NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed all classes of Newcastle CDO IX Ltd./ LLC (Newcastle CDO IX). A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmation reflects sufficient credit enhancement relative to Fitch's base case loss expectation of 56.3%, an increase from 37.9% at the last rating action. Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines.
Since the last rating action and as of the November 2014 trustee report, the transaction has paid down by $140.9 million from the full repayment of four assets, the partial payoff of another asset, and the amortization of several other assets in the pool. The transaction has also realized losses of $5.1 million over the same period from partial losses on a B-note and a real estate bank loan. As of the December 2013 trustee report, all overcollateralization (OC) and interest coverage tests were in compliance.
As of the November 2014 trustee report and per Fitch categorizations, the collateralized debt obligation (CDO) was substantially invested as follows: commercial real estate (CRE) mezzanine debt (34.6%), REBL (15.8%), CRE CDOs (14.9%), commercial mortgage-backed securities (CMBS; 12.7%), preferred equity (12.3%), B-notes (5.5%), whole loans/A-notes (4%), principal cash (0.1%), and residential mortgage-backed securities (RMBS; 0.1%). The CRE loan portion of the collateral is comprised mostly of subordinate debt (52.4% is comprised of mezzanine debt, B-notes, or preferred equity) and of non-traditional property types, which include hotel (16.4%), construction (12.3%), and golf (9.7%), all of which typically exhibit greater performance volatility and uncertainty than traditional property types.
The percentages of defaulted assets and Fitch Loans of Concern have increased to 3.2% and 45.7%, respectively, compared to 2.4% and 27.6% at the last rating action. Two assets (3.2%), both secured by the same property, were reported as defaulted, which include one CMBS rake bond (0.5%) and a mezzanine loan (2.7%).
Under Fitch's methodology, approximately 62.1% 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% from the most recently available information, generally, either from trailing 12-month (TTM) third and fourth quarter 2013, year-end 2013, or TTM second quarter 2014. Modeled recoveries are below average at 9.2% due to the high percentage of subordinate debt.
The largest component of Fitch's base case loss expectation is the non-CREL portion of the collateral (43.5% of the pool), which includes CMBS, RMBS, CRE CDO, and real estate bank loans with a Fitch weighted average rating factor (WARF) of 'B/B-', which has remained the same since the last rating action.
The second largest component of Fitch's base case loss expectation is preferred equity (12.3%) on a construction project of a super-regional mall and retail/entertainment facility located in East Rutherford, New Jersey. The project's original business plan was stalled due to the economic downturn and multiple delays and cost overruns. A replacement developer has been selected and negotiations to secure minimum financing to continue the construction of the project remain in progress. The original loan was restructured whereby the existing lender debt in the CDO was subordinated to additional debt from new construction financing and new equity contributions by the replacement developer.
The third largest component of Fitch's base case loss expectation is a mezzanine loan (9.7%) secured by an interest in a portfolio of golf courses located across the United States. Fitch modeled a term default and a full loss on this overleveraged position in its base case scenario.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs', which applies stresses to property cash flows and debt service coverage ratio tests to project future default levels for the underlying portfolio. Recoveries for the CRE loan portion of the collateral are based on stressed cash flows and Fitch's long-term capitalization rates. The non-CRE loan portion of the collateral was analyzed in the Portfolio Credit Model according to the 'Global Rating Criteria for Structured Finance CDOs'. The combined default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under the various default timing and interest rate stress scenarios, as described in the report 'Global Rating Criteria for Structured Finance CDOs'. The breakeven rates for classes A-2 through G are generally consistent with the ratings listed below.
The 'CCCsf' ratings for classes H through L are based on a deterministic analysis that considers Fitch's base case expected loss 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.
Newcastle CDO IX is a CRE CDO managed by Newcastle Investment Corp. The CDO exited its reinvestment period in May 2012. The CDO was originally issued as an $825 million CRE CDO; however, in April and September 2009, notes with a face amount of $64.525 million were surrendered to the trustee for cancellation, which has resulted in greater cushion to the OC ratios.
The CDO's asset manager, Newcastle Investment Corp., did not provide updated information on the CRE loans and real estate bank loan collateral (representing 72.1% of the pool) despite repeated requests. Fitch made conservative assumptions in its modeling based on the limited information available and on the publicly available information on the remaining 27.7% of the pool, which is comprised of CRE CDO, CMBS, and RMBS bonds. While the information available for Fitch's rating actions today are sufficient relative to the rating decision, the lack of updated information, in addition to the increasing concentration of the pool and risk of adverse selection, precluded any potential consideration for upgrades of the senior class. Furthermore, with continued lack of updated information from the asset manager, downgrades may be possible.
The Rating Outlook for class A-2 remains Stable to reflect the class' seniority in the liability structure, the increasing credit enhancement, and the expected continued paydown of the class. The Rating Outlook for class B was revised to Stable from Negative as well due to improving credit enhancement and cushion in the modeling.
The Negative Outlooks on classes E through G reflects the pool's collateral concentrations and the potential for future downgrades if there is deterioration in loan performance or if the ratings of the underlying rated securities migrate downward. The distressed classes (those rated 'CCCsf') are subject to further downgrades as losses are realized or if realized losses exceed Fitch's expectations.
Fitch has affirmed and revised Rating Outlooks, where indicated, on the following classes:
--$85.7 million class A-2 at 'BBsf'; Outlook Stable;
--$37.1 million class B at 'BBsf'; Outlook to Stable from Negative;
--$24.8 million class E at 'BBsf'; Outlook Negative;
--$18.6 million class F at 'Bsf'; Outlook Negative;
--$11.3 million class G at 'Bsf'; Outlook Negative;
--$18.1 million class H at 'CCCsf'; RE 0%;
--$21.7 million class J at 'CCCsf'; RE 0%;
--$19.6 million class K at 'CCCsf'; RE 0%;
--$23.7 million class L at 'CCCsf'; RE 0%.
Class S and class A-1 have paid in full. Fitch has previously withdrawn the ratings on classes C and D. Fitch does not rate class M and the preferred shares.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 4, 2014);
--'Surveillance Criteria for U.S. CREL CDOs' (Nov. 24, 2014);
--'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
Global Rating Criteria for Structured Finance CDOs