NEW YORK--(BUSINESS WIRE)--Fitch Ratings upgrades three classes and affirms one class of Talmage Structured Real Estate Funding 2006-4 Ltd./LLC (Talmage 2006-4). A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
The upgrades reflect improved credit characteristics due to deleveraging and upgrades to the underlying CUSIP collateral since Fitch's last rating action.
This transaction's performance expectation was analyzed under the framework described in Fitch's 'Surveillance Criteria for U.S. CREL CDOs' which incorporates prospective views regarding commercial real estate (CRE) market value and cash flow declines for the underlying portfolio. Due to the portfolio concentration, Fitch also conducted look-through analyses on the structure based on the current underlying portfolio for both principal and interest coverage. Based on these analyses, the class E, F and G notes are reliant on collateral rated 'BBsf'/Outlook Negative.
As of the March 2016 trustee report, the liabilities have amortized by an additional $14 million since the last rating action primarily due to the repayment and amortization of CUSIP collateral, and through interest diversion. The transaction is considered concentrated with only three obligors remaining.
Talmage 2006-4, a CRE collateralized debt obligation (CDO) managed by Talmage, LLC, is undercollateralized with approximately $79.3 million of collateral remaining. The transaction had a five-year reinvestment period that ended in February 2012. All remaining assets are subordinate debt or subordinate tranches of structured finance transactions, except for one bond (4.1%) which is the senior-most bond in a CRE CDO transaction.
As of the March 2016 trustee report, the class F/G/H overcollateralization (OC) test is failing. As a result, any interest proceeds remaining after the payment of the class H interest are being redirected to redeem class E, the most senior class outstanding.
The largest obligor (41.8% of the pool) is the primary component of Fitch's base case loss expectation and consists of three B-notes secured by a portfolio of three hotel/gaming properties that have experienced significant declines in performance. Fitch modeled a full loss on these subordinate positions.
The second largest obligor (37.8%) is a subordinate bond from a CMBS single borrower transaction that is currently rated 'BBsf'/Outlook Negative and has an expected maturity of October 2016.
The third obligor consists of two bonds issued from one CRE CDO; since Fitch's last rating action, one bond (4.1%) was upgraded to 'BBBsf'/Outlook Stable from 'Bsf and one bond (16.3%) was upgraded to 'BBsf'/Outlook Stable from 'CCCsf', RE100.
Although class E's principal balance is covered by collateral rated 'BBsf'/Outlook Stable, Fitch also evaluated the ability of the CDO's underlying collateral to cover interest obligations to the outstanding classes, including timely interest to class E. The class's interest payments are subordinate to the net hedge payment and other various CDO management fees and expenses. The interest rate hedge has a current notional balance of $25.5 million and terminates in October 2016. Based on these analyses, the ratings for classes E through G are consistent with 'BBsf'/Outlook Negative.
Based on prior modeling results and the interest coverage analysis, no material analytical impact was anticipated from cash flow modeling the transaction.
RATING SENSITIVITIES
The credit enhancement for class E significantly exceeds the rating stress expected loss for the assigned rating. However, an upgrade is not warranted because the credit enhancement does not exceed the rating stress expected loss for the next higher rating stress. Given the concentration of the collateral, the ratings for classes E through H are based on a look-through analysis that considers the principal and interest coverage for each class' principal and interest amounts.
The rating and the Negative Outlook for classes E through G reflect the underlying rating of the collateral on which the interest payments rely. Classes E through G could be upgraded or downgraded in step with the ratings of the underlying CUSIP collateral. After the swap terminates, the Outlook for class E could be revised to Stable, if the class is still outstanding. Class H is subject to realized losses upon the liquidation of the remaining CREL assets, although a substantial recovery is expected.
DUE DILIGENCE USAGE
No third party due diligence was provided in relation to this rating action.
Fitch has upgraded the following ratings:
--$7.6 million class E to 'BBsf' from 'Bsf'; Outlook revised to Negative from Stable;
--$13.2 million class F to 'BBsf' from 'CCCsf'; Outlook Negative assigned;
--$14.4 million class G to 'BBsf' from 'CCsf'; Outlook Negative assigned.
Fitch has affirmed the following rating:
--$11.4 million class H at 'Csf'; RE80.
Classes A-1, A-2, S, B, C, and D have paid in full. Fitch does not rate classes J, K and Preferred Shares.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
Surveillance Criteria for U.S. CREL CDOs (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873275
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002570
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002570
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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