NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded three and affirmed two classes of Guggenheim Structured Real Estate Funding 2005-1 Ltd./Corp. (Guggenheim 2005-1) reflecting Fitch's base case loss expectation of 23.4%, an increase from last review that has been more than offset by increased credit enhancement to the classes resulting from repayments. A detailed list of rating actions follows at the end of this release.
The transaction is primarily collateralized by subordinate commercial real estate debt (74.9% of total collateral is either B-notes or mezzanine loans). Fitch has modeled significant losses upon default for many of these assets, including two Fitch loans of concern (20.4%), since they are generally highly leveraged debt classes. However, no loans in the pool are currently delinquent. Further, two assets, representing 8.2% of the CDO collateral, are CMBS bonds that carry a Fitch rating of 'AA'.
The transaction exited its reinvestment period in May 2010 and as such all loan repayments, of which there have been over $78 million since last review, have been used to amortize the rated classes on a pro rata basis. The preferred shares do not receive principal payments until all rated notes have been paid in full. As a result, the credit enhancement to all classes has increased significantly. The class E credit enhancement, the most junior rated class, is 90.5%. The overcollateralization (OC) test and interest coverage test are both passing their respective covenants with substantial cushion.
Under Fitch's updated methodology, approximately 53.2% 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 6.3%, generally from trailing 12 months November or December 2010 cash flows. Fitch estimates average recoveries to be moderate (56.1%).
The largest component of Fitch's base case loss expectation are two B-notes (12.1%) secured by a 524,000 square foot regional mall. As of November 2010, the mall was 81.6% occupied. Property net cash flow for year-end 2010 declined 18% since year-end 2009. Fitch modeled a term default and full loss on this loan in its base case scenario.
The next largest component of Fitch's base case loss expectation is a mezzanine loan (21.9%) backed by partnership interests in a portfolio of 108 select service and extended stay hotels (12,638 keys) located across 34 states in the U.S. Fitch modeled a maturity default in its base case scenario on this loan.
Guggenheim 2005-1 is a CRE collateralized debt obligation (CDO) that is managed by Guggenheim Structured Real Estate Advisors (GSREA) and has approximately $118 million of collateral. The transaction's five-year reinvestment period ended in May 2010. As of the February 2011 trustee report and per Fitch categorizations, the CDO was invested as follows: B-notes (53%), whole loans/A-notes (24%), CRE mezzanine loans (21.9%), and commercial mortgage-backed securities (CMBS; 1.1%). In general, Fitch models non-senior, single-borrower CMBS as CRE B-notes.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions', which applies stresses to property cash flows and uses debt service coverage ratio (DSCR) tests to project future default levels for the underlying portfolio. Property cash flow stresses have been updated to reflect more recently available CRE performance and outlooks. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. The transaction was not evaluated in a cash flow model because of the significant increase in credit enhancement compared to the modest increase in base case expected loss.
The ratings and Outlooks for classes A through E reflect expectations that the classes will be repaid in full under investment grade stresses. Due to the concentration of the pool with only nine obligors remaining, the percentage of loans considered Fitch loans of concern, and the concentration of loans with near term maturities, high investment grade ratings are not warranted.
Fitch has taken rating actions on, and revised LS Ratings as indicated on the following classes; the Outlooks are revised to Stable from Negative:
--$4,943,021 class A, affirmed at 'Asf'; revised to 'LS5' from 'LS3';
--$2,095,729 class B, affirmed at 'BBBsf'; revised to 'LS5' from 'LS4';
--$2,558,103 class C, upgraded to 'BBBsf' from 'BBsf'; revised to 'LS5' from 'LS4';
--$1,173,718 class D, upgraded to 'BBBsf/LS5' from 'BBsf/LS5';
--$476,053 class E, upgraded to 'BBBsf/LS5' from 'BBsf/LS5'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 13, 2010);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Dec. 2, 2010)
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Feb. 17, 2010)
--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009).
Applicable Criteria and Related Research:
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=579165
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326
Criteria for Interest Rate Stresses in Structured Finance Transactions (Global SF)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=500306
Criteria for Structured Finance Loss Severity Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=426038
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