NEW YORK--(BUSINESS WIRE)--Fitch Ratings upgrades four and affirms one class of Talmage Structured Real Estate Funding 2006-4 Ltd./LLC (Talmage 2006-4). A full list of rating actions follows at the end of this ratings action commentary.
KEY RATING DRIVERS
The upgrades reflect improved credit enhancement due to better than anticipated recoveries on distressed assets and stable expected losses on the remaining assets. Fitch's base case loss expectation is currently 51.9% for the remaining assets. Fitch's performance expectation incorporates prospective views regarding commercial real estate (CRE) market value and cash flow declines.
Since Fitch's last rating action and as of the May 2015 trustee report, the liabilities have amortized by an additional $76 million primarily due to the liquidation of four asset positions and the payment in full of one bond, and through interest diversion. The transaction is considered concentrated with only three obligors remaining.
Talmage 2006-4 is a CRE collateralized debt obligation (CDO) managed by Talmage, LLC, which is under collateralized with approximately $94.7 million of collateral. The transaction had a five-year reinvestment period that ended in February 2012. All remaining assets are subordinate debt or subordinate tranches of structured finance transactions.
As of the May 2015 trustee report, the class F/G/H overcollateralization (OC) test is failing. As a result, any interest proceeds remaining after the payment of the class H interest are being redirected to redeem class D, the most senior-class outstanding.
Under Fitch's methodology, approximately 58.5% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch modeled recoveries of 11.3%.
The largest obligor is the primary component of Fitch's base case loss expectation and consists of three B-notes (35%) secured by a portfolio of three hotel/gaming properties that have experienced significant declines in performance. Fitch modeled a term default in its base case scenario with a full loss on the subordinate positions.
The second largest obligor consists of three bonds issued from one CRE CDO; two bonds are rated 'Bsf', Outlook Stable (19.6%) and one bond is rated 'CCCsf', RE100 (13.7%).
The third obligor (31.7%) is a subordinate bond from a CMBS single borrower transaction that is currently rated 'BBsf', Outlook Negative and has an expected maturity of October 2016.
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 (DSCR) 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 credit enhancement to classes D and E was then compared to the modeled expected losses.
Additional sensitivity was performed to analyze the reliance on collateral needed to perform for the payment of the net hedge payment, CDO fees, and timely interest on the notes. The interest coverage based on the collateral composition was determined to be sufficient for the ratings assigned below. The interest rate hedge has a current notional balance of $25.5 million and terminates in October 2016. Based on prior modeling results and the sensitivity analysis, no additional analytical impact was anticipated from cash flow modeling the transaction.
The 'CCC' and below ratings for classes F 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 Fitch Assets of Concern factoring in anticipated recoveries relative to each class' credit enhancement.
The Stable Rating Outlooks reflect the adequacy of credit enhancement to the classes relative to potential further negative credit migration. The junior classes are subject to downgrade as losses are realized or if realized losses exceed Fitch's expectations.
DUE DILIGENCE USAGE
No third party due diligence was provided in relation to this rating action.
Fitch has upgraded the following ratings:
--$10.2 million class D to 'Bsf' from 'CCCsf'; Outlook Stable Assigned;
--$13.2 million class E to 'Bsf' from 'CCCsf'; Outlook Stable Assigned;
--$13.2 million class F to 'CCCsf'; RE100 from 'CCsf';
--$14.4 million class G to 'CCsf'; RE60 from 'Csf'.
Fitch has also affirmed the following rating:
--$11.4 million class H at 'Csf'; RE0.
Classes A-1, A-2, S, B and C have paid in full. Fitch does not rate classes J, K and Preferred Shares.
Additional information is available at www.fitchratings.com.
Global Structured Finance Rating Criteria (pub. 31 Mar 2015)
Surveillance Criteria for U.S. CREL CDOs (pub. 24 Nov 2014)
Dodd-Frank Rating Information Disclosure Form