NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded eight and affirmed one class of notes issued by N-Star Real Estate CDO II Ltd. (N-Star CDO II) as a result of negative credit migration and increased interest shortfalls on the underlying collateral. A complete list of rating actions follows at the end of this press release.
This transaction was analyzed under the framework described in Fitch's report 'Global Rating Criteria for Structured Finance CDOs' using the Portfolio Credit Model (PCM) for projecting future default levels for the underlying portfolio. Fitch analyzed the portfolio's sensitivity to CMBS collateral with near term maturities by assuming an extended maturity for these assets. The default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under the various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in Corporate CDOs'. Based on this analysis, the class A-1 through C-2 notes' breakeven rates are generally consistent with the ratings assigned below.
Since its last rating action in March 2010, Fitch has downgraded approximately 36.4% of the portfolio and placed 4.5% on Rating Watch Negative. Currently, 41.9% has a Fitch-derived rating below investment grade and 17.5% has a rating in the 'CCC' rating category or lower, compared to 34.3% and 4.5% at last review. The class A-1 notes have received $49.3 million in pay downs since the last review. In addition, the class D overcollateralization (OC) test is failing its covenant. As of the Jan. 24, 2011 trustee report, 11.6% of the collateral is experiencing interest shortfalls, compared to 0.8% at last review.
For the class D notes, Fitch analyzed the class' sensitivity to the default of the distressed assets ('CCC' and below) and assets experiencing interest shortfalls. Given the high probability of default of the underlying assets and the expected limited recovery prospects upon default, the class D notes have been downgraded to 'C', indicating that default is inevitable. Since the Dec. 28, 2010 payment date, the class D notes have been receiving interest paid in kind (PIK) whereby the principal amount of the notes is written up by the amount of interest due.
The Negative Outlook on the class A-1 through C-1 notes reflects Fitch's expectation that underlying CMBS loans will continue to face refinance risk. The Loss Severity (LS) rating indicates a tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the base-case loss expectation for the collateral, as explained in 'Criteria for Structured Finance Loss Severity Ratings'. The LS rating should always be considered in conjunction with the probability of default for tranches. Fitch does not assign LS ratings or Outlooks to classes rated 'CCC' and below.
N-Star CDO II is a static arbitrage cash flow collateralized debt obligation (CDO), which closed July 1, 2004. The collateral is composed of 74.3% commercial mortgage backed securities (CMBS), 14.5% real estate investment trusts (REIT), and 11.2% of SF CDOs. The majority of the CMBS assets range from the 1997 through 2004 vintages, with 4.0% from the 2006 vintage and 1.7% from the 2005 vintage.
Fitch taken the following actions, including revising LS ratings, for the following classes as indicated:
--$84,755,443 class A-1 affirmed at 'AAAsf'; to 'LS3' from 'LS2'; Outlook Negative;
--$42,000,000 class A-2A downgraded to 'BBBsf/LS4' from 'Asf/LS3'; Outlook Negative;
--$15,000,000 class A-2B downgraded to 'BBBsf/LS4' from 'Asf/LS3'; Outlook Negative;
--$12,000,000 class B-1 downgraded to 'BBBsf/LS5' from 'Asf/LS5'; Outlook Negative;
--$14,000,000 class B-2 downgraded to 'BBsf/LS5' from 'BBBsf/LS4'; Outlook Negative;
--$24,000,000 class C-1 downgraded to 'Bsf/LS5' from 'BBsf/LS4'; Outlook Negative;
--$6,000,000 class C-2A downgraded to 'CCCsf' from 'Bsf/LS4';
--$16,000,000 class C-2B downgraded to 'CCCsf' from 'Bsf/LS4';
--$15,081,043 class D downgraded to 'Csf' from 'CCCsf'.
Additional information is available at www.fitchratings.com.
The information used to assess these ratings was sourced from note valuation reports, and the public domain.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 13, 2010);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 15, 2010);
--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 17, 2010).=
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