Fitch Affirms FMC Real Estate CDO 2005-1; Assigns Outlooks

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms and assigns Rating Outlooks to FMC Real Estate CDO 2005-1 Ltd. (FMC 2005-1) as follows:

--$131,825,000 class A-1 at 'AAA'; Outlook Stable;

--$43,941,000 class A-2 at 'AAA'; Outlook Stable;

--$43,941,000 class B at 'AA'; Outlook Stable;

--$49,434,000 class C at 'A'; Outlook Stable;

--$34,055,000 class D at 'BBB+'; Outlook Stable;

--$13,182,000 class E at 'BBB'; Outlook Stable;

--$21,970,000 class F at 'BBB-'; Outlook Stable;

--$35,153,000 class G at 'BB'; Outlook Stable;

--$12,084,000 class H at 'B'; Outlook Stable.

Fitch has affirmed and assigned Stable Outlooks to all classes due to the overall stable performance of the portfolio, above average reinvestment cushion to the modeled Poolwide Expected Loss (PEL), and the transaction passing its stress testing. The Collateralized Debt Obligation (CDO) was reviewed as approximately 12% of the portfolio has turned over since the last review.

Transaction Summary:

FMC 2005-1 is a $439,519,500 revolving commercial real estate (CRE) cash flow CDO that closed on July 13, 2005. As of the Oct. 21, 2008 trustee report and based on Fitch categorizations, the CDO was substantially invested as follows: commercial mortgage whole loans/A-notes (33.9%), commercial mortgage B-notes (30.3%), CRE mezzanine loans (35.8%), and cash (0.1%). The CDO is also permitted to invest in credit tenant lease (CTL) loans, Real Estate Investment Trust (REIT) debt, commercial mortgage-backed securities (CMBS), and CRE CDOs.

The portfolio is selected and monitored by SCFFI GP LLC, an affiliate of Five Mile Capital. FMC 2005-1 has a five-year reinvestment period during which, if all reinvestment criteria are satisfied, principal proceeds may be used to invest in substitute collateral. The reinvestment period ends August 2010.

Performance Summary:

Since last reviewed in October 2007, the PEL has increased to 36.125% from 32.625%. Despite this increase, the transaction's current reinvestment cushion of 20.375% to its modeled stressed PEL of 56.500% is still considered above-average.

Since Fitch's last review, four assets (11.5%) have been added to the pool while one asset (1.7%) paid off. The new assets have a significantly higher weighted average expected loss than the weighted average expected loss of the loans that have remained in the pool. The added assets consist of a B-note (4.5%) secured by an 18 acre development site located on the Las Vegas strip that is currently improved with various low-rise mixed-use commercial buildings; an A-note (3.7%) backed by a condo conversion located in Tampa, FL; a B-note (2.1%) secured by a regional mall located in a suburb of Chicago, IL; and a mezzanine loan (1.2%) secured by ownership interests in an office park located in a suburb of Detroit, MI.

In general, the performance of the loans remaining in the pool since the last review has been stable. Several properties experienced improved performance as a result of the actualization of business plans, while others experienced a decline in credit quality, yielding no significant net change on a poolwide basis.

As of October 2008, there are no delinquent loans reported. It should be noted, however, that a B-note (4.5%) is currently in forbearance. This loan, which is secured by a 3.8 acre site located in Miami Beach, FL, matured in June 2008. A new investor has assumed responsibility for the project, has made $50 million in pay downs to the A-note to date, and is expected to repay the B-note by the end of November 2008.

As of the October 2008 trustee report, the overcollateralization (OC) and interest coverage (IC) ratios of all classes remain above their covenants.

Collateral Analysis:

Per the October 2008 trustee report, the CDO is within all its property type covenants. Retail and office properties represent the largest concentrations of traditional property types at 28.3% and 25.7%, respectively. The portfolio also contains non-traditional property types including land (11.4% according to Fitch categorizations) and a condominium conversion (3.7%).

