NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded one and affirmed 10 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 $74.8 million primarily from the disposition of six assets. While five assets were repaid in full, one asset experienced a deminimis loss, which resulted in realized losses of approximately $800. 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 51.3%. While there are no defaulted assets, Fitch assets of concern (including the largest loan) increased to 53.7% compared to 39.3% at the last rating action. This is due to the pool's reduced size, as there are no new assets of concern. The CDO is overcollateralized by $13.8 million.
As of the June 2016 trustee report and per Fitch categorizations, the CDO is substantially invested as follows: whole loans/A-notes (68.9%), mezzanine debt (3.8%), preferred equity (4.9%), CMBS (19.5%) and cash (2.9%). The weighted average rating of the CMBS securities declined to 'B/B-' from 'B+/B' since last review, as higher rated CUSIPS were repaid in full and the remaining CUSIPS with higher ratings have amortized. Per the current trustee reporting, the transaction passes all interest coverage and overcollateralization tests.
Under Fitch's methodology, approximately 88.3% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Modeled recoveries are average at 41.9%.
The largest contributor to Fitch's base case loss is a whole loan (9.3% of the pool) 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% in 2015. Occupancy has since remained flat as of February 2016. Fitch modeled a substantial loss on this asset in its base case scenario.
The second largest contributor to Fitch's base case loss expectation is the modeled losses on the CMBS bond collateral.
The third largest contributor to Fitch's base case loss is an A-note (10.5% of the pool) secured by a land parcel located in Studio City, CA. The Sponsor originally planned to pre-lease and fully permit the site for redevelopment of approximately 65,000 sf of retail, but was delayed. 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 B 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 Outlook on class B reflects the class' senior position in the capital structure. The Negative Outlook on class C reflects the class' vulnerability to interest shortfalls resulting from payments due under the hedge and increasing concentration. Interest to the class is junior to the five hedges in the transaction (one expires in October 2016 and four expire in 2017), fees due to the trustee and interest due to class B. Limited paydown is expected in the near term and the majority of remaining collateral consists of poor-performing assets.
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 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.
Upgrades to classes B 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:
--$10.7 million class B to 'BBsf' from 'Bsf'; Outlook revised to Stable from Positive.
Fitch has affirmed the following classes and revised Outlooks as indicated:
--$7 million class C at 'Bsf'; Outlook revised to Negative from Stable;
--$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%.
Fitch does not rate the preferred shares.
Additional information is available at www.fitchratings.com.
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)
Global Surveillance Criteria for Structured Finance CDOs (pub. 13 Jul
Surveillance Criteria for U.S. CREL CDOs (pub. 17 Nov 2015)
Dodd-Frank Rating Information Disclosure Form