NEW YORK - (Business Wire) Fitch affirms all classes of N-Star REL CDO VIII, Ltd./LLC (N-Star VIII) floating-rate notes as follows:
--$100,000,000 class A-1 affirmed at 'AAA'
--$260,000,000 class A-R affirmed at 'AAA';
--$103,050,000 class A-2 affirmed at 'AAA';
--$60,300,000 class B affirmed at 'AA+';
--$24,300,000 class C affirmed at 'AA';
--$17,100,000 class D affirmed at 'AA-';
--$22,050,000 class E affirmed at 'A+';
--$25,200,000 class F affirmed at 'A';
--$26,100,000 class G affirmed at 'A-';
--$20,700,000 class H affirmed at 'BBB+';
--$26,100,000 class J affirmed at 'BBB';
--$18,900,000 class K affirmed at 'BBB-';
--$22,050,000 class L affirmed at 'BB+';
--$14,850,000 class M affirmed at 'BB'; and
--$22,500,000 class N affirmed at 'BB-'.
Fitch's affirmation of the above classes is based on the transaction maintaining an adequate reinvestment cushion, remaining within its other transaction covenants, and passing Fitch's property value decline stress scenarios. The deal was reviewed as over 25% of the portfolio has turned over since the last review.
Deal Summary:
N-Star VIII, a wholly owned subsidiary of NorthStar Realty Finance Corp. (NYSE: NRF) (NorthStar), is a $900,000,000 revolving commercial real estate (CRE) cash flow collateralized debt obligation (CDO) that closed on December 7, 2006. As of the June 2, 2008 trustee report and based on Fitch categorizations, the CDO was substantially invested as follows: commercial mortgage whole loans/A-notes (71.2%), commercial real estate mezzanine loans (17.4%), CRE CDOs (4.5%), CMBS (2.6%), CRE B-notes (1.9%), and cash (2.4%). The CDO is also permitted to invest in REIT debt and loans secured by credit tenant leases. As of June 2, 2008, $79,085,000 has been advanced from the A-R class leaving $180,915,000 outstanding. It is expected that the future funding on the loans will be covered by the remaining A-R facility.
The portfolio is selected and monitored by NS Advisors, LLC NStar), as collateral asset manager. NStar, a wholly owned subsidiary of NorthStar, is rated 'CAM2' by Fitch. N-Star VIII 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 January 2012.
Asset Manager:
NorthStar is an internally-managed real estate finance company operating as a REIT that has three primary business lines: real estate debt, real estate security purchasing, and net lease property ownership. The Real Estate Debt business originates, acquires, and structures senior and subordinate debt investments secured primarily by commercial real estate properties. The Real Estate Securities business invests in commercial real estate debt securities, including CMBS, CDOs, REIT unsecured debt, and credit tenant lease loans. The Net Lease Properties business concentrates on the acquisition of real estate properties primarily net leased to corporate tenants. As of March 31, 2008, NS Advisors, LLC had approximately $7.1 billion in assets under management, consisting of real estate securities and real estate debt positions financed through nine issued CDOs.
For more details, refer to Fitch's Asset Manager Profile on NS Advisors, LLC, available on the Fitch Ratings web site at www.fitchratings.com.
Performance Summary:
Since the last review, the Fitch as-is poolwide expected loss (PEL) has increased to 42.000% from 37.625%. As a result, the reinvestment cushion, while remaining adequate, has decreased to 4.375% from 8.750%. This reinvestment cushion is considered below average as compared to other CRE CDOs. The increased PEL is primarily attributable to the addition of six new loans ($210.9 million), which have a higher weighted average expected loss than the seven loans ($205.2 million) that were removed or paid off. Furthermore, of the new loans added, and based on Fitch categorizations, 45% were land and construction loans, which generally carry higher risk than other loan types.
Of the newly added commercial real estate loan collateral, five are whole loans/A-notes (19.6% of the total pool) and one is a highly levered mezzanine loan (3.8% of the total pool), based on Fitch's stressed loan to value (LTV). Based on Fitch categorization, five of these newly added loans are among the top ten assets in the pool. Additionally, since last review, one new CMBS security (2.6%) was also added to the pool.
It should be noted that one whole loan (1.3%) was reported by NStar to be less than 30 days delinquent in May 2008. NStar reports that the loan has since been made current, but Fitch has concerns about the ability of the property to achieve stabilization and as such, has increased the expected loss on this loan.
As of the June 2008 trustee report, the weighted average spread (WAS) was 3.91% and the weighted average coupon (WAC) was 11.95%. Both have increased slightly since the last review and remain well above the covenanted WAS and WAC of 2.35% and 6%, respectively.
The overcollateralization (OC) and interest coverage (IC) ratios of all classes have remained above their covenants, as of the June 2, 2008 trustee report.
Collateral Analysis:
The majority of the collateral continues to be whole loans/A-notes at 71.2%. Most of the whole loans/A-notes are secured by assets in a state of transition. The successful refinancing of these assets is tied to the actualization of the borrower's business plans.
As of the June 2, 2008 trustee report, the CDO is within all property type covenants. The transaction has a significant exposure to non-traditional property types. Based upon Fitch's categorizations, construction loans make up the largest percentage of assets in the pool at 24.3%, closely approaching the maximum covenanted bucket of 25%. Land loans comprise 14.3% of the pool, also closely approaching their maximum covenanted bucket of 15%. The CDO is also within all its geographic covenants with the highest percentage of assets located in California at 14.9%.
The Fitch Loan Diversity Index is 341 compared to the covenant of 455, which represents average diversity as compared to other CRE CDOs.
For a summary of the Fitch Loans of Concern and the 10 largest loans, please refer to the N-Star REL CDO VIII CREL Surveyor Snapshot, which will be available beginning June 24, 2008, on the Fitch web site www.fitchratings.com.
Rating Definitions:
The ratings of the class A 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, K, L, M, and N notes address the likelihood that investors will receive ultimate interest payments, as well as the stated balance of principal, by the legal final maturity date, 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. Fitch will consider placing classes on rating watch negative should the reinvestment cushion fall to 2% or below. Additionally, Fitch performs underlying property value decline stress testing on the CDO's liabilities. To the extent investment grade rated bonds could be impaired by a 25% value decline, classes could also be placed on Rating Watch Negative or downgraded. 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, quarterly, 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
Stacey McGovern, 212-908-0722
Jenny Story, 212-908-0302
or
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Sandro Scenga, 212-908-0278
