NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded one and affirmed four classes of Talmage Structured Real Estate Funding 2006-3 Ltd./LLC (Talmage 2006-3) reflecting an increase in credit enhancement due to principal paydown and improved recovery prospects since Fitch's last rating action. Fitch's base case loss expectation is currently 43.7% for the remaining assets. 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
Since Fitch's last rating action and as of the May 2014 trustee report, the transaction has amortized by $19.4 million due to repayment in full of two CMBS bonds and amortization and recovery of deferred interest on other underlying collateral. While the transaction is considered concentrated with only nine obligors, recovery prospects have improved since the last rating action, primarily due to the upgrade of underlying cusip collateral and the anticipated near term repayment of a CMBS position and related B-note.
Talmage 2006-3 is collateralized by commercial real estate (CRE) debt of which approximately 34.1% is subordinate debt or non-senior tranches from structured finance transactions. Fitch expects significant losses upon default for the subordinate positions, since they are generally highly leveraged. Two loans (15.3%) are currently defaulted and two loans (41.1%) are considered Fitch Loans of Concern. Fitch has modeled significant losses on the defaulted assets and loans of concern in the 'B' stress.
Talmage 2006-3 is a CRE collateralized debt obligation (CDO) managed by Talmage, LLC with approximately $132 million of collateral. The transaction had a five-year reinvestment period that ended in August 2011.
As of the May 2014 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: CRE subordinate debt (30.3%), A-notes/whole loans (41.1%), CMBS and CRE CDOs (28.6%). In general, Fitch treats non-senior, single-borrower CMBS as CRE B-notes.
All overcollateralization (OC) and interest coverage (IC) tests are passing, as of the May 2014 trustee report. The swap terminated with the Aug. 25, 2012 payment date.
Under Fitch's methodology, approximately 64% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch modeled recoveries of 31.7%.
The largest component of Fitch's base case loss expectation is a highly leveraged whole loan (30.2%) on a full-service hotel located one block east of Chicago's Magnificent Mile. The hotel's most recently reported trailing 12-month net cash flow has decreased significantly from the prior year's cash flow, but remains sufficient to cover its debt service payments, given historically low LIBOR. The loan remains overleveraged and Fitch modeled a term default and a substantial loss in its base case scenario.
The second largest component of Fitch's base case loss expectation is an A-note (14.1%) secured by an undeveloped land parcel in Orlando, FL. Fitch modeled a term default in its base case scenario with a substantial modeled loss.
The third largest component of Fitch's base case loss expectation is the expected loss assigned to the CRE CDO collateral (18% of the pool).
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions', which applies stresses to property cash flows and 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. The credit enhancement to class C and D was then compared to the modeled expected losses. Additional sensitivity was performed to analyze the reliance on collateral needed to perform for repayment of the notes with additional consideration given to a CMBS class and B-note that are anticipated to repay in full in the near term. In consideration of the high concentration of the pool, the credit enhancement was determined to be consistent with the ratings assigned below. Based on prior modeling results, no material impact was anticipated from cash flow modeling the transaction. The Rating Outlooks for classes C through D are Stable, reflecting the current credit enhancement to the senior notes.
The 'CCC' and below ratings for classes E through G 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 class' credit enhancement.
RATING SENSITIVITIES
The Rating Outlooks on classes C and D are Stable, reflecting the adequacy of credit enhancement relative to potential further negative credit migration. The junior classes are subject to downgrade as losses are realized or if realized losses exceed Fitch's expectations.
Fitch has upgraded the following class as indicated:
--$24 million class D upgraded to 'BBBsf' from 'Bsf'; Outlook Stable.
Fitch has affirmed the following classes and revised the recovery estimate as indicated:
--$15.8 million class C affirmed at 'Asf'; Outlook Stable;
--$28 million class E affirmed at 'CCCsf'; Recovery Estimate revised to RE100%;
--$18 million class F affirmed at 'CCsf'; Recovery Estimate revised to RE35%;
--$20 million class G affirmed at 'CCsf'; RE0%.
Class S, A-1, A-2 and B have paid in full.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 20, 2014);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Nov. 25, 2013).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748821
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723059
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836318
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