NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded two classes of AMAC CDO Funding I (AMAC CDO) and affirmed the remaining six classes. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Fitch's rating actions reflect an increased risk of insufficient interest and principal proceeds to pay the timely interest now that the pool is more concentrated. AMAC CDO Funding I is highly concentrated with only 18 assets remaining in the portfolio. The CDO remains under-collateralized by approximately $27.4 million. Further 26.3% of the portfolio is considered either defaulted or Fitch Loans of Concern. Since the last rating action, the class A-1 notes have received further pay down totaling $112.9 million from nine full loan payoffs, scheduled amortization, and interest diversion from failures of the Class D/E overcollateralization test prior to April 2015. There have been no realized losses since the last rating action.
Two large loans paid off prior to their scheduled maturity during the first quarter of 2015, which resulted in a significant mismatch between the notional balance of the swap and assets. On May 5, 2015, the asset manager provided Fitch with a copy of a fully executed confirmation letter for a partial hedge termination in the amount of $42.7 million. While the partial termination improves the cushion of CDO cash flow over the periodic swap payment due under the hedge agreement, there remains some risk that CDO cash flow will be insufficient to cover the periodic payment due under the hedge which is senior in priority to the timely classes (A through B) should loans default beyond expectations. The partial termination fee of $2.9 million will be paid on or prior to the next payment date and has been fully funded from escrowed proceeds that otherwise would have gone to class F during the prior payment period in April 2015. Class F is owned by an affiliate of the collateral manager.
As of the April 2015 trustee report, and per Fitch categorization, the CDO is substantially invested as follows: whole loans/A-notes (94.6%), B-notes (3.3%), and mezzanine debt (2%). While overall modeled losses have declined by $1.4 million, modeled expected loss is higher at 14.2% compared to 11.8% at last review due to the pool's increased concentration.
Under Fitch's methodology, approximately 56.9% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Modeled recoveries are well above average at 75.1% due to the, generally, stabilized nature of the collateral and the senior position of the majority of the debt.
The largest component of Fitch's base case loss is a whole loan (12.8%) secured by a 203,300 square foot (sf) office property located in Bethpage, NY. Although cash flow has improved due to the sponsor re-leasing a large component of the space vacated in 2012, the loan remains over leveraged. Further there is 25% of tenant rollover is scheduled in 2016.
The next largest component of Fitch's base case loss expectation is a B-note loan (3.3%) secured by an interest in a 281,697 sf office complex located in Indianapolis, IN. The loan is subordinate to a $41.9MM A note which is not in the CDO. As of December 2014, the property was 90.2% occupied. The asset manager did not provide information regarding the loan's upcoming October 2015 repayment status.
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 for classes A through B are generally consistent with the ratings below. The reduced hedge obligation, which is senior in priority to the timely classes, was factored into Fitch's analysis.
For classes A-1, A-2, and B, unanticipated increases in defaulted loans and/or loss severity could result in the increased likelihood of a timely interest default and downgrades. Additionally, further early repayments in excess of the hedge notional step down could also result in increased likelihood of timely interest default.
The Stable Outlooks on class A-1 and A-2 generally reflect their senior positions in the liability structure and/or positive cushion in the modeling. The Negative Outlook to the class B reflects the greater exposure to concentration risk and its more junior position in the liability structure. The ratings for classes C through F 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.
Fitch has downgraded the following classes:
--$27,344,954 class A-1 notes to 'Bsf' from 'BBBsf'; Outlook Stable;
--$50,000,000 class A-2 notes to 'Bsf' from 'BBsf'; Outlook Stable.
Fitch has affirmed the following classes:
--$20,000,000 class B notes at 'Bsf'; Outlook Negative;
--$15,000,000 class C notes at 'CCCsf'; RE: 100%;
--$12,000,000 class D-1 notes at 'CCsf'; RE: 50%;
--$5,000,000 class D-2 notes at 'CCsf'; RE: 0%;
--$6,000,000 class E notes at 'CCsf'; RE: 0%;
--$19,275,567 class F notes at 'Csf'; RE: 0%.
Fitch does not rate the $26,000,000 preferred shares.
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' (March 2015).
Applicable Criteria and Related Research:
Surveillance Criteria for U.S. CREL CDOs
Global Rating Criteria for Structured Finance CDOs
Global Structured Finance Rating Criteria