NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded two senior classes and affirmed 14 classes of Nomura CRE CDO 2007-2, Ltd. /LLC (Nomura 2007-2), reflecting Fitch's base case loss expectation of 29.7%. 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 to classes A-1 and A-R reflect significant paydown to these classes as well as better than expected recoveries on several assets. Since the last rating action and as of the August 2014 trustee report, the transaction has paid down by $221.5 million from the disposal of several assets as well as scheduled amortization and interest diversion. The senior class notes have paid down by 23.3% of the original balance. Realized losses were approximately $50.0 million over the same period.
While the percentage of defaulted assets remained relatively flat at 27% since last review, by dollar balance, the total committed loan amount of defaulted assets fell to $86.9 million from $164.0 million. Fitch Loans of Concern (FLOC) represent a larger percentage of the reduced pool size at 21.9% compared to 2.3% the prior year, as their total committed loan amount increased to $71.7 million from $13.9 million. The Fitch derived weighted average rating of the rated securities remained at 'CC/C'.
Nomura 2007-2 is a commercial CRE CDO managed by C-III Investment Management LLC. Per Fitch categorizations, the CDO is substantially invested as follows: whole loans/A-note (70.7%), B-notes (17.1%), CRE CDO (10.2%), and principal cash (2.0%). The CDO exited its reinvestment period in February 2013.
As of the August 2014 trustee report, the CDO is failing all overcollateralization tests. Classes D and below are not receiving any interest payments. Interest is being capitalized on these classes; total capitalized interest to date is $23.0 million.
Under Fitch's methodology, approximately 60.4% 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 7.0% from, generally, either year end 2013 or trailing 12-month second quarter 2014. Fitch modeled above average recoveries of 50.7% due to the high percentage of senior debt.
The largest component of Fitch's base case loss expectation is a B-note (17.1%) originally secured by a portfolio of 20 office properties located in Washington, D.C. and Seattle, WA. The senior loan and B-note were both transferred to special servicing in April 2010 for imminent default. The portfolio was returned to the Master Servicer on May 7, 2012 and contained 13 properties. Given the post-default waterfall, the B-note will not receive any payments until the A-notes are paid in full. Fitch modeled a full loss on this B-note position.
The next largest component of Fitch's base case loss expectation is an A- note (9.0%) secured by a 353 room hotel property located in Honolulu, HI. The loan was transferred back to the Master Servicer in October 2012. The $5 million interest reserve created at the closing of the modification has been depleted. Cash flow remains low due to higher payroll costs associated with contract labor costs and increased staffing. The hotel's restaurant revenues continue to lag the budget. Management states it is taking steps to address the restaurant's operations. Fitch modeled a significant loss on this overleveraged position.
The third largest component of Fitch's base case loss expectation is a defaulted whole note (1.4%) secured by a 84 room three-story limited-service hotel located in Chantilly, VA. Currently, the property is operating under a 10-year franchise agreement with Marriott International, Inc. As hotel guests are primarily government employees and government contractors, performance has declined since 2012 as a result of the government cut-backs in travel spending. In addition, in January and February 2014, the property was further impacted by severe weather conditions which negatively impacted the Washington D.C. area. Fitch also modeled a significant loss on this position.
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 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'. Several asset specific hedges remain in place, which have obligations senior to the notes, including five that are linked to assets no longer in the transaction. The class A-1 and A-R notes and the class A-2 notes are passing above their current rating category. However, a further upgrade was not warranted given the hedges in place and the transaction's increasing concentration, and high percentage of defaults and FLOC.
The Stable Outlook on the class A-1 and A-R notes and rating for class A-2 generally reflect the classes' seniority in the capital stack and expectation of continued further paydown over the near term.
The ratings for classes B through O 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 classes credit enhancement.
An additional stress scenario against current cashflows of the underlying collateral was considered in Fitch's decision to upgrade class A-1 and A-R notes. If the collateral continues to repay at higher than expected recoveries, senior classes may be upgraded. The junior classes are subject to further downgrade should realized losses begin to increase.
Fitch upgrades the following classes as indicated:
--$88.1 million class A-1 to 'BBsf' from 'Bsf'; Outlook Stable;
--$14.0 million class A-R to 'BBsf' from 'Bsf'; Outlook Stable.
Fitch affirms the following classes as indicated:
--$60.7 million class A-2 at 'CCCsf'; RE 100%;
--$70.5 million class B at 'CCCsf'; RE 85%;
--$26.6 million class C at 'CCCsf'; RE 0%;
--$28.2 million class D at 'CCsf'; RE 0%;
--$21.3 million class E at 'Csf'; RE 0%;
--$22.7 million class F at 'Csf'; RE 0%;
--$26.4 million class G at 'Csf'; RE 0%;
--$21.6 million class H at 'Csf'; RE 0%;
--$27.2 million class J at 'Csf'; RE 0%;
--$27.0 million class K at 'Csf'; RE 0%;
--$10.7 million Class L at 'Csf'; RE 0%;
-- $7.1 million Class M at 'Csf'; RE 0%;
--$10.6 million Class N at 'Csf'; RE 0%;
--$18.0 million Class O at 'Csf'; RE 0%.
Fitch does not rate the $48.5 million preferred shares.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 24, 2014);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Nov. 25, 2013);
--'Global Rating Criteria for Structured Finance CDOs' (July 16, 2014).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
Global Rating Criteria for Structured Finance CDOs