NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded one class and affirmed the remaining six classes of Petra CRE CDO 2007-1 (Petra 2007-1). A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The CDO is significantly under-collateralized with liabilities exceeding collateral by over $290 million; only four loan interests remain in the highly concentrated pool. Fitch's actions reflect concern over the CDO's ability to continue to make timely interest payments to class D, and Fitch's high base case loss expectation of 84.2%. Currently, 60% of the pool is defaulted while the remaining 40% are loans of concern. Fitch's performance expectation incorporates prospective views regarding commercial real estate market values and cash flow declines.
Since the last rating action, classes B and C have paid in full while class D has been paid down by 28% from the payoff or disposal at a loss of approximately 18 assets. Realized losses to par over the period have been significant at approximately $100 million. Due to the under-collateralization of the CDO, classes F and below have negative credit enhancement.
Since the July 2011 payment date, interest proceeds have, generally, been insufficient to pay the interest due on the timely classes; the interest due on these classes has been paid from principal proceeds. The senior-most class D is now a timely interest pay class and Fitch is concerned about the CDO's ability to continue to make timely interest payments to the class. While in March 2014, the available interest proceeds (remitted from the servicer) to pay down the waterfall were $1.43 million, the available proceeds in February 2014 were close to zero (only $120). The March 2014 number was driven by a lump sum interest payment on the Allerton Hotel mezzanine loan of $1.45 million. Going forward, there are no assets remaining that are paying interest on a current basis.
All classes are subject to further downgrades should additional losses be realized.
Under Fitch's surveillance methodology, the entire portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch estimates that average recoveries will be low at 15.8%.
The largest component of Fitch's base case loss expectation is related to a junior mezzanine/preferred equity interest (40.1% of the pool) backed by a portfolio of full-service luxury hotels. The loan is currently operating under a forbearance agreement. Further, portfolio performance remains significantly below expectations at issuance. Fitch modeled a full loss on this significantly overleveraged loan interest in its base case scenario.
The next largest component of Fitch's base case loss expectation is related to a defaulted A-note (48.2% of the pool) secured by a residential construction project located in the Washington Heights neighborhood of Manhattan. Construction activity stalled in 2009, and a foreclosure action has been ongoing for several years. Fitch modeled a significant loss on the loan in its base case scenario.
This 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 transaction was not cash-flow modeled based on the limited available interest received from the assets, the majority of which are defaulted; historically unpredictable timing and substantial amount of expenses and advances being made by the servicers prior to the Waterfall; and given the distressed nature of the ratings.
The 'CC' and below ratings for classes D 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 each class' credit enhancement. The downgrade to class E is the result of increased expected losses on the defaulted assets.
Fitch has downgraded the following class:
--$22.8 million class E to 'Csf' from 'CCsf; RE0%;
Fitch has affirmed the following classes, as indicated:
--$18.9 million class D at 'CCsf'; RE 50%;
--$35.8 million class F at 'Csf'; RE 0%;
--$22.2 million class G at 'Csf'; RE 0%;
--$29.6 million class H at 'Csf'; RE 0%;
--$52.1 million class J at 'Csf'; RE 0%
--$44.4 million class K at 'Csf'; RE 0%.
Classes A-1 through C have paid in full.
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. 25, 2013);
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'Global Rating Criteria for Structured Finance CDOs' (Sep. 12, 2013).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Global Rating Criteria for Structured Finance CDOs