NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded six classes and affirmed nine classes of N-Star REL CDO VIII, Ltd./LLC (N-Star VIII) reflecting Fitch's base case loss expectation of 49.1%, an increase from 47.4% at Fitch's last rating action. 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
The downgrades reflect an increase in the overall loss expectations for the pool due to higher modeled losses on several of the commercial real estate (CRE) loans that are subordinate debt positions and secured by non-traditional property types. The downgrade also reflects the lack of forward progress on several exposures in the pool including the largest loan (11.6%), which is a secured by the construction of a 1.9 million square foot entertainment and retail complex located in Meadowlands, NJ. Furthermore, the combined percentage of defaulted assets and assets of concern has increased to 54.5% from 42.5% at the last rating action and the rated securities portion of the collateral has also deteriorated in credit quality.
The collateral pool comprises a high percentage of subordinate debt positions (totaling 35.4% of the pool) and non-traditional property types, including loans secured by construction (11.6%), hotels (10.5%), healthcare (9.2%), and undeveloped land (8.4%). These assets generally exhibit a greater volatility in their valuations and their property performance. The weighted average Fitch-derived rating of the rated securities has declined to 'CCC-' from 'CCC+/CCC' at the last rating action due to lower Fitch-derived ratings of the underlying bonds.
Since the last rating action, principal paydowns to classes A-1 and A-R were $21.5 million. One asset was sold at a discount to par with realized losses of approximately $2 million. As of the June 2013 trustee report, all overcollateralization and interest coverage tests were in compliance.
As of the June 2013 trustee report and per Fitch categorization, the collateralized debt obligation (CDO) was substantially invested as follows: whole loans/A-notes (54.2%), CRE mezzanine debt (24.9%), preferred equity (8%), CRE CDOs (6.9%), B-notes (2.6%), commercial-mortgage backed securities (CMBS: 2.6%), and principal cash (0.8%).
Under Fitch's methodology, approximately 89.9% 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 5.2% from, generally, year-end 2012 or trailing 12-month first quarter 2013. Modeled recoveries are average at 47%.
The largest component of Fitch's base case loss expectation is the modeled loss on the rated securities collateral (9.6% of the pool).
The next largest component of Fitch's base case loss expectation is a mezzanine loan (6.5%) secured by an interest in a 2.2 million square foot office complex located in Chicago. The largest tenant vacated approximately 22% of the net rentable area (NRA) upon its November 2012 lease expiration. In addition, another tenant, which occupies 17% of the NRA, has already provided notice that it will vacate upon its May 2014 lease expiration. A loan modification was recently executed which modified the senior loan into an A and a B note. Fitch modeled a full loss on this mezzanine loan under the base case stress scenario.
The third largest component of Fitch's base case loss expectation is a mezzanine loan (4.3%) secured by an interest in a portfolio of 11 retail properties located in Phoenix, AZ. Fitch modeled a term default with a full loss under its base case scenario due to the loan's high leverage under Fitch's base case stress scenario.
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 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 default 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, A-R, A-2, and B are generally consistent with the ratings assigned below.
The ratings for classes C through N are based upon a deterministic analysis that considers Fitch's base case loss expectation for the pool and the current percentage of defaulted assets and assets of concern, factoring in anticipated recoveries relative to each class' credit enhancement.
RATING SENSITIVITIES
The Negative Outlooks on classes A-1, A-R, A-2, and B reflect the potential for future downgrades if there is continued deterioration of loan performance or if the ratings of the underlying rated securities migrate downward. The junior classes are subject to downgrade as losses are realized or if realized losses exceed Fitch's expectations.
N-Star VIII was initially issued as a $900 million CRE CDO managed by NS Advisors, LLC. The transaction had a five-year reinvestment period during which principal proceeds may be used to invest in substitute collateral which ended in February 2012. In November 2009, $31.1 million of notes were surrendered to the trustee for cancellation.
Fitch has downgraded the following classes as indicated:
--$92.8 million class A-1 to 'BBsf' from 'BBBsf'; Outlook Negative;
--$241.3 million class A-R to 'BBsf' from 'BBBsf'; Outlook Negative;
--$103.1 million class A-2 to 'Bsf' from 'BBsf'; Outlook Negative;
--$22.1 million class L to 'CCsf' from 'CCCsf'; RE 0%;
--$14.9 million class M to 'CCsf' from 'CCCsf'; RE 0%;
--$22.5 million class N to 'CCsf' from 'CCCsf'; RE 0%.
In addition, Fitch has affirmed the following classes:
--$60.3 million class B at 'Bsf'; Outlook Negative;
--$24.3 million class C at 'CCCsf'; RE 0%;
--$17.1 million class D at 'CCCsf'; RE 0%;
--$22.1 million class E at 'CCCsf'; RE 0%;
--$25.2 million class F at 'CCCsf'; RE 0%;
--$9.1 million class G at 'CCCsf'; RE 0%;
--$20.7 million class H at 'CCCsf'; RE 0%;
--$12 million class J at 'CCCsf'; RE 0%;
--$18.9 million class K at 'CCCsf'; 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);
--'Global Rating Criteria for Cash Flow Analysis in CDOs' (Sept. 13 2012);
--'Fitch's Interest Rate Stress Assumptions for Structured Finance' (Jan. 29, 2013).
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
Global Criteria for Cash Flow Analysis in CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688518
Fitch's Interest Rate Stress Assumptions for Structured Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700189
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794575
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