NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed all rated classes of Capmark VII-CRE, Ltd./Corp. (Capmark VII). Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and property cash flow declines. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Since Fitch's last rating action, class A-2 has paid in full and class B has received pay down of approximately $18.5 million from the full payoff of four assets, the discounted payoff or sale of two other assets, asset amortization, and interest diversion from the failure of coverage tests. Realized losses since last review total $9.5 million. The CDO is under-collateralized by $182 million.
The portfolio is very concentrated with only eight loans remaining, three of which are cross collateralized. The CDO collateral consists entirely of whole loans and A-notes. The current combined percentage of defaulted assets and Fitch Loans of Concern (LOCs) is 69%.
Capmark VII is a commercial real estate (CRE) CDO managed by CenterSquare Investment Management, a real estate investment subsidiary of BNY Mellon Asset Management. As of the February 2015 trustee report, the transaction was failing two of its principal coverage tests resulting in diverted interest to pay principal to B and capitalized interest to classes F through K.
Because the collateral pool is concentrated, Fitch assumed that 100% of the portfolio will default in the base case stress scenario, defined as the 'B' stress. Modeled recoveries were above average at 71% due to the senior debt position of the collateral.
The largest component of Fitch's base case loss expectation is related to a defaulted A-note (20.9% of the pool) secured by undeveloped land located adjacent to the Potomac River in Arlington, VA. Fitch modeled a significant loss on this loan in its base case scenario.
The largest remaining loan in the pool (30.6% of the pool) is a whole loan secured by a 105,000 sf mixed use property located in San Francisco, CA. The majority of the tenancy is comprised of telecom related tenants. As of the December 2014 rent roll, the property was 86% occupied with approximately 23% tenant roll over the next year. Further, the largest tenant, which comprises approximately 47% of the NRA, has lease maturities in April 2017, March 2018, and October 2019, close to the loan's final extended maturity date in April 2018.
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 (DSCR) tests to project future default levels for the underlying portfolio. Recoveries for the loan assets are based on stressed cash flows and Fitch's long-term capitalization rates. The senior class B is affirmed at 'CCC'. Fitch is concerned about the CDOs ability to continue to make timely interest payments to this class due to the significant pool concentration; high percentage of currently defaulted assets; and potential risk of further asset defaults, which could result in insufficient available interest and principal proceeds to pay interest on class B. While default of the class is possible due to missed timely interest, Fitch expects a full principal recovery. Cash flow modeling was not performed, as no material impact from the analysis was anticipated.
The 'CC' and below ratings for classes C through H 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 classes credit enhancement.
Future upgrades will be limited as the pool becomes more concentrated given the risk of adverse selection and the possibility of insufficient interest and principal proceeds to pay the timely interest due on the senior class. While Fitch has modeled conservative loss expectations on the pool, unanticipated increases in defaulted loans and/or loss severity could result in downgrades.
Fitch affirms the following classes:
--$61.5 million class B at 'CCCsf'; RE 100%;
--$30 million class C at 'CCsf'; RE 80%;
--$7.5 million class D at 'Csf'; RE 0%;
--$7.5 million class E at 'Csf'; RE 0%;
--$35.2 million class F at 'Csf'; RE 0%;
--$13.7 million class G at 'Csf'; RE 0%;
--$11.1 million class H at 'Csf'; RE 0%;
Classes A-1 and A-2 have paid in full.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Surveillance Criteria for U.S. CREL CDOs' (November 2014);
--'Global Structured Finance Rating Criteria' (August 2014).
Applicable Criteria and Related Research:
Surveillance Criteria for U.S. CREL CDOs
Global Structured Finance Rating Criteria