NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms 11 classes of RAIT CRE CDO I Ltd. (RAIT CRE CDO I). A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
Since the last rating action, senior classes A-1A and A-1B have received $110.6 million in pay down from scheduled amortization and the removal of approximately 20 loan interests, including 15 full payoffs. Realized losses over the year were approximately $14 million. While recoveries were higher than expected on these assets, many of the remaining assets are significantly overleveraged with high losses modeled.
Interests from approximately 70 different assets are contributed to the CDO. Approximately 40% of the pool matures over the next year. The current percentage of defaulted assets and Loans of Concern (LOCs) is 6.9% and 69%, respectively. Many of the remaining loans have been modified, including maturity extensions, since origination. Further, RAIT affiliates now have ownership interests in over 25 of the CDO assets, totaling approximately $438 million (61%).
There are two variances from criteria related to classes A-1A and A-1B, based on the surveillance criteria. Criteria indicated that rating upgrades were possible for the classes. However, Fitch has determined that upgrades are not warranted at this time due to the high percentage of defaulted/LOCs, significant upcoming scheduled maturities, and concentration of RAIT affiliated borrowing entities.
As of the June 2016 trustee report, and per Fitch categorization, the CDO is substantially invested as follows: whole loans/A-notes (75.5%), mezzanine debt (16.9%), and preferred equity (7.6%). Fitch expects significant losses upon default for many of the loan positions as they are significantly over-leveraged. All over-collateralization and interest coverage tests were in compliance.
Fitch's base case loss expectation is 56.2%. Under Fitch's methodology, approximately 92.6% 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 11.1% from, generally, YE 2015 or trailing 12 months first quarter 2016. Modeled recoveries are 39.3%.
The largest contributor to Fitch's base case loss expectation is an A-note (5.3% of the pool) secured by a poorly performing regional mall located in Houston, TX. The mall has not seen notable improvement since a repositioning in 2010/2011. The year-end 2015 reported occupancy was 53% and cash flow has been insufficient to cover debt service. Fitch modeled a substantial loss on this loan in its base case.
The next largest contributor to Fitch's base case loss expectation is a preferred equity position (4.5%) on an office complex located in Boca Raton, FL. After a period of vacancy, the property was 100% leased to a new tenant in 2011. However, the property remains overleveraged, and Fitch modeled a substantial loss in its base case scenario on this position.
The third largest component of Fitch's base case loss expectation is a whole loan (4.2%) secured by a poorly performing regional mall located in South Carolina. Occupancy recently fell to approximately 30% after the movie theater/bowling alley closed suddenly in May 2016. The most recently reported cash flow was negative. Fitch modeled a substantial loss in its base case scenario on this loan.
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 A-1 through A-2 generally pass the cash flow model at or above the ratings listed below.
The 'CCC' and below ratings for classes B through J 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 class's credit enhancement.
RAIT CRE CDO I is managed by RAIT Partnership, L.P.
The Positive Outlooks for classes A-1A and A-1B reflects the significant credit enhancement to the classes; upgrades are possible in the near term should the assets continue to payoff at or above expectations. The Negative Outlook on Class A-2 reflects the potential for further negative credit migration of the underlying pool. The distressed classes are subject to further downgrade should realized losses begin to increase.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch affirms the following classes and revises Outlooks as indicated:
--$90.6 million class A-1A notes at 'BBsf'; Outlook to Positive from Negative;
--$124.6million class A-1B notes at 'BBsf'; Outlook to Positive from Negative;
--$90 million class A-2 notes at 'Bsf'; Outlook Negative;
--$110 million class B notes at 'CCCsf'; RE 0%;
--$41.5 million class C notes at 'CCCsf'; RE 0%;
--$22.5 million class D notes at 'CCCsf'; RE 0%;
--$16 million class E notes at 'CCsf'; RE 0%;
--$500,000 class F notes at 'CCsf'; RE 0%;
--$12.5 million class G notes at 'CCsf'; RE 0%.
--$17.5 million class H notes at 'CCsf'; RE 0%;
--$35 million class J notes at 'CCsf'; RE 0%.
Fitch does not rate class PS (the preferred shares).
Additional information is available at www.fitchratings.com.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14
Criteria for Interest Rate Stresses in Structured Finance Transactions
and Covered Bonds (pub. 17 May 2016)
Fitch's Interest Rate Stress Assumptions for Structured Finance and
Covered Bonds - Excel File (pub. 17 May 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Surveillance Criteria for U.S. CREL CDOs (pub. 17 Nov 2015)
Dodd-Frank Rating Information Disclosure Form