MUMBAI, India & NEW YORK & SINGAPORE--(BUSINESS WIRE)--Fitch Ratings has upgraded one and affirmed 12 classes of Resource Real Estate Funding CDO 2007-1 Ltd./LLC (RRE 2007-1). A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The actions reflect the delevering of the capital structure that has occurred since the last rating action.
Since the last rating action, the transaction has paid down by $50 million from the full repayment of nine assets. The transaction has also realized losses of approximately $3.8 million over the same period from partial losses on two commercial real estate (CRE) whole loans. While recoveries were better than expected, many of the remaining assets are significantly overleveraged with high modeled losses.
Fitch's base case loss expectation is 42.3%. While there are no defaulted assets, the percentage of Fitch assets of concern (including the largest loan) remained flat at 39.3% of pool compared to 40.1% at the last rating action. The CDO is overcollateralized by $7.9 million.
As of the June 2015 trustee report and per Fitch categorizations, the CDO is substantially invested as follows: whole loans/A-notes (70.4%), mezzanine debt (2.8%), preferred equity (3.6%), and CMBS (23.3%). The CMBS have a weighted average rating of 'B+/B'. Per the current trustee reporting, the transaction passes all interest coverage and overcollateralization tests.
Under Fitch's methodology, approximately 74.8% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Modeled recoveries are average at 43.5%.
The largest contributor to Fitch's base case loss expectation is the modeled losses on the CMBS bond collateral.
The second largest contributor to Fitch's base case loss is a whole loan (11.5%) secured by a multifamily property located in Renton, WA. While performance at the property has improved over the past year with increasing rents, cash flow remains insufficient to cover debt service. Despite this, shortfalls have been funded by the borrower and the loan remains current. Fitch modeled a substantial loss on this asset in its base case scenario.
The third largest contributor to Fitch's base case loss is a whole loan (6.8%) secured by a 79,522 square foot multi-tenant office property located in Phoenix, AZ. The property was built in 1981 and the original seller planned to sell the subject as condominiums, which led occupancy to decline to 49% at loan closing. Subsequently, the borrower decided to keep the property as an office property and has increased occupancy to 64.1% as of May 2015. Fitch modeled a substantial loss on this asset in its base case scenario.
The 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 CREL portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. The rated securities (CUSIP) portion of the collateral was analyzed according to the 'Global Rating Criteria for Structured Finance CDOs', whereby the default and recovery rates are derived from Fitch's Structured Finance Portfolio Credit Model. Rating default rates and rating recovery rates from both the CREL and CUSIP portions of the collateral are then blended on a weighted average basis. 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 C generally pass the cash flow model at or above the ratings listed below. Upgrades to the classes were limited due to the increasing concentration of the portfolio.
The Stable and Positive Outlooks on classes A-1 through C generally reflect the classes' senior position in the capital structure and/or cushion in the modeling.
The 'CCC' and 'CC' ratings for classes D through M are generally 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 the credit enhancement of each class.
Resource Real Estate, Inc. is the collateral asset manager for the transaction. The CDO's reinvestment period ended in June 2012. The CDO was originally issued as a $500 million CRE CDO; however, in June 2012, the balance of the class A-1R notes was reduced to zero. This was a revolving class and the $50 million available was not drawn upon and the class was subsequently retired.
If the collateral continues to repay at or near par, class B may be upgraded. Upgrades to classes A-1, A-2 and C may be limited due to the increasing concentration of the pool.
The distressed classes D through M 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 or reviewed in relation to this rating action.
Fitch has upgraded the following class:
--$57.5 million class A-2 to 'BBBsf' from 'BBsf'; Outlook Stable.
Fitch has affirmed the following classes and revised Outlooks as indicated:
--$14 million class A-1 at 'Asf'; Outlook Stable;
--$15 million class B at 'Bsf'; Outlook revised to Positive from Stable;
--$7 million class C at 'Bsf'; Outlook revised to Stable from Negative;
--$26.8 million class D at 'CCCsf'; RE 100%;
--$11.9 million class E at 'CCCsf'; RE 100%;
--$5.4 million class F at 'CCCsf'; RE 100%;
--$5 million class G at 'CCCsf'; RE 90%;
--$625,000 class H at 'CCCsf'; RE 0%;
--$11.3 million class J at 'CCCsf'; RE 0%;
--$10 million class K at 'CCCsf'; RE 0%;
--$18.8 million class L at 'CCCsf'; RE 0%;
--$28.8 million class M at 'CCsf'; RE 0%.
Additional information is available at www.fitchratings.com.
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Global Surveillance Criteria for Structured Finance CDOs (pub. 13 Jul 2015)
Surveillance Criteria for U.S. CREL CDOs (pub. 24 Nov 2014)
Dodd-Frank Rating Information Disclosure Form