Fitch Affirms N-Star VIII

NEW YORK--()--Fitch Ratings has affirmed all classes of N-Star REL CDO VIII, Ltd./LLC (N-Star VIII). Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The affirmations reflect the relatively stable performance of the portfolio since the last rating action. Fitch's base case loss expectation is 62.4% compared to 62% at the last rating action. Since the last rating action and as of the May 2015 trustee report, principal paydowns to classes A-1 and A-R were $90.8 million. Four assets were repaid in full, while two assets realized losses totalling $6.5 million, generally in line with Fitch's expectations at last rating action. As of the May 2015 trustee report, all overcollateralization and interest coverage ratios were in compliance.

N-Star VIII is collateralized by commercial real estate (CRE) loans, consisting of both senior and subordinate debt positions, as well as rated securities, consisting of CRE collateralized debt obligation (CDO) bonds. As of the May 2015 trustee report and per Fitch categorization, the CDO was substantially invested as follows: whole loans/A-notes (42.5%), preferred equity (27.8%), mezzanine debt (21.8%), CRE CDOs (7.5%), and principal cash (0.4%). The portfolio collateral comprises a high percentage of non-traditional property types, including loans secured by construction (14.1%), hotels (12%), healthcare (9.7%), and undeveloped land (8.1%). The combined percentage of defaulted assets and loans of concern increased to 64.5% from 50% at the last rating action as the pool has become more concentrated.

Under Fitch's methodology, approximately 89.7% 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, generally, third-quarter 2014 and year-end 2014 cash flows. Modeled recoveries are low at 30.4%.

The largest contributor to modeled losses, which has remained the same since the last rating action, is preferred equity (14.1% of pool) on a planned construction project of a super-regional mall and retail/entertainment facility located in East Rutherford, New Jersey. The project's original business plan stalled due to the economic downturn and multiple delays and cost overruns. The overall project designs have been updated with the selection of a new replacement developer to include a planned amusement/water park and the originally planned entertainment/retail center. Fitch remains concerned with the uncertainty and timing surrounding the ultimate completion of the business plan. The original loan was restructured whereby the existing lender debt was subordinated to additional debt from new construction financing and new equity contributions by the selected replacement developer.

The next largest contributor to modeled losses is a mezzanine loan (7.8%) secured by an interest in a 2.2 million square foot office complex located in Chicago, IL. The senior debt was securitized in two CMBS transactions and was modified into A/B notes in June 2013. The most recently reported appraisal indicates a valuation below the senior debt amount. Fitch modeled a full loss on the CDO's overleveraged mezzanine position under the base case stress scenario.

The third largest contributor to modeled losses is the rated securities portion of the collateral (7.5%), which has a weighted average Fitch-derived rating of 'CCC/CCC-', remaining the same since the last rating action.

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 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 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-1, A-R, A-2, and B are generally consistent with the ratings assigned below.

The ratings for classes C through N are based upon a deterministic analysis that considers Fitch's base case loss expectation for the pool and the current percentage of defaulted assets and assets of concern, factoring in anticipated recoveries relative to each class' credit enhancement.

N-Star VIII was initially issued as a $900 million CRE CDO managed by NS Advisors, LLC. The transaction had a five-year reinvestment period during which principal proceeds may be used to invest in substitute collateral which ended in February 2012. In November 2009, $31.1 million of notes were surrendered to the trustee for cancellation.

RATING SENSITIVITIES

The Negative Rating Outlooks on classes A-1, A-R, A-2, and B reflect the potential for future downgrades if there is deterioration of loan performance or if the ratings of the underlying rated securities migrate downward. The junior classes C through N are subject to downgrade as losses are realized or if realized losses exceed Fitch's expectations.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

Fitch has affirmed the following classes:

--$61.8 million class A-1 at 'BBsf'; Outlook Negative;

--$160.7 million class A-R at 'BBsf'; Outlook Negative;

--$103.1 million class A-2 at 'Bsf'; Outlook Negative;

--$60.3 million class B at 'Bsf'; Outlook Negative;

--$24.3 million class C at 'CCCsf'; RE 0%;

--$17.1 million class D at 'CCCsf'; RE 0%;

--$22.1 million class E at 'CCCsf'; RE 0%;

--$25.2 million class F at 'CCCsf'; RE 0%;

--$9.1 million class G at 'CCCsf'; RE 0%;

--$20.7 million class H at 'CCCsf'; RE 0%;

--$12 million class J at 'CCCsf'; RE 0%;

--$18.9 million class K at 'CCCsf'; RE 0%;

--$22.1 million class L at 'CCsf'; RE 0%;

--$14.9 million class M at 'CCsf'; RE 0%;

--$22.5 million class N at 'CCsf'; RE 0%.

Fitch does not rate the preferred shares.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Global Rating Criteria for Structured Finance CDOs (pub. 16 Jul 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751136

Global Structured Finance Rating Criteria (pub. 31 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864268

Surveillance Criteria for U.S. CREL CDOs (pub. 24 Nov 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=811268

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985739

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Melissa Che
Director
+1-212-612-7862
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Mary MacNeill
Managing Director
+1-212-908-0785
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Melissa Che
Director
+1-212-612-7862
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Mary MacNeill
Managing Director
+1-212-908-0785
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com