NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded four classes and affirmed eight classes of Credit Suisse First Boston Mortgage Securities Corp., series 2006-TFL1 (CSFB 2006-TFL1). A detailed list of rating actions follows at the end of this release.
CSFB 2006-TFL1 has only two loans remaining. The downgrades of classes H though L reflect base case losses of 3.6%, as well as concern over the ability of the Tharaldson Hotel Portfolio loan to refinance at maturity. This Fitch loan of concern, which comprises 87.7% of the pool, is highly leveraged with a base case stressed loan-to-value (LTV) of 94% on the A-note and 157% on the total debt stack. In addition, its final extended maturity date is in April 2011. The downgrades are a result of inadequate credit enhancement to withstand Fitch's loss expectations, which incorporate prospective views of cash flow declines and commercial real estate market value declines.
The Tharaldson Hotel Portfolio loan is secured by fee and/or leasehold interests in 105 limited service hotels (8,238 rooms). The portfolio, which is located across 26 states, consists of hotels with 14 different flags. Currently, in addition to the $478.5 million A-note, there are $177.5 million in B-notes and $145.1 million in mezzanine debt held outside the trust. Portfolio performance declined substantially enough in 2009 to trigger a financial covenant. As of November 2009, all excess cash flow after debt service is being swept into a lender-controlled reserve account as additional collateral for the loan. Under Fitch's updated analysis, the Tharaldson loan is modeled to default in the base case stress scenario, defined as the 'B' stress.
The other loan in the transaction is secured by Charleston Place Hotel, a 442-room full-service luxury hotel located in the Historic District of Charleston, South Carolina. The collateral also includes approximately 50,000 square feet of retail space and a former theater that is used for meeting space and administrative offices. The loan is currently in its third and final extension period and matures in March 2011. Currently, in addition to the $67 million A-note, there is both B-note and mezzanine debt held outside the trust. Both subordinate loans are serviced only by excess cash flow and may accrue. Additionally, the theater portion of the property secures a $3 million senior lien in favor of the City of Charleston. Debt service on this senior lien is being escrowed in full by the borrower.
In its base case scenario, the modeled average cash flow decline for the two assets is 6.6% from year end 2009 servicer-reported financial data.
Fitch has downgraded and removed the following classes from Rating Watch Negative, and assigned a Recovery Rating (RR) as indicated:
--$25 million class H to 'BBB' from 'A-', Outlook Stable;
--$27 million class J to 'BB' from 'BBB', Outlook Stable.
--$36 million class K to 'B' from 'BBB-', Outlook Negative;
--$32.5 million class L to 'CCC/RR4' from 'BBB-'.
Fitch has affirmed and removed the following classes from Rating Watch Negative, and assigned or revised Outlooks as indicated:
--$52 million class A-1 at 'AAA', Outlook to Stable from Negative;
--$195 million class A-2 at 'AAA', Outlook Stable;
--$39 million class B at 'AAA', Outlook Stable;
--$34 million class C at 'AA+', Outlook Stable;
--$27 million class D at 'AA'; Outlook Stable;
--$29 million class E at 'AA-'; Outlook Stable;
--$24 million class F at 'A+', Outlook Stable;
--$25 million class G at 'A', Outlook Stable.
In addition, Fitch withdraws the rating of the interest-only classes A-X-1 and A-X-2. (For additional information, see 'Fitch Revises Practice for Rating IO & Pre-Payment Related Structured Finance Securities', dated June 23, 2010.)
Class A-X-3 has paid in full.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs'. It applies stresses to property cash flows and uses debt service coverage ratio (DSCR) tests to project future default levels for the underlying portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. This methodology was used to review this transaction as floating-rate commercial mortgage backed security (CMBS) loan pools are concentrated and similar in composition to CREL CDO pools. In many cases, the CMBS notes are senior portions of notes held in CDO transactions. The assets are generally transitional in nature, frequently underwritten with pro forma income assumptions that have not materialized as expected. Overrides to this methodology were applied on a loan-by-loan basis if the property specific performance warranted an alternative analysis.
For bonds rated 'B-' or better, the current credit enhancement levels were compared to the expected losses generated in each rating category divided by the total deal size. These classes were assigned Loss Severity (LS) ratings, which indicate each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the expected losses for the collateral in the 'B' stress. LS ratings should always be considered in conjunction with probability of default indicated by a class' long-term credit rating. Fitch does not assign Rating Outlooks or LS ratings to classes rated 'CCC' and lower.
Rating Outlooks were determined by further stressing the cash flows and fully recognizing all maturity defaults in all ratings stresses. The credit enhancements were then compared to the expected losses generated in each rating category to determine potential credit migration over the next two years. If the Rating Outlook scenario would imply a lower rating, then the class was assigned a Negative Outlook.
The ratings for bonds rated 'CCC' or lower are based on a deterministic analysis. Bonds are rated 'C' when the expected losses on currently defaulted loans exceed a class's respective credit enhancement level. Bonds are rated 'CC' when the combined base case expected losses on the currently defaulted loans and loans likely to default exceed a class's respective credit enhancement level. Bonds are rated 'CCC' when the base case expected loss exceeds a class's respective credit enhancement level.
Bonds rated 'CCC' and below were assigned Recovery Ratings (RR) in order to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities. Recovery Ratings are calculated by subtracting the base case expected losses in reverse sequential order from the pooled and non-pooled rake certificates. Any principal recoveries first pay interest shortfalls on the bonds and then sequentially through the classes. The remaining bond principal amount is divided by the current outstanding bond balance. The resulting percentage is used to assign the Recovery Ratings on the bonds.
The assignment of 'RR4' to class L reflects modeled recoveries of 37% of its outstanding balance. The expected recovery proceeds are broken down as follows:
--Present value of expected principal recoveries ($11.7 million)
--Present value of expected interest recoveries ($0.2 million)
--Total present value of recoveries ($11.9 million)
--Sum of undiscounted recoveries ($13.1 million)
Classes are assigned a Recovery Rating of 'RR6' when the present value of the recoveries in each case is less than 10% of each class' principal balance.
As there are only two loans remaining, one of which is over 87% of the remaining collateral, the transaction is similar to a U.S. CMBS single-borrower transaction. In addition to the CREL CDO methodology, Fitch reviewed the transaction in conjunction with its 'Rating U.S. Single-Borrower Commercial Mortgage Transactions,' including reviewing insurance requirements and borrower structure. As there is no current criteria for assigning Loss Severity ratings to single-borrower deals, none were assigned to this transaction's classes.
The rating actions reflect the application of Fitch's current criteria which is available at 'www.fitchratings.com' and specifically include the following reports:
--'Global Structured Finance Rating Criteria' (Sept. 20, 2009);
--'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs' (Nov. 9, 2009);
--'Criteria for Structure Finance Recovery Ratings' (Aug. 17, 2009);
--'Rating U.S. Single-Borrower Commercial Mortgage Transactions' (Feb. 7, 2007).
Additional information is available at 'www.fitchratings.com'.