Additionally, the transaction remains within all of its geographic location covenants with the highest concentrations in Arizona at 12% and Florida at 11.3%.

The portfolio's weighted average spread (WAS) is currently 4.88%, above the minimum covenant of 4.25%, and the weighted average coupon is currently 7.28%, above the minimum covenant of 6.5%.

The Fitch Loan Diversity Index (LDI) is 434 compared to the covenant of 500. The current LDI represents average diversity as compared to other CRE CDOs.

For a summary of the Fitch Loans of Concern and the 10 largest loans, please refer to the FMC Real Estate CDO 2005-1 CREL Surveyor Snapshot on the Fitch Research website (www.fitchratings.com), which will be available beginning Nov. 21, 2008.

Asset Manager:

Five Mile is an alternative fixed-income investment management firm founded in February 2003 by individuals whose former experience includes positions with Salomon Brothers Inc., Greenwich Capital Markets, Inc., Kidder, Peabody & Company, Inc., and PaineWebber Inc. Five Mile is majority owned and controlled by its management and minority owned by affiliates of American International Group, Inc. and W.R. Berkley Corporation. To date, Five Mile has launched four investment funds: Housatonic Fund, Silvermine Fund, Structured Income Fund, of which SCFFI is a general partner and Five Mile Capital Partners II, a successor fund to the Structured Income Fund. The assets for FMC 2005-1 are from the Structured Income Fund, which has $662 million in equity commitments and is now closed to new investors. This fund focuses on debt and debt-like investments secured by commercial real estate, consumer receivables, and other asset-backed collateral.

Ongoing Surveillance:

Upgrades during the reinvestment period are unlikely given the pool could still migrate to the PEL covenant. Fitch will consider assigning Negative Outlooks or placing classes on Rating Watch Negative should the reinvestment cushion fall to 2% or below. Additionally, Fitch performs underlying property value decline stress testing on the CDO's liabilities. To the extent investment grade rated bonds could be impaired by a 25% property value decline, classes could also be assigned Negative Outlooks, placed on Rating Watch Negative or downgraded. The Fitch PEL is a measure of the hypothetical loss inherent in the pool at the 'AA' stress environment before taking into account the structural features of the CDO liabilities. Fitch PEL encompasses all loan, property, and pool-wide characteristics modeled by Fitch.

Fitch will continue to monitor and review this transaction and will issue an updated Snapshot report after each committeed review. The surveillance team will conduct a review whenever there is approximately 15% change in the collateral composition, quarterly, or semi-annually.

The ratings of the class A and B notes address the likelihood that investors will receive full and timely payments of interest, as per the governing documents, as well as the aggregate outstanding amount of principal by the stated maturity date. The ratings of the class C, D, E, F, G, and H notes address the likelihood that investors will receive ultimate interest and deferred interest payments, as per the governing documents, as well as the aggregate outstanding amount of principal by the stated maturity date.

Fitch introduced Rating Outlooks for U.S. structured finance in September 2008 to provide investors with forward-looking analysis for a structured finance tranche's credit performance. Fitch's Rating Outlook indicates the likely direction of any rating change over a one- to two-year period and may be Positive, Negative, Stable or, occasionally, Evolving. More information is available in Fitch's Sept. 11, 2008 report 'Introducing Rating Outlooks for U.S. Structured Finance Bonds'.

For CREL CDOs, a Negative Outlook may be assigned to any class that fails Fitch's stress testing. Fitch's stress testing assumes various property value declines for each rating stress. Based on these results, any loan whose loan-to-value ratio is greater than 100% is assumed to default with the recovery calculated based on the property value in that rating stress.

For more information on the Fitch Rating Methodology for CREL CDOs, see 'Rating Methodology for U.S. Revolving Commercial Real Estate Loan CDOs' dated Dec. 20, 2007, which is also available at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.