CHICAGO - (Business Wire) Fitch has affirmed the following floating-rate classes of Marathon Real Estate CDO 2006-1, Ltd. /LLC (Marathon CRE CDO):
--$520,000,000 class A-1 at 'AAA';
--$50,000,000 class A-2 at 'AAA';
--$99,000,000 class B at 'AA';
--$51,500,000 class C at 'A+';
--$16,000,000 class D at 'A';
--$14,000,000 class E at 'A-';
--$23,500,000 class F at 'BBB+';
--$15,500,000 class G at 'BBB';
--$26,000,000 class H at 'BBB-';
--$56,300,000 class J at 'BB';
--$26,700,000 class K at 'B'.
Fitch's affirmation of the above classes is based on the transaction staying within its covenanted limits and maintaining adequate reinvestment cushion.
Deal Summary:
Marathon CRE CDO is a revolving commercial real estate (CRE) cash flow collateralized debt obligation (CDO), which closed on May 18, 2006. It was incorporated to issue $1,000,000,000 of floating-rate notes and preferred shares. As of the April 21, 2008 trustee report, the CDO was substantially invested as follows: commercial mortgage whole loans/A-notes (47.8%), B-notes (17.0%), mezzanine loans (11.8%), commercial mortgage backed securities (CMBS) (10.8%), real estate bank loans (REBL) (3.0%), credit tenant lease (CTL) loans (4.6%), asset-backed securities (ABS) (0.9%), CRE CDO (3.1%), preferred equity (0.3%), and cash (0.7%). The CDO is also permitted to invest in real estate investment trust (REIT) debt and synthetic assets.
The portfolio is selected and monitored by Marathon Asset Management, LLC (Marathon). The CDO has a five-year reinvestment period, during which, if all reinvestment criteria are satisfied, principal proceeds may be used to invest in substitute collateral. The reinvestment period ends May 18, 2011.
Asset Manager:
Marathon Asset Management LLC (Marathon) is a global alternative investment and asset management company that manages $10.5 billion in capital and $20 billion in assets.
Founded in January 1998, Marathon maintains its headquarters in New York City and has offices in London and Hong Kong. The company formed its Real Estate Finance Group (REFG) as an originator and investor in commercial real estate (CRE) debt in 2003 and has made more than $3 billion in investments. The REFG team consists of 17 real estate professionals plus support staff.
Fitch finds Marathon to be an acceptable commercial real estate loan (CREL) CDO asset manager. Marathon has engaged Wachovia Securities (Wachovia) as its master servicer, rated 'CMS2' by Fitch. Marathon's asset managers oversee Wachovia's loan administration. Marathon manages its sub-performing loan activities directly. To date, Marathon has had one real estate loan within the CDO that reached the workout stage. This loan was successfully resolved.
For more details refer to Fitch's Asset Manager Profile on Marathon Asset Management LLC, available on the Fitch's web site at www.fitchratings.com.
Performance Summary:
As of the April 21, 2008 trustee report, the overall poolwide expected loss (PEL) increased to 35.625% from 30.625% as of the effective date (February 12, 2007). The negative credit migration of the portfolio is primarily attributed to the following two factors: first, several loans have fallen behind in their business plans resulting in higher expected losses for those loans. Secondly, a majority of the newly added loans consist of highly levered hotel and health care properties. Generally, these asset types carry higher than average expected losses.
At the same time that the credit profile of the portfolio has gotten riskier, the as-is weighted average spread (WAS) has declined. As a result, the amount of reinvestment cushion has decreased to 6.175% from to 13.625% at the effective date. The CDO's Fitch PEL covenant varies depending on the trustee reported WAS. Based on the trustee reported WAS, the PEL covenant can range from 38.750% to 51.050% (the WAS/PEL matrix). As the current reported WAS is 2.40%, the PEL covenant has declined to 41.800% from 44.250% at the effective date.
