NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded two and affirmed seven classes of Gramercy Real Estate CDO 2005-1, Ltd./LLC (Gramercy 2005-1). Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrades and affirmations reflect the continued delevering of the capital structure that has occurred since the last rating action. Since the last rating action, eight assets are no longer in the pool; five CMBS positions paid in full while two loans and one CUSIP position took partial to full losses totalling approximately $103 million in realized losses. Total pay down to classes A-2 and B from loan payoffs, scheduled amortization, and diverted interest since the last rating action was $89.6 million.
The collateralized debt obligation (CDO) continues to become more concentrated with only 12 assets remaining in the transaction. The CDO is currently under-collateralized by approximately $179 million; classes J and below have negative credit enhancement. Further, as of the April 2016 trustee report, the CDO is failing one over-collateralization test resulting in the diversion of interest payments from classes J and below.
Approximately 49% of the total collateral consists of commercial real estate loans; 13% of the pool is a whole loan while 35.6% is subordinate debt. Commercial mortgage-backed securities (CMBS) now represent the majority of the pool at 51% of the collateral. Since Fitch's last rating action, the average Fitch derived rating for the underlying CMBS collateral improved to 'B+/B 'from 'B-'. There are no defaulted assets; however, 28.2% of the pool is considered assets of concern.
Fitch's base case loss expectation is 24.5%. Under Fitch's methodology, approximately 64% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Modeled recoveries are 61.6%.
The largest component of Fitch's base case loss expectation is the modeled losses on the CMBS bond collateral.
The next largest component of Fitch's base case loss expectation is related to a whole loan secured by approximately 176 coop units located in a complex in Riverdale, NY. The loan, which is scheduled to mature in July 2016, was recently transferred to special servicing due to imminent maturity default. The remaining units have experienced a prolonged sell out period with only a handful of units sold over the last year. Currently, the unsold units are being rented out; the most recent reported occupancy was 96%. Fitch modeled a substantial loss on this asset.
The 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 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 Surveillance 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 as described in the report 'Global Rating Criteria for Structured Finance CDOs'. The breakeven rates for classes B through F generally pass the cash flow model at or above the ratings listed below. While only class B now requires timely interest payments; classes C and below will require timely interest payments should they become the senior most class.
Fitch ran a further cash flow model sensitivity to evaluate the impact to the breakeven rates for the non-senior classes should they eventually require timely interest payments. As a result, Fitch capped the ratings for these classes; future upgrades to classes C through F are expected to be limited due to this concern and the diminishing level of proceeds available to pay the notes as the pool becomes increasingly concentrated.
The Stable and Positive Outlooks on classes B through E generally reflect the classes' senior position in the capital structure and/or cushion in the modeling.
The 'CCCsf' and below ratings for classes G through K 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 assets of concern factoring in anticipated recoveries relative to each classes credit enhancement.
Gramercy 2005-1 is a commercial real estate CDO managed by CWCapital Investments LLC, which became the successor collateral manager in March 2013.
In December 2011, $6.1 million of notes were surrendered to the trustee for cancellation, including partial amounts of classes E, F, G and H.
A swap, which is senior in priority to the notes, remains in place; it expires in January 2017. Class B may be subject to upgrade, after the swap's expiration, should assets continue to perform as expected. Upgrades to classes C through F may be limited due to the increasing concentration of the pool.
The distressed classes G through K are subject to downgrade as losses are realized or if realized losses exceed Fitch's expectations.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has upgraded the following classes:
--$ 14.2 million class B to 'BBBsf' from 'BBsf'; Outlook Positive;
--$ 47 million class C to 'BBsf' from 'Bsf'; Outlook Stable.
Fitch has affirmed the following classes:
--$ 12.5 million class D at 'Bsf'; Outlook Stable;
--$ 14.9 million class E at 'Bsf'; Outlook Stable;
--$ 15 million class F at 'CCCsf'; RE 100%;
--$ 15.5 million class G at 'CCCsf'; RE 90%;
--$ 27 million class H at 'CC'sf; RE 0%;
--$ 57.7 million class J at 'Csf'; RE 0%;
--$ 46 million class K at 'Csf'; RE 0%.
Class A-1 and A-2 have paid in full. Fitch does not rate the preferred shares.
Additional information is available at www.fitchratings.com.
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)
Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 May 2016)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Global Surveillance Criteria for Structured Finance CDOs (pub. 13 Jul 2015)
Surveillance Criteria for U.S. CREL CDOs (pub. 17 Nov 2015)
Dodd-Frank Rating Information Disclosure Form