expectation of 31.6%. Fitch's performance expectation incorporates prospective views regarding commercial real estate (CRE) market value and cash flow declines. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
ARMSS 2006-1 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 (62.8%), B-notes (20.8%), mezzanine debt (4.4%), preferred equity (3.7%), and cash (8.3%). Approximately 8% of the pool is currently defaulted while a further 43% is 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 December 2011. Total paydown to class A-1A and A-1AR from loan payoffs, scheduled amortization, and asset sales since last review was $78.9 million. No realized losses were reported over the same period. As of the August 2013 trustee report, all par value and interest coverage tests were in compliance.
Under Fitch's methodology, approximately 85% 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 12% from, generally, trailing 12-months 1Q or 2Q 2013. Recoveries are above average at 62.8% due to the significant percentage of senior debt.
The largest component of Fitch's base case loss expectation is a first mortgage (12.5%) secured by a large student housing property located on the Upper East Side of Manhattan. In 2011, the master tenant cancelled its master lease obligation for the entire property and now directly leases only a portion of the space. While the borrower has successfully leased the property to above 90%, cash flow is still significantly below expectations. Fitch modeled a term default and a substantial loss on this position in its base case scenario.
The next largest component of Fitch's base case loss expectation is a defaulted whole loan (5.0%) secured by 22.8 acres of waterfront land located in Jacksonville, Florida. Development plans for the property have stalled. Fitch modeled a significant loss on this asset 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 Rating Criteria for Structured Finance CDOs'. The breakeven rates for classes A-1 through B are generally consistent with the ratings listed below.
The Stable Outlook on class A-1 through A-2 generally reflect the classes' 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 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, classes A-1A and A-1AR may be upgraded. The junior classes are subject to further downgrade should realized losses begin to increase.
Fitch affirms the following classes as indicated:
--$156.1 million class A-1A at 'BBBsf'; Outlook Stable;
--$67.9 million class A-1AR at 'BBBsf'; Outlook Stable;
--$72.9 million class A-2 at 'BBsf'; Outlook Stable;
--$41.1 million class B at 'Bsf'; Outlook Negative;
--$31.2 million class C at 'CCCsf'; RE 0%;
--$13.35 million class D at 'CCCsf'; RE 0%;
--$14.25 million class E at 'CCCsf'; RE 0%;
--$16.95 million class G at 'CCsf'; RE 0%;
--$14.1 million class H at 'CCsf'; RE 0%;
Fitch downgrades the following class as indicated:
--$13.65 million class F to 'CCsf' from 'CCCsf'; RE 0%.
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', Sep. 12, 2013.
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 25, 2013);
Applicable Criteria and Related Research:
Global Rating Criteria for Structured Finance CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
Global Structured Finance Rating Criteria