OREANDA-NEWS. February 29, 2016. Fitch Ratings has affirmed 15 classes of Gramercy Real Estate CDO 2007-1 Ltd./LLC (Gramercy 2007-1). A detailed list of rating actions follows at the end of this release.

KEY RATING DRIVERS
The affirmations at distressed levels reflect the high probability of default of the classes. Since the last rating action, the class A-1 notes have received approximately \\$48.2 million in pay down from asset sales, principal amortization, and interest diversion due to the failure of the coverage tests. Over the same period, the CDO realized losses of approximately \\$91 million, including, as expected, the full write down of a \\$39.9 million junior mezzanine interest in Stuyvesant Town/Peter Cooper Village.

The CDO is approximately \\$150 million under collateralized. As of the February 2016 trustee report, the CDO was comprised of 13.9% commercial real estate loans and 86.1% rated securities. The rated securities have a weighted average Fitch derived rating of 'CCC+'.

The CDO continues to fail its overcollateralization tests, resulting in the capitalization of interest for classes C through J. The transaction entered into an Event of Default (EOD) on March 12, 2012 due to the class A/B Par Value Ratio falling below 89%; to date, the majority controlling class has waived the EOD until Jan. 27, 2017. The majority of the controlling class, however, has reserved the right to revoke or extend the waiver at any time.

In recent payment periods, interest proceeds have been insufficient to pay both swap counterparty obligations and timely interest due on the senior classes (A-1 through B). As a result, a significant portion of the interest due on these obligations has been paid using principal proceeds. Fitch is concerned about the asset manager's ability to continue to manage the CDO such that principal and interest proceeds are available to make timely interest payments to these classes given the diminished amount of funds available and significant swap payments, which are senior to these classes within the waterfall.

Under Fitch's methodology, approximately 71.6% 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 35.5% reflecting low recovery expectations upon default of the CMBS tranches and non-senior real estate loans. This results in a Fitch's base case loss of 46.2%.

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 related to a mezzanine loan (2.9% of the pool) backed by a 1.2 million-sf office tower located in the garment district of Midtown Manhattan. As of the September 2015 rent roll, the property was 85% leased. However, the loan is over-leveraged, and Fitch modeled a significant loss on this interest.

This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs', 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 CRE loan portion of the collateral are based on stressed cash flows and Fitch's long-term capitalization rates. The non-CRE loan portion of the collateral was analyzed in the Portfolio Credit Model according to the 'Global Rating Criteria for Structured Finance CDOs'. The transaction was not cash flow modeled given the limited available interest received from the assets relative to the interest rate swap payments due; unpredictable timing and availability of principal proceeds; and distressed nature of the ratings.

All ratings are based on a deterministic analysis that considers Fitch's base case 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' credit enhancement as well as consideration for the likelihood of the CDO to continue its ability to make timely payments on the senior classes. Ultimate recoveries to the senior class, however, should be significant.

Gramercy 2007-1 is a commercial real estate collateralized debt obligation CREL CDO managed by CWCapital Investments LLC.

RATING SENSITIVITIES

Classes A-1 through B are subject to further downgrade should available interest and principal proceeds not be sufficient to meet timely interest payment obligations.

DUE DILIGENCE USAGE
No third-party due diligence was provided or reviewed in relation to this rating action.

Fitch has affirmed the following classes:

--\\$499.9 million class A-1 notes at 'CCsf/RE 65%';
--\\$121 million class A-2 notes at 'Csf/RE 0%;
--\\$116.6 million class A-3 notes at 'Csf/RE 0%;
--\\$29.5 million class B-FL notes at 'Csf/RE 0%;
--\\$20 million class B-FX notes at 'Csf/RE 0%;
--\\$22.6 million class C-FL notes at 'Csf/RE 0%;
--\\$5.2 million class C-FX notes at 'Csf/RE 0%;
--\\$5 million class D notes at 'Csf/RE 0%;
--\\$5.8 million class E notes at 'Csf/RE 0%;
--\\$11.5 million class F notes at 'Csf/RE 0%';
--\\$3.7 million class G-FL notes at 'Csf/RE 0%';
--\\$3 million class G-FX notes at 'Csf/RE 0%';
--\\$2.6 million class H-FL notes at 'Csf/RE 0%';
--\\$7.8 million class H-FX notes at 'Csf/RE 0%';
--\\$20.9 million class J notes at 'Csf/RE 0%'.

Fitch does not rate classes K and preferred shares.