KEY RATING DRIVERS
The performance of the transaction has been in line with expectations over the last year. However, Fitch remains concerned about a default in the payment of timely interest given the significant hedge counterparty payment and increasing concentration of the portfolio.
Since the last rating action in
Under Fitch's methodology, approximately 88.5% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch estimates that average recoveries will be 29.4% reflecting the low recovery expectations upon default of the CMBS tranches and real estate loans.
Over the past three years, interest proceeds have consistently been insufficient to pay the interest due on the timely classes and hedge counterparty payments; the interest due on these classes has been paid from principal proceeds. Fitch continues to be concerned about the CDO's ability to make timely interest payments to the A-1/A-1R classes given the diminished amount of interest proceeds and significant swap counterparty payments. The affirmation at 'CCC' reflects the possibility going forward that interest and/or principal proceeds will not be sufficient to pay the timely interest class, especially if there are further defaults or delinquencies on the underlying collateral. Ultimate recoveries to the class, however, should be substantial.
Since the last rating action, the CUSIP collateral has experienced principal writedowns. This, along with the principal being used to pay interest, has resulted in the class A-2 notes becoming undercollateralized. As a result, the class A-2 notes have been downgraded and the class B through L notes have been affirmed at 'Csf', indicating default is inevitable.
The largest component of Fitch's base case loss is the expected losses on the CMBS bond collateral. The second largest contributor to loss is a B-note (6.5%) on a 314,074 square foot (sf) office tower located in
The third largest contributor to loss is a subordinate mortgage participation (5.1%) originally collateralized by four casino/hotel properties located in
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 (DSCR) tests to project future default levels for the underlying CREL collateral in the portfolio and uses the Portfolio Credit Model for the CMBS collateral. Recoveries for the CREL collateral are based on stressed cash flows and Fitch's long-term capitalization rates.
The ratings on the class A-1 through B notes may be subject to downgrades if principal proceeds are insufficient to pay the timely interest of the notes.
Fitch has downgraded the following classes:
Fitch has affirmed to following classes:
Additional information is available at 'www.fitchratings.com'.
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (
--'Global Structured Finance Rating Criteria' (
--'U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria' (
--'Global Rating Criteria for Structured Finance CDOs' (
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
Global Structured Finance Rating Criteria
U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria
Global Rating Criteria for Structured Finance CDOs
Source: Fitch Ratings
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