CHICAGO--(BUSINESS WIRE)--(This is an amended version of a press release originally issued June 3, 2010, containing revised rating information on classes E, F, G & H.)
Fitch Ratings has downgraded 10 classes from the pooled portion of Citigroup Commercial Mortgage Trust, series 2007-FL3, reflecting Fitch's base case loss expectation of 7.9%. Six of the non-pooled junior component certificates were also downgraded to reflect Fitch's loss expectations on these assets. Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. The Negative Rating Outlooks reflect additional sensitivity analysis related to further negative credit migration of the underlying collateral. A detailed list of rating actions follows at the end of this release.
Under Fitch's updated analysis, approximately 76.8% of the pooled loans, and 80.2% of the non-pooled components, are modeled to default in the base case stress scenario, defined as the 'B' stress. In this scenario, the modeled average cash flow decline is 12.3% from generally third- and fourth-quarter 2009 servicer-reported financial data. In its review, Fitch analyzed servicer reported operating statements and Smith Travel Research (STR) reports, updated property valuations, and recent sales comparisons. Fitch estimates that average recoveries will be relatively stable, with an approximate base case recovery of 89.7%.
Given that the loan positions within the pooled portion of the commercial mortgage backed securities (CMBS) are the lower leveraged A-notes (average base case loan-to-value [LTV] of 82.8%), Fitch estimates that average recoveries on the pooled loans will be approximately 89.7% in the base case, whereas the more highly leveraged non-pooled component notes (average base case LTV of 110.1%) have a lower modeled recovery of 28.4%.
The transaction is collateralized by 13 loans, all of which are secured by hotels. All of the final extension options on the loans are within the next three years and are as follows: 72.2% in 2011 and 27.8% in 2012.
Fitch identified eight Loans of Concern (53.6%) within the pool, five of which are specially serviced, The Hudson Hotel (14%), The Mondrian Los Angeles (5.2%), Westmont Hotel Portfolio (3.1%), Avalon Hotel (1.5%) and Maison 140 (0.7%). Fitch's analysis resulted in loss expectations for three A-notes in the 'B' stress scenario. The largest contributors to losses (by unpaid principal balance) in the 'B' stress scenario are as follows: Hudson Hotel (14%), The Mondrian Los Angeles (5.2%) and the Viceroy Santa Monica (4.5%).
The Hudson Hotel is secured by the fee and leasehold interest in an 805-room full-service hotel located in midtown Manhattan, NY, on the south side of West 58th Street between Eighth and Ninth Avenues. The loan transferred to the special servicer in May 2010 due to imminent maturity default. The property was originally constructed in 1928 and underwent a three-year, $125 million ($155,279 per key) renovation following the purchase in 1997 by Morgan Hotels. The renovation was Ian Schrager's first New York City hotel in over 10 years.
At issuance, the loan was underwritten with the expectation that continued strength in the New York City market would continue to drive average daily rate (ADR) and higher cash flows. The property failed to achieve the projected increases, due in large part to the difficulty the economy has experienced. The trailing 12 months (TTM) ended Sept. 30, 2009 servicer reported NOI was approximately 56.5% lower than year-end (YE) 2008. For the TTM ending December 2009, the occupancy, ADR and RevPAR were 83.9%, $199.36 and $167.18, respectively, compared to 87.1%, $262.37 and $228.45, respectively, at issuance. As the loan is in special servicing due to imminent default, a term default was modeled in Fitch's base case.
The Mondrian Los Angeles is collateralized by a 237-room boutique full-service hotel located in West Hollywood, CA along the Sunset Strip. The loan transferred to special servicing in May 2010 due to imminent maturity default. The property was originally constructed in 1959 as an apartment building and converted to an all suites hotel in 1984. Morgans Hotel Group purchased the property in 1995 and completed a $15 million ($63,000 per key) renovation headed by Ian Schrager. The hotel opened in December 1996. At issuance, the borrower had planned a $9.4 million ($40,000 per key) renovation and replacement of existing bathroom fixtures, guest room soft goods and technology upgrades. The renovations were completed in late 2007.
At issuance, the loan was underwritten to a stabilized cash flow which anticipated higher revenues as a result of the upgrades. As of December 2009, the TTM occupancy, ADR and RevPAR were 63.5%, $263.64 and $167.51, respectively, compared to 80.3%, $309.36 and $248.39 at issuance. Property performance has slightly improved over the past year, with reported net operating income (NOI) as of the TTM ended Sept. 30, 2009 increasing 16.9% from YE 2008. Property performance has declined since YE 2007, with reported NOI declining 46.1% from YE 2007. As the loan is in special servicing due to imminent default, a term default was modeled in Fitch's base case.
The Viceroy Santa Monica loan is collateralized by a full-service 162-room boutique hotel located in Santa Monica, CA. The property was originally constructed in 1969 and was completely renovated and repositioned at a cost of $18.3 million ($113,000 per key) in 2002. At issuance the loan was underwritten to a stabilized cash flow which anticipated continued increases in ADR in the Santa Monica market. 2007 performance was in-line with underwritten assumptions; however, the property has experienced significant declines due to the economic downturn. As of YE 2009, the servicer-reported NOI DSCR was 1.22 times ([x] based on the capped LIBOR), compared with 3.01x (on a NCF basis) underwritten at issuance. As of YE 2009 occupancy, ADR and RevPAR were 76.9%, $257.60 and $198.21 respectively. This represents a RevPAR decline of 25% from YE 2008. Underwritten occupancy, ADR and RevPAR were 83%, $331.96 and $275.51 respectively. As the loan does not pass Fitch's refinance test, a maturity default was modeled in Fitch's base case.
