NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded one and affirmed 12 classes of Resource Real Estate Funding CDO 2007-1 Ltd./LLC (RRE 2007-1), reflecting Fitch's base case loss expectation of 39%. Fitch's performance expectation incorporates prospective views regarding commercial real estate market values and cash flow declines. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrade reflects the increased credit enhancement due to continued delevering of the senior notes. The affirmations reflect the delevering as well as concerns about several of the larger loans in the transaction which remain underperforming or have yet to stabilize. Per Fitch categorizations, commercial real estate loans (CREL) comprise approximately 77.2% of the collateral of the CDO. Approximately 72% of the pools are whole loans or A-notes and 5.2% are preferred equity or mezzanine loans. Commercial mortgage backed securities (CMBS) represents 22.8% of the total collateral. Per the current trustee reporting, the transaction passes all interest coverage and overcollateralization tests.
Under Fitch's methodology, approximately 70.9% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch estimates that average recoveries will be 44.9% reflecting the recovery expectations upon default of the CMBS tranches and real estate loans.
The largest contributor to Fitch's base case loss is a whole loan (9.5%) secured by a multifamily property located in Renton, WA. While performance at the property has improved over the past year with increasing rents, cash flow remains insufficient to cover debt service. Despite this, shortfalls have been funded by the borrower and the loan remains current.
The next largest contributor to Fitch's base case loss is an A note (6.3%) secured by a 5.5 acre fee simple parcel. The borrower planned to redevelop the property; however, the plans were not executed due to market conditions. Recently, Equinox Gym signed a lease for 30,000 square feet (sf) at the site. Construction remains in the approval stages at this time.
The next largest contributor to Fitch's base case loss is a whole loan (5.6%) secured by a 79,522 sf multi-tenant office property located in Phoenix, AZ. The property was built in 1981 and the original seller planned to sell the subject as condominiums which caused occupancy at the property to decline to 49% at loan closing. Afterwards, the borrower decided to keep the property as an office property and has increased occupancy to 67.2% as of May 2014.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions', which applies recoveries 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 various default 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 C are generally consistent with the ratings listed below. The Stable Outlook on the class A-1 through B notes reflects increased credit enhancement and the expectation that the transaction will continue to delever. The Negative Outlook on the class C notes reflect the junior position of the notes and uncertainty regarding future cash flows from several large assets.
The 'CCC' and 'CC' ratings for classes D through M 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 the credit enhancement of each class.
Fitch conducted additional sensitivity analysis on the larger unstabilized assets and expects that the ratings on the class A-1 through B notes to remain stable. The rating on the class C notes may be subject to further downgrades if collateral performance deteriorates. The ratings on the class D through M notes may be subject to further downgrades as losses are realized.
Resource Real Estate, Inc. is the collateral asset manager for the transaction. The CDO's reinvestment period ended in June 2012.
Fitch has upgraded the following class as indicated:
--$64.9 million class A-1 to 'Asf' from 'BBBsf'; Outlook to Stable from Negative.
Fitch has affirmed the following classes as indicated:
--$57.5 million class A-2 at 'BBsf'; Outlook to Stable from Negative;
--$15 million class B at 'Bsf'; Outlook to Stable from Negative;
--$7 million class C at 'Bsf'; Outlook Negative;
--$26.8 million class D at 'CCCsf'; RE 100%;
--$11.9 million class E at 'CCCsf'; RE 100%;
--$5.4 million class F at 'CCCsf'; RE 100%;
--$5 million class G at 'CCCsf'; RE 90%;
--$625,000 class H at 'CCCsf'; RE 0%;
--$11.3 million class J at 'CCCsf'; RE 0%;
--$10 million class K at 'CCCsf'; RE 0%;
--$18.8 million class L at 'CCCsf'; RE 0%;
--$28.8 million class M at 'CCsf'; RE 0%.
Fitch previously withdrew its rating on class A-1R notes. Fitch does not rate the $41.3 million preferred shares.
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 20, 2014);
--'U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria' (Dec. 11, 2013);
--'Global Rating Criteria for Structured Finance CDOs' (Sept. 12, 2013).
Applicable Criteria and Related Research:
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
Global Structured Finance Rating Criteria
U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria
Global Rating Criteria for Structured Finance CDOs