NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded seven classes of Wachovia CRE CDO 2006-1, Ltd. (Wachovia CRE CDO 2006-1). 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 reflect the significant delevering of the capital structure and Fitch's better than average base case expected loss of 6.2% for the CDO. Since the last rating action, classes A though G have paid in full from the disposal of 19 loan or CMBS interests as well as asset amortization. There were no realized losses over the same period as all assets were removed or paid off at or above par. Further, in August 2014, the asset manager surrendered portions of classes B through N for cancellation. Between built par and the surrendered notes, the CDO is significantly over collateralized by $166 million, as of the Feb 2015 trustee report.
As of February 2015, CDO collateral consisted of the following: whole loans/A-notes (82%), CMBS (3.6%), and cash (14.4%). The approximately $40 million in principal proceeds are expected to be used to further pay down classes H through K.
The CDO collateral continues to become more concentrated. There are interests in approximately 14 different assets contributed to the CDO. The current combined percentage of defaulted assets and Loans of Concern is 38%.
Under Fitch's methodology, approximately 68.1% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Modeled recoveries are well above average due to the, generally, stabilized nature of the collateral and the senior position of the majority of the debt.
The largest contributor to base case loss is a whole loan (20.6% of the pool) secured by a 402,000 sf retail center located in Glen Mills, PA. As of 9/30/14, occupancy was 96.7%. The largest tenants are Home Depot through 2033 and Marshalls through 2018. The loan, which matures on March 31, 2015, is over leveraged and Fitch modeled a loss 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 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 H through O pass the cash flow model at or above the ratings listed below. Upgrades to classes M though O were limited due to the increasing concentration of the portfolio.
The Stable Outlooks generally the significant credit enhancement to the classes and positive cushion in the modeling.
If the collateral continues to repay at or near par, classes may be upgraded further.
Wachovia CRE CDO 2006-1 is a CRE CDO managed by Structured Asset Investors, LLC with Wells Fargo Bank, N.A., successor-by-merger to Wachovia Bank, N.A., as sub-advisor. The CDO exited its reinvestment period in September 2011.
Fitch upgrades the following classes as indicated:
--$15 million class H notes to 'AAAsf' from 'Asf'; Outlook Stable;
--$13 million class J notes to 'AAAsf' from 'BBBsf'; Outlook Stable;
--$10.95 million class K notes to 'AAAsf' from 'BBBsf'; Outlook Stable;
--$5 million class L notes to 'AAAsf' from 'BBBsf'; Outlook Stable;
--$21.75 million class M notes to 'Asf' from 'BBsf'; Outlook Stable;
--$6.9 million class N notes to 'Asf' from 'Bsf'; Outlook Stable;
--$6.5 million class O notes to 'Asf' from 'Bsf'; Outlook Stable.
Classes A through G have paid in full. The preferred shares are not rated.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Surveillance Criteria for U.S. CREL CDOs' (November 2014);
--'Global Rating Criteria for Structured Finance CDOs' (July 2014);
--'Global Structured Finance Rating Criteria' (August 2014).
Applicable Criteria and Related Research:
Surveillance Criteria for U.S. CREL CDOs
Global Rating Criteria for Structured Finance CDOs
Global Structured Finance Rating Criteria