NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed 11 classes of RAIT CRE CDO I Ltd. (RAIT CRE CDO I) reflecting Fitch's base case loss expectation of 50.2%. 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
Since the last rating action, the senior classes, A-1A and A-1B, have received $63.4 million in pay down from the removal of approximately 14 loan interests and scheduled amortization. While recoveries were higher than expected on these assets, realized losses on the removed assets still totaled $15.9 million, and many of the remaining assets are significantly overleveraged with high losses modeled.
Approximately 105 different assets are contributed to the CDO. Since the revolving period ended in November 2011, only 11% of the collateral has been repaid or otherwise resolved. The current percentage of defaulted assets and loans of concern is 2.2% and 46.2%, respectively. Many of the remaining loans have been modified, including maturity extensions, since origination. Further, RAIT affiliates now have ownership interests in over 35 of the CDO assets totaling approximately $507 million (57%).
As of the June 2014 trustee report, and per Fitch categorization, the CDO is substantially invested as follows: whole loans/A-notes (69%), B-notes (0.6%), mezzanine debt (21%), preferred equity (8%), and REIT debt (1%). Fitch expects significant losses upon default for many of the loan positions as they are significantly over leveraged. All over-collateralization and interest coverage tests were in compliance.
Under Fitch's methodology, approximately 86% 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 7.4% from, generally, YE 2013 or T12 1Q 2014. Modeled recoveries are average at 41.7%.
The largest contributor to Fitch's base case loss expectation is a preferred equity position (3.6% of the pool) on an office complex located in Boca Raton, FL. After a period of vacancy, the property was 100% leased to a new tenant in 2011. However, the property remains overleveraged, and Fitch modeled a substantial loss in its base case scenario on this position.
The next largest component of Fitch's base case loss expectation is a whole loan (4.4%) secured by an office building located in Scottsdale, AZ. As of year-end 2013, occupancy had declined to 75% from 95% the prior year. Cash flow does not support debt service. Fitch modeled a substantial loss in its base case scenario on this loan.
The third largest component of Fitch's base case loss expectation is a whole loan (3.4%) secured by a poorly performing regional mall located in South Carolina. Cash flow does not support debt service. 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 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 A-2 are consistent with the ratings listed below.
The 'CCC' and below ratings for classes B through J 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 Assets of Concern, factoring in anticipated recoveries relative to each class's credit enhancement.
RAIT CRE CDO I is managed by RAIT Partnership, L.P.
The Negative Outlooks for classes A-1 through A-2 reflect the potential for further negative credit migration of the underlying collateral. The junior classes are subject to further downgrade should realized losses begin to increase.
Fitch affirms the following classes:
--$160.7 million class A-1A notes at 'BBsf'; Outlook Negative;
--$220.9 million class A-1B notes at 'BBsf'; Outlook Negative;
--$90 million class A-2 notes at 'Bsf'; Outlook Negative;
--$110 million class B notes at 'CCCsf'; RE 0%;
--$41.5 million class C notes at 'CCCsf'; RE 0%;
--$22.5 million class D notes at 'CCCsf'; RE 0%;
--$16 million class E notes at 'CCsf'; RE 0%;
--$500,000 class F notes at 'CCsf'; RE 0%;
--$12.5 million class G notes at 'CCsf'; RE 0%.
--$17.5 million class H notes at 'CCsf'; RE 0%;
--$35 million class J notes at 'CCsf'; RE 0%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria'(May 20, 2014);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Nov. 25, 2013);
--'Global Rating Criteria for Structured Finance CDOs'(Sept. 12, 2013).
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