NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed all 11 classes of Marathon Real Estate CDO 2006-1. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmations are due to stable pool performance, continued paydown to the class A-1 and better than expected recoveries on several assets.
Since the prior rating action in November 2013, class A-1 received paydown of approximately $114 million primarily from six full loan payoffs, one discounted payoff, and scheduled amortization. Realized losses totaled approximately $23.5 million over the same period. The CDO is over collateralized by approximately $30 million, as of the October 2014 trustee report.
The percentage of defaulted assets declined to 7.2% compared to 9.1% at last review. Fitch Loans of Concern (FLOC) also represent a smaller percentage of the pool at 12.2% compared to 28.2% the prior year. The Fitch derived weighted average rating of the rated securities declined to 'BB-/B+' compared to 'BB/BB' over the same period.
Per the October 2014 trustee report, and per Fitch categorization, approximately 47.6% of the total collateral is whole loans or A-notes, while 5.8% is B-notes and 0.2% is principal cash. With respect to CUSIP securities, commercial mortgage backed securities (CMBS) represent 33.6% of the collateral, followed by CRE CDOs (7.3%), REIT debt (2.0%), and other rated debt (3.5%).
Under Fitch's methodology, approximately 57.8% 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 decrease is 7% from generally year-end (YE) 2013 reporting. Recoveries were modeled at 47.2% in the base case.
The largest component of Fitch's base case loss expectation is the modeled losses on the rated debt collateral (46.4% of the pool).
The second largest component of Fitch's base case loss expectation is a whole loan (9.3%) secured by a 363-key limited service hotel located on Manhattan's Upper West Side. The sponsor has been converting the property's single-occupancy rooms into traditional rooms on an ongoing basis. There are 50 SRO units left and the borrower is currently exploring the option of converting to another flag. YE 2013 net cash flow increased 20% from the prior year. Fitch modeled losses on this over leveraged 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 CREL portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. The rated securities (CUSIP) portion of the collateral was analyzed according to the 'Global Rating Criteria for Structured Finance CDOs', whereby the default and recovery rates are derived from Fitch's Structured Finance Portfolio Credit Model. Rating default rates and rating recovery rates from both the CREL and CUSIP portions of the collateral are then blended on a weighted average basis. 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. The breakeven rates for classes A-1 through E pass or exceed the cash flow model at the ratings listed below. Further upgrades were not warranted at this time given the transaction's increasing concentration and lower Fitch derived weighted average rating for the CUSIP collateral.
The Positive and Stable Outlooks on classes A-1 through E generally reflect the classes' seniority in the capital stack and expectation of increasing credit enhancement from further paydowns over the near term. The 'CCC' and below ratings for classes F through K are based on a deterministic analysis that considers Fitch's base case loss expectations 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.
An additional stress scenario against the current cash flows of the underlying collateral was considered in Fitch's ratings.
If the collateral continues to repay at or near par, classes A-2 and B may be upgraded. Should realized losses increase from current expectations, further downgrades to the distressed classes may occur.
Fitch affirms the following classes as indicated:
--$186,149,594 class A-1 at 'Asf'; Outlook Stable;
--$50,000,000 class A-2 at 'BBBsf'; Outlook Positive;
--$99,000,000 class B at 'BBsf'; Outlook Positive;
--$51,500,000 class C at 'Bsf'; Outlook Stable;
--$16,000,000 class D at 'Bsf'; Outlook Stable;
--$14,000,000 class E at 'Bsf'; Outlook Stable;
--$23,500,000 class F at 'CCCsf'; RE 100%;
--$15,500,000 class G at 'CCCsf'; RE 100%;
--$26,000,000 class H at 'CCCsf'; RE 100%;
--$56,300,000 class J at 'CCCsf'; RE 50%;
--$26,700,000 class K at 'CCCsf'; RE 0%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 24, 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' (July 16, 2014).
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