NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded two and affirmed eight classes of Arbor Realty Mortgage Securities Series 2006-1, Ltd./LLC (ARMSS 2006-1) reflecting Fitch's base case loss expectation of 34.5%. Fitch's performance expectation incorporates prospective views regarding commercial real estate (CRE) market value and cash flow declines. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrades are due to significant paydown of the collateral and better than expected recoveries of liquidated assets. ARMSS 2006-1 is a CRE collateralized debt obligation (CDO) managed by Arbor Realty Collateral Management, LLC (Arbor). As of the August 2014 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: whole loans/A-notes (78.9%), B-notes (3.1%), mezzanine debt (5.6%), preferred equity (9.1%), and cash (3.3%). Approximately 62% of the pool is either defaulted or a Fitch loan of concern (FLOC). Fitch expects significant losses on many of the assets as they are highly leveraged subordinate positions.
The CDO exited its reinvestment period in December 2011. Total paydown to class A-1A and A-1AR from loan payoffs, scheduled amortization, and asset sales since last review was approximately $204 million. No realized losses were reported over the same period. As of the August 2014 trustee report, all par value and interest coverage tests were in compliance.
Under Fitch's methodology, approximately 93.1% 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 7.6% from, generally, trailing 12-months first-quarter or second-quarter 2014. Recoveries are above average at 62.9% due to the significant percentage of senior debt.
The largest component of Fitch's base case loss expectation is a defaulted whole loan (8.4%) secured by 22.8 acres of waterfront land located in Jacksonville, Florida. Development plans for the property have stalled. Fitch modeled a significant loss on this asset in its base case scenario.
The next largest component of Fitch's base case loss expectation is related to an A-note (14.6%) secured by a portfolio of five full- and limited-service hotels located in Daytona Beach, FL. The portfolio was previously in bankruptcy, and an Arbor affiliate took title to the properties in February 2011. While new management has been installed at the properties, it is expected to take time for performance at all five properties to stabilize. A sixth poorly performing hotel was sold in December 2012 with proceeds applied to the senior debt. Fitch modeled a term default and a substantial loss on the loan in its base case scenario.
The 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 defaults timing and interest rate stress scenarios as described in the report 'Global Rating Criteria for Structured Finance CDOs'. The breakeven rates for classes A-1 through B generally pass at or above the ratings listed below. Further upgrades were not warranted at this time given the transaction's increasing concentration, and high percentage of defaults and FLOC.
The Positive and Stable Outlooks on classes A-1 through B generally reflect the classes' seniority in the capital stack and expectation of increasing credit enhancement from further paydowns over the near term. The ratings for classes C through H 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 FLOC, factoring in anticipated recoveries relative to each classes' credit enhancement.
An additional stress scenario against the current cash flows of the underlying collateral was considered in Fitch's ratings.
If the collateral continues to repay at or near par, the 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:
--$14.1 million class A-1A to 'Asf from 'BBBsf'; Outlook Stable;
--$6.1 million class A-1AR to 'Asf from 'BBBsf'; Outlook Stable;
Fitch affirms the following classes and revises Outlooks as indicated:
--$72.9 million class A-2 at 'BBsf'; Outlook to Positive from Stable;
--$41.1 million class B at 'Bsf'; Outlook to Stable from Negative;
--$31.2 million class C at 'CCCsf'; RE 100%;
--$13.35 million class D at 'CCCsf'; RE 100%;
--$14.25 million class E at 'CCCsf'; RE 75%;
--$13.65 million class F at 'CCsf'; RE 0%.
--$16.95 million class G at 'CCsf'; RE 0%;
--$14.1 million class H at 'CCsf'; RE 0%.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 4, 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 Rating Criteria for Structured Finance CDOs
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
Global Structured Finance Rating Criteria