Fitch Upgrades RFC 2006-1
KEY RATING DRIVERS
The upgrade of class A-2 reflects sufficient credit enhancement due to continued principal paydown as well as the quality of the remaining collateral pool. Since Fitch's last rating action, the CDO liabilities have paid down an additional \$7.7 million; total paydown since issuance has reached \$395.3 million (65.9% of the original transaction balance). The paydowns since last review were due to the payoff of two commercial mortgage-backed securities (CMBS) assets, the partial payment of one CMBS asset, the amortization of another CMBS asset, and the diversion of interest proceeds from the failure of the OC/IC tests. Realized losses since last review totaled \$9.7 million. The CDO is under-collateralized by \$102.8 million.
The portfolio is concentrated with only 14 assets remaining. As of the January 2015 trustee report and per Fitch categorizations, the CDO consists of the following: whole loans (46.5%), (CMBS: 33.9%), and mezzanine debt (19.6%). Defaulted assets and Fitch Loans of Concern, combined, currently make up 72.1% of the pool compared to 73.2% at Fitch's last rating action. Further, the trustee classifies 68.1% of the collateral pool as impaired. The Fitch derived weighted average rating of the remaining CMBS bonds has improved to 'BB-' from 'B-/CCC+' at last review.
Under Fitch's methodology, approximately 72.1% 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% from, generally, year-end 2014. Fitch estimates that average recoveries will be low, at 14.5%, due to the concentration of defaulted assets, subordinate debt positions, and speculative-grade-rated CMBS bonds.
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 portfolio. Recoveries for the loan assets are based on stressed cash flows and Fitch's long-term capitalization rates. In addition to the standard modeling, Fitch applied additional deterministic analysis based on loss expectations on an asset-by-asset basis. The liquidated credit enhancement level for each class was then compared to the credit quality of the remaining assets. Although class A-2 passes higher, the upgrade is limited to 'BBsf' to reflect the concentration of the pool, the risk of the CDO making timely interest payments, as well as the limited CDO management experience of the current asset manager, CV Holding, Inc. Based on prior modeling results, no material impact was anticipated from cash flow modeling the transaction.
The 'CCC' and below ratings assigned to classes B through K are based on a deterministic analysis that considers Fitch's loss expectation for the pool and the current percentage of defaulted assets and Fitch Loans of Concern, factoring in anticipated recoveries relative to each class's credit enhancement, as well as the likelihood for overcollateralization (OC) tests to cure.
The largest component of Fitch's base case loss expectation is a whole loan (32.2%) secured by a 72-room boutique hotel located in the Times Square area of New York City. In 2012, the loan was restructured into an A-note, B-note, and a Hope note, and the loan's maturity was extended to 2019. The B note was subsequently purchased by an investor related to the borrower and the proceeds have been applied to the CDO. Current property cash flow remains significantly below issuance and underwritten expectations.
The second largest component of Fitch's base case loss expectation is a mezzanine loan (19.6%) secured by an interest in a 575-room full-service hotel located in Tucson, Arizona. Fitch modeled a full loss on this highly leveraged position in its base case scenario.
RATING SENSITIVITIES
The rating on class A-2 is expected to remain stable as future upgrades are unlikely due to concerns over the CDO's ability to make timely interest payments; the increasing concentration of the transaction; poor quality of the collateral pool, and limited CDO management experience of the current collateral manager. The distressed classes (rated below 'B') may be subject to further rating actions as losses are realized.
RFC 2006-1 is a commercial real estate CDO. The transaction exited its reinvestment period in April 2011. The CDO's asset manager is CV Holdings, Inc., formerly known as Realty Finance Corp. (RFC). Both accounting and asset management functions for the CDO are performed by the asset manager.
The transaction was formerly known as CBRE Realty Finance CDO 2006-1, Ltd./LLC.
Fitch has upgraded the following classes:
--\$12.7 million class A-2 to 'BBsf' from 'CCCsf'; outlook stable.
Fitch has affirmed the following classes:
--\$34.5 million class B at 'CCCsf'; RE 90%;
--\$15 million class C at 'CCCsf'; RE 0%;
--\$13.5 million class D at 'CCsf'; RE 0%;
--\$9 million class E at 'Csf'; RE 0%;
--\$10.5 million class F at 'Csf'; RE 0%;
--\$13.5 million class G a at 'Csf'; RE 0%;
--\$4.5 million class H at 'Csf'; RE 0%;
--\$24 million class J at 'Csf'; RE 0%;
--\$20.3 million class K at 'Csf'; RE 0%.
Class A-1 has paid in full.
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