NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed all classes of CapitalSource Real Estate Loan Trust 2006-A (CapitalSource 2006-A) reflecting Fitch's base case loss expectation of 34.9%. 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, principal paydowns to classes A-A, A-1R, and A-2A were $176.8 million. Eleven assets are no longer in the pool, 10 of which were repaid in full and one of which was sold at a discount with a de minimis loss realized. As of the May 2013 trustee report, all overcollateralization and interest coverage tests were in compliance.
CapitalSource 2006-A is primarily collateralized by senior commercial real estate (CRE) debt with 87.2% of the total collateral consisting of whole loans/A-notes. According to the May 2013 trustee report and per Fitch categorizations, the remaining collateral consisted of term loan financing (5.4%), commercial mortgage-backed securities (CMBS; 2.6%), B-notes (2.5%), residential mortgage-backed securities (RMBS: 2.2%), and principal cash (0.1%). The combined percentage of defaulted assets and assets of concern has increased slightly to 33.9% from 31.3% at the last rating action. The weighted average Fitch-derived rating of the rated securities has declined to 'CCC+' from 'BB-/B+' at the last rating action due to ratings downgrade of the underlying RMBS bonds.
Under Fitch's surveillance methodology, approximately 67.3% 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 7%. Modeled recoveries are average at 48.2%.
The largest component of Fitch's base case loss expectation is a whole loan (10.3%) which was initially secured by the construction of a 331-key hotel property located in Atlantic City, NJ. Construction has since been completed and the property is fully operational. Property cash flow has been insufficient to support debt service over the past two years in 2011 and 2012. For the trailing 12 months ended March 2013, occupancy, average daily rate, and revenue per available room were 49.5%, $136, and $67, respectively. Fitch modeled a term default with a significant loss under its base case scenario.
The next largest component of Fitch's base case loss expectation is an A-note (4.5%) secured by over 2,000 acres of land located in the Pocono Mountains of Pennsylvania. The initial business plan was to develop the site with retail and multifamily in multiple phases, but due to economic downturn, the plan was not realized. The loan was recently extended for an additional year to March 2014. Fitch modeled a term default with a significant loss under its base case scenario.
The third largest component of Fitch's base case loss expectation is an A-note (5.6%) secured by over 6,000 acres of land located in Edgewater and New Smyrna Beach, FL. The initial business plan was to develop single-family homes and commercial space; however, the market downturn put a halt to this plan. The land is heavily forested and comprises of wetlands; thereby only a portion of the land is developable. Debt service on this loan was previously funded with revenue from timber operations at the property and through timber reserves transferred to debt service reserves. These reserves were depleted in late 2012 and shortly afterwards, the borrower agreed to transfer the property to the lender in lieu of foreclosure. A deed in lieu was completed in May 2013.
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-1A, A-1R, A-2A, A-2B, and B are generally consistent with the ratings assigned below.
The ratings for classes C through J 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 rating on class A-2A is expected to remain stable. The Negative Outlooks on classes A-1A, A-1R, A-2B, and B reflect the potential for future downgrades if there is 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.
CapitalSource 2006-A was initially issued as a $1.3 billion revolving CRE CDO managed by CapitalSource Finance, LLC (CapitalSource), a subsidiary of CapitalSource, Inc. In the fourth quarter of 2010, NS Advisors II, LLC (NS Advisors II) became the delegated collateral manager for the CDO under the delegation provisions of the Indenture. All collateral manager responsibilities and fees have been delegated to NS Advisors II. In addition, an amendment to the servicing agreement replaced the special servicer of the CDO with NS Servicing, LLC (NS Servicing). NS Servicing assumed all rights, interests, duties, and obligations as special servicer under the servicing agreement previously held by CapitalSource.
Fitch has affirmed the following classes as indicated:
--$148.4 million class A-2A at 'BBsf'; Outlook Stable;
--$30.8 million class A-1A at 'BBsf'; Outlook Negative;
--$124.1 million class A-1R at 'BBsf'; Outlook Negative;
--$125 million class A-2B at 'BBsf'; Outlook Negative;
--$82.9 million class B at 'Bsf'; Outlook Negative;
--$62.4 million class C at 'CCCsf'; RE 100%;
--$30.2 million class D at 'CCCsf'; RE 0%;
--$30.2 million class E at 'CCCsf'; RE 0%;
--$26.7 million class F at 'CCsf'; RE 0%;
--$33.2 million class G at 'CCsf'; RE 0%;
--$31.2 million class H at 'Csf'; RE 0%;
--$47.5 million class J at 'Csf'; 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=794577
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.