NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed eight classes and downgraded three classes of Gramercy Real Estate CDO 2005-1, Ltd./LLC (Gramercy 2005-1) reflecting Fitch's base case loss expectation of 34.1%. Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Since the last rating action, seven assets are no longer in the pool; three positions paid in full while four took losses. Overall, the loss severity on the removed assets was approximately 38%. Total paydown to class A-1 from loan payoffs, scheduled amortization, diverted interest, and asset sales since last review was $148.3 million. Realized losses totaled approximately $54 million over the same period. The CDO is currently undercollateralized by approximately $34 million. As of the May 2013 trustee report, the CDO is failing two over-collateralization tests resulting in the diversion of interest payments from classes F and below.
The portfolio has become increasingly concentrated. Commercial real estate loans (CREL) comprise the majority of the collateral. Approximately 30% of the total collateral consists of whole loans or A-notes, while 23% are real estate owned (REO) assets, 10.8% are B-notes, and 5.7% mezzanine debt. CMBS represent 30.5% of the collateral. Since last review, the average Fitch derived rating for the underlying CMBS collateral declined to 'B+/B' from 'BB/BB-'. The combined percentage of defaulted loans and assets of concern has increased to 48% from 40.2% at last review.
Under Fitch's methodology, approximately 57.7% 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 9.1% from, generally, year-end 2012. Recoveries are average at 40.8%.
The largest component of Fitch's base case loss expectation is REO land for development (11.3% of the portfolio) located within the Coyote Valley of southern San Jose, CA. The original business plan was to market the 279 developable acres for lot sales; however, to date, no sales have occurred. The loan matured in July 2012 and the lender took title via a deed in lieu of foreclosure. Fitch modeled a substantial loss on this property in its base case scenario.
The next largest component of Fitch's base case loss expectation is the modeled losses on the CMBS bond collateral (30.5% of the pool).
The third largest component of Fitch's base case loss expectation is a defaulted mezzanine loan (5.7%) secured by ownership interests in a multifamily property located in New York, NY. The property contains over 11,000 residential units and approximately 120,000 square feet of office and retail space. The sponsors' plan was to convert the majority of rent controlled units to market rates; however, the plan has faced significant economic and legal hurdles. The loan became delinquent in January 2010. Fitch modeled no recovery on this highly leveraged mezzanine position.
The 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 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 Criteria for Cash Flow Analysis in CDOs'. The breakeven rates for classes A-1 through F pass the cash flow model at the ratings listed below.
The Stable Outlooks on classes A-1 through D generally reflect the classes' senior position in the capital structure and/or cushion in the modeling.
The 'CCC' ratings for classes G through K 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 assets of concern factoring in anticipated recoveries relative to each classes credit enhancement.
RATING SENSITIVITIES
If the collateral continues to repay at or near par, classes may be upgraded. The junior classes are subject to further downgrade should realized losses begin to increase.
Gramercy 2005-1 is a commercial real estate (CRE) CDO managed by CWCapital Investments LLC, which became the successor collateral manager in March 2013.
In December 2011, $6.1 million of notes were surrendered to the trustee for cancellation, including partial amounts of classes E, F, G and H.
Fitch affirms the following classes as indicated:
--$167.7 million class A-1 at 'BBBsf'; Outlook Stable;
--$ 57 million class A-2 at 'BBsf'; Outlook Stable;
--$102.5 million class B at 'BBsf'; Outlook Stable;
--$ 47 million class C at 'Bsf'; Outlook Stable;
--$ 12.5 million class D at 'Bsf'; Outlook Stable;
--$ 14.9 million class E at 'Bsf'; Outlook Negative;
--$ 15.3 million class F at 'Bsf'; Outlook Negative;
--$ 15.8 million class G at 'CCCsf'; RE 25%.
Fitch downgrades the following classes as indicated:
--$ 27.7 million class H to 'CCsf' from 'CCCsf'; RE 0%;
--$ 51.5 million class J to 'Csf' from 'CCsf'; RE 0%;
--$ 37.5 million class K to 'Csf' from 'CCsf'; RE 0%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Nov. 29, 2012);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 3, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 25, 2013);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012),
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18, 2011).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661
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=695733
Global Rating Criteria for Structured Finance CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=690203
Criteria for Interest Rate Stresses in Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695535
Global Criteria for Cash Flow Analysis in CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688518
Structured Finance Recovery Estimates for Distressed Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656557
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794257
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