Fitch has removed the following pooled classes from Rating Watch Negative, downgraded the ratings and assigned Rating Outlooks, Loss Severity Ratings, and Recovery Ratings, as indicated:
--$164,608,000 class A-2 to 'A/LS2 ' from 'AAA'; Outlook Negative;
--$24,903,000 class B to 'BBB/LS3' from 'AA-'; Outlook Negative;
--$19,923,000 class C to 'BBB/LS5' from 'A+'; Outlook Negative;
--$12,949,000 class D to 'BB/LS5' from 'A'; Outlook Negative;
--$11,954,000 class E to 'BB/LS5' from 'BBB+'; Outlook Negative;
--$12,950,000 class F to 'B/LS-5' from 'BBB'; to Outlook Negative;
--$11,953,000 class G to 'CCC/RR2' from 'BBB-';
--$11,954,000 class H to 'CCC/RR6' from 'BB+';
--$11,953,000 class J to 'CCC/RR6' from 'BB';
--$19,923,000 class K to 'CC/RR6' from 'B'.
Fitch has removed the following non-pooled classes from Rating Watch Negative, downgraded the ratings and assigned Rating Outlooks, Loss Severity Ratings, and Recovery Ratings, as indicated:
--$3,800,000 class THH-1 to 'CC/RR6' from 'BBB-';
--$3,600,000 class MLA-1 to ' CC/RR6' from 'B-';
--$3,200,000 class MLA-2 to ' CC/RR6' from 'B-';
--$1.9 million class HTT-1 to 'BB/LS5' from BBB-; Outlook Negative;
--$3,000,000 class VSM-1 to ' CCC/RR6' from 'BB-';
--$1,000,000 class VSM-2 to ' CCC/RR6' from 'BB-'.
In addition, Fitch has removed the following classes from Rating Watch Negative and affirmed the ratings and assigned Rating Outlooks, and Loss Severity Ratings as indicated:
--$368.9 million class A-1 at 'AAA/LS1'; Outlook Stable;
--Interest only class X-2 at 'AAA'; Outlook Stable;
--$2.9 million class INM at 'B-/LS5'; Outlook Negative;
--$1.5 million class WES at 'B/LS5'; Outlook Negative;
--$1.2 million class RSI-1 at 'B-/LS5'; Outlook Negative;
--$1.6 million class RSI-2 at 'B-/LS5'; Outlook Negative;
--$1.9 million class AVA at 'B-/LS5'; Outlook Negative;
--$0.8 million class MOF at 'BB-/LS5'; Outlook Negative.
Classes X-1, HOA-1, HOA-2, HFS-1, HFS-2, and HFS-3 have all paid in full. Fitch does not rate classes THH-2 and HTT-2.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs'. It applies stresses to property cash flows and uses debt service coverage ratio (DSCR) tests to project future default levels for the underlying portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. This methodology was used to review this transaction as floating-rate CMBS loan pools are concentrated and similar in composition to CREL CDO pools. In many cases, the CMBS notes are senior portions of notes held in CDO transactions. The assets are generally transitional in nature, frequently underwritten with pro forma income assumptions that have not materialized as expected. Overrides to this methodology were applied on a loan-by-loan basis if the property specific performance warranted an alternative analysis.
For bonds rated 'B-' or better, the current credit enhancement levels were compared to the expected losses generated in each rating category divided by the total deal size. These classes were assigned Loss Severity (LS) ratings, which indicate each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the expected losses for the collateral in the 'B' stress. LS ratings should always be considered in conjunction with probability of default indicated by a class' long-term credit rating. Fitch does not assign Rating Outlooks or LS ratings to classes rated 'CCC' and lower.
Rating Outlooks were determined by further stressing the cash flows and fully recognizing all maturity defaults in all ratings stresses. The credit enhancements were then compared to the expected losses generated in each rating category to determine potential credit migration over the next two years. If the Rating Outlook scenario would imply a lower rating, then the class was assigned a Negative Outlook.
Bonds rated 'CCC' and below were assigned Recovery Ratings (RR) in order to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities. Recovery Ratings are calculated by subtracting the base case expected losses in reverse sequential order from the pooled and non-pooled rake certificates. Any principal recoveries first pay interest shortfalls on the bonds and then sequentially through the classes. The remaining bond principal amount is divided by the current outstanding bond balance. The resulting percentage is used to assign the Recovery Ratings on the bonds.
The assignment of 'RR6' to class H reflects modeled recoveries of 19% of its outstanding balance. The expected recovery proceeds are broken down as follows:
--Present value of expected principal recoveries ($2.2 million);
--Present value of expected interest payments ($15,370);
--Total present value of recoveries ($2.3 million);
--Sum of undiscounted recoveries ($2.5 million).
Classes are assigned a Recovery Rating of 'RR6' when the present value of the recoveries in each case is less than 10% of each class' principal balance.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 16, 2010);
--'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs' (Nov. 9, 2009);
--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009);
--'Criteria for Structure Finance Recovery Ratings' (Aug. 17, 2009).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326
Criteria for Structured Finance Loss Severity Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=426038
Criteria for Structured Finance Recovery Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462434
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