Of the loans that are behind in their business plans, one loan (0.57%) is a Miami hotel that was originally planned to be converted into a condominium. The conversion plan has since been abandoned and the property is expected to remain a hotel. Another loan (0.79%) is secured by a New Jersey office property with 38% occupancy. This property is behind in its lease-up plan. A third loan (3.66%) consists of a portfolio of four manufactured housing properties that have experienced declining occupancy since loan closing. Fitch increased the expected losses on these three loans. In addition, one loan (0.74%) is currently 90 days delinquent and was modeled with a 100% probability of default.
Since last review, approximately 50% of the collateral has paid off with the proceeds reinvested resulting in a significantly different portfolio composition. Many of the loans that were added include highly leveraged hotel and health care loans with a Fitch weighted average stressed loan to value (LTV) above 100%. The portfolio's concentration in hotel and health care properties increased to 28.2% and 6.5% from 16.6% and 2.7%, respectively, as of the effective date. The overall Fitch stressed LTV has increased to 121.7% from 97.5% at the effective date.
The rated collateral in this transaction (22.5%) consists of CMBS, ABS, CRE CDOs, REBLs, and CTL loans. Since last review, this collateral has negatively migrated toward a 'B/B+' weighted average rating from a 'BB-/B+' weighted average rating.
The overcollateralization (OC) and interest coverage (IC) ratios of all classes have remained above their covenants, as of the April 21, 2008 trustee report.
Collateral Analysis:
Although the portfolio has migrated to a higher concentration of whole loans since last review (47.8% from 34.5%), many of these loans are secured by transitional and non-traditional property types, such as hotel and health care properties. Several mezzanine loans have paid off since last review decreasing the concentration of this asset type to 11.9% from 22.9%. The deal has maintained a 0.3% concentration of preferred equity positions. Uninvested proceeds comprise 0.7% of the collateral balance.
Per the April 21, 2008 trustee report and based on Fitch categorizations, the CDO is within all property type covenants; hotels have the highest concentration at 28.2%; this concentration is near its covenant maximum of 30.0%. A positive trend has been reduced exposures to other non-traditional property types. Investment in land loans has decreased to 0.0% from 8.9%, while condominium conversion loans have declined to 2.6% from 11.1%. The CDO is also within all its geographic covenants with the highest concentration in New York at 20.1%.
The Fitch Loan Diversity Index (LDI) is 207, which represents a diverse portfolio as compared to other CRE CDOs with the largest loan comprising only 5.8% of the CDO and the top five assets only representing 18.9% of the CDO. The Fitch LDI covenant is 435.
For a summary of the Fitch Loans of Concern and the 10 largest loans, please refer to the 'Marathon Real Estate CDO 2006-1 CREL Surveyor Snapshot' on the Fitch Research web site, which will be available beginning May 16, 2008.
Rating Definitions:
The ratings of the class A-1, A-2 and B notes address the likelihood that investors will receive full and timely payments of interest, as per the governing documents, as well as the aggregate outstanding amount of principal by the stated maturity date. The ratings of the class C, D, E, F, G, H, J and K notes address the likelihood that investors will receive ultimate interest and capitalized interest payments, as per the governing documents, as well as the aggregate outstanding amount of principal by the stated maturity date.
Ongoing Surveillance:
Upgrades during the reinvestment period are unlikely given the pool could still migrate to the PEL covenant. The Fitch PEL is a measure of the hypothetical loss inherent in the pool at the 'AA' stress environment before taking into account the structural features of the CDO liabilities. Fitch PEL encompasses all loan, property, and poolwide characteristics modeled by Fitch.
Fitch will continue to monitor and review this transaction and will issue an updated Snapshot report after each committeed review. The surveillance team will conduct a review whenever there is approximately 15% change in the collateral composition, or semi-annually.
For more information on the Fitch Rating Methodology for CREL CDOs, see 'Rating Methodology for U.S. Revolving Commercial Real Estate Loan CDOs' dated Dec. 20, 2007, which is also available at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site
Fitch Ratings, New York
Steven Caldwell, +1-212-908-0565
Karen Trebach, +1-212-908-0215
Julian Dennison, +44 20 7862 4080
(Media Relations, London)
Sandro Scenga, +1-212-908-0278
(Media Relations, New York)
