NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded one and affirmed eight classes of Newcastle CDO VIII 1, Ltd./Newcastle CDO VIII 2, Ltd./ Newcastle CDO VIII, LLC (collectively, Newcastle CDO VIII). A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The downgrade to class XII reflects an increase in expected losses associated with the defaulted assets and Fitch assets of concern. The affirmation of the remaining classes reflects sufficient credit enhancement relative to Fitch's base case loss expectation of 66.1%, an increase from 41.9% at the last rating action. Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. The combined percentage of defaulted assets and Fitch assets of concern has increased to 40.2% from 17.9% at the last rating action.
Since the last rating action and as of the November 2014 trustee report, the transaction has paid down by $245.2 million from the full repayment of 13 assets, the partial payoff of another asset, and the amortization of several other assets in the pool. The transaction has also realized losses of approximately $18.7 million over the same period from a partial loss on a commercial real estate (CRE) whole loan, a partial loss on a real estate bank loan (REBL), and a full loss on a commercial mortgage-backed security (CMBS) bond. As of the November 2014 trustee report, all overcollateralization (OC) and interest coverage tests were in compliance.
As of the November 2014 trustee report and per Fitch categorizations, the collateralized debt obligation (CDO) was substantially invested as follows: CRE mezzanine debt (35.6%), CRE CDOs (19.4%), REBL (17.2%), CMBS (14.3%), residential mortgage-backed securities (RMBS: 13.3%), and principal cash (0.2%). The CRE loan portion of the collateral (35.6%) is comprised entirely of mezzanine debt secured by interests in non-traditional property types including hotel (26.2%) and golf (9.4%), which typically exhibit greater performance volatility than traditional property types.
Under Fitch's methodology, approximately 78.7% 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% from the most recently available information, generally, either from trailing 12-month (TTM) third and fourth quarter 2013, year-end 2013, or TTM second quarter 2014. Modeled recoveries are low at 16% due to the high percentage of subordinate CRE debt.
The largest component of Fitch's base case loss expectation is the non-CRE loan portion of the collateral (64.1% of the pool), which includes CMBS, RMBS, CRE CDO, and real estate bank loans with a Fitch weighted average rating factor (WARF) of 'B-/CCC+', which has remained the same since the last rating action.
The second largest component of Fitch's base case loss expectation is a mezzanine loan (12%) secured by an interest in a portfolio that was initially comprised of 12 full service hotels totaling 4,718 keys located in Puerto Rico, Jamaica, and Florida. Performance has remained significantly below underwritten expectations at issuance. Fitch modeled a term default and a full loss on this overleveraged position in its base case scenario.
The third largest component of Fitch's base case loss expectation is a mezzanine loan (9.4%) secured by an interest in a portfolio of golf courses located across the United States. Fitch modeled a term default and a full loss on this overleveraged position in its base case scenario.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs', which applies stresses to property cash flows and debt service coverage ratio tests to project future default levels for the underlying portfolio. Recoveries for the CRE loan portion of the collateral are based on stressed cash flows and Fitch's long-term capitalization rates. The non-CRE loan portion of the collateral was analyzed in the Portfolio Credit Model according to the 'Global Rating Criteria for Structured Finance CDOs'. The combined 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'. The breakeven rates for classes II through III are generally consistent with the ratings listed below.
The 'CCCsf' and below ratings for classes V through XII are based on a deterministic analysis that considers Fitch's base case expected loss 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.
Newcastle CDO VIII is a CRE CDO managed by Newcastle Investment Corp. The CDO exited its reinvestment period in November 2011. The CDO was originally issued as a $950 million CRE CDO; however, in April and September 2009, notes with a face amount totaling $80.19 million were surrendered to the trustee for cancellation, which has resulted in greater cushion to the OC ratios.
The CDO's asset manager, Newcastle Investment Corp., did not provide updated information on the CRE mezzanine debt and real estate bank loan collateral (representing 52.8% of the pool) despite repeated requests. Fitch made conservative assumptions in its modeling based on the limited information available and on the publicly available information on the remaining 47% of the pool, which is comprised of CRE CDO, CMBS, and RMBS bonds. While the information available for Fitch's rating actions today are sufficient relative to the rating decision, the lack of updated information, in addition to the increasing concentration of the pool and risk of adverse selection, precluded any potential consideration for upgrades of the senior class. Furthermore, with continued lack of updated information from the asset manager, downgrades may be possible.
The Rating Outlook for class II was revised to Stable from Negative to reflect the class' seniority in the liability structure, the increasing credit enhancement, and the expected continued paydown of the class. The Rating Outlook for class III was revised to Stable from Negative as well due to improving credit enhancement and cushion in the modeling. The distressed classes (those rated 'CCC' and below) are subject to further downgrades as losses are realized or if realized losses exceed Fitch's expectations.
Fitch has downgraded the following class:
--$29.3 million class XII to 'CCsf' from 'CCCsf'; RE 0%.
In addition, Fitch has affirmed and revised Rating Outlooks, where indicated, on the following classes:
--$39.8 million class II at 'BBsf'; Outlook to Stable from Negative;
--$42.8 million class III at 'Bsf'; Outlook to Stable from Negative;
--$28.5 million class V at 'CCCsf'; RE 0%;
--$22.6 million class VIII at 'CCCsf'; RE 0%;
--$6 million class IX-FL at 'CCCsf'; RE 0%;
--$7.6 million class IX-FX at 'CCCsf'; RE 0%;
--$18.7 million class X at 'CCCsf'; RE 0%;
--$24.1 million class XI at 'CCCsf'; RE 0%.
Class S, I-A, I-AR, and I-B have paid in full. Fitch previously withdrew the ratings on classes IV, VI, and VII. Fitch does not rate the Preferred Shares.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 4, 2014);
--'Surveillance Criteria for U.S. CREL CDOs' (Nov. 24, 2014);
--'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
Global Rating Criteria for Structured Finance CDOs