NEW YORK - (Business Wire) Fitch Ratings downgrades CBRE Realty Finance CDO 2007-1 Ltd./LLC (CBRE 07-1) as follows:
-- $17,000,000 class J to 'B+' from 'BB+';
-- $15,500,000 class K to 'B' from 'BB';
-- $9,500,000 class L to 'B-' from 'BB-'.
The following classes are affirmed by Fitch:
-- $450,000,000 class A-1 at 'AAA';
-- $50,000,000 class A-1R at 'AAA';
-- $125,000,000 class A-2 at 'AAA';
-- $25,000,000 class A-2R at 'AAA';
-- $86,500,000 class B at 'AA';
-- $48,000,000 class C at 'A+';
-- $19,000,000 class D at 'A';
-- $15,000,000 class E at 'A-';
-- $22,500,000 class F at 'BBB+';
-- $15,000,000 class G at 'BBB';
-- $24,000,000 class H at 'BBB-'.
Fitch conducted this review as three assets are either defaulted or have been deemed distressed since the last review (4.9% of the portfolio). The actions are based on Fitch's expected loss assumptions regarding the distressed assets, the transaction breaching its poolwide expected loss (PEL) covenant, and failure of Fitch's property value decline stress scenarios. Additionally, approximately 4.5% of the portfolio has turned over since Fitch's last review.
Deal Summary:
CBRE Realty Finance CDO 2007-1 Ltd/LLC (CBRE 07-1) is a $1,000,000,000 revolving commercial real estate (CRE) collateralized debt obligation (CDO) that closed on April 2, 2007. As of the Aug. 29, 2008 trustee report and based on Fitch categorizations, the CDO was substantially invested as follows: commercial mortgage whole loans/A-notes (55.8%), CMBS (19.8%), B-notes (12.9%), commercial real estate mezzanine loans (11.1%), and CRE CDOs (0.5%). The CDO is also permitted to invest in synthetically referenced assets, real estate bank loans, and REIT debt. As of Aug. 29, 2008, $41.7 million had been advanced from the A-1R class with $9.3 million remaining. No funds have been advanced from the $25 million A-2R class. While the revolving classes are not fully drawn, they are fully committed to cover future funding obligations of commercial real estate loans (CREL) currently in the portfolio.
The portfolio is selected and monitored by CBRE Realty Finance Management, LLC (CBRE). CBRE Realty Finance CDO 2007-1 Ltd/LLC 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 in April 2012.
Although the CDO's poolwide expected loss covenant varies depending on the in-place weighted average spread (WAS), the collateral manager has the option of contributing additional equity to the transaction, which allows for additional credit migration beyond the WAS/PEL Matrix.
Performance Summary:
CBRE 07-1 became effective on Jan. 2, 2008. Since Fitch's last review in January 2008, the as-is poolwide expected loss (PEL) has increased to 34.375%. Additionally, the portfolio's WAS decreased, lowering the PEL covenant to 32.875% from 33.875%, according to the transaction's WAS/PEL matrix. The higher PEL combined with the lower PEL covenant contributed to the negative reinvestment cushion of -1.500%.
Since January 2008, two CREL positions (4.1%) have been added to the pool while one (2.0%) paid off and another, a mezzanine loan (2.5%) on a hotel property, was repurchased. One asset (1.0%) defaulted, and another (2.5%) was deemed distressed. The weighted average expected loss of the CREL assets increased to 34.375% from 30.250% at last review, and from 26.500% at the transaction's close. The primary reason for the increased expected loss is due to the two newly defaulted/distressed loans, increasing the total number of distressed loans to three.
The first loan of concern is a mezzanine loan (2.5%) on Riverton Apartments, a multifamily property located in the Harlem submarket of New York City. While both August and September interest payments were made, there is concern about their ability to make future payments. The distressed condition resulted from an underperforming business plan, which involved the conversion of rent stabilized units to market rate, and reduction of the interest reserve. The borrower is currently working with the special servicer of the A-note on potential work-out strategies. Given its deeply subordinated position in the capital stack, Fitch assumed 100% expected loss on this loan.
The second loan of concern is a whole loan (1.0%) for a motorcycling recreational facility located in Hartford, Connecticut which defaulted. Since defaulting on the loan, the borrower has come out-of-pocket to bring the interest payments current, and has also paid down the loan balance by $1.5 million. While the borrower also replenished the interest reserve with $500,000, it is only expected to cover interest shortfalls through October 2008. The borrower is currently marketing the property for sale.
The last loan of concern (1.4%) is a defaulted whole loan on an office property located in Schaumberg, Illinois, which remains in default since last review. CBRE continues to work through the foreclosure process, which it expects to resolve by year-end 2008.
In addition to the defaulted assets mentioned above, the credit quality of the remaining CREL assets declined on average. Since last review, the weighted average Fitch stressed debt service coverage ratio (DSCR) on stabilized net cash flow decreased to 0.91 times (x) from 0.96x, while the weighted average Fitch stressed loan-to-value (LTV) increased to 129% from 125%. Over the same period, Fitch's weighted average volatility score increased to 6 from 5. Fitch's volatility score is a measure of the viability of a property's business plan, and considers change from as-is to stabilized net cash flow, time to stabilization, market, and sub-market factors. Volatility scores range from 1 to 10, where 10 is considered the most volatile.
As of the August trustee report, the CDO was in compliance with all its reinvestment covenants. The WAS has decreased to 2.55% from 2.90% at last review. The weighted average coupon (WAC) remains at 6.30%. The decreased WAS causes the transaction to reference a lower PEL covenant (32.875%) than at last review (33.875%), according to the transaction's WAS/PEL matrix.
The overcollateralization (OC) and interest coverage (IC) ratios of all classes have remained above their covenants as of the Aug. 29 trustee report. The class F/G/H OC test result (110.89%) is tight compared to its covenant (109.66%) as a result of the loan defaults. The OC test excludes one of the distressed assets (1%) as this loan has since been brought current; however, this asset continues to be a Fitch loan of concern. Should the OC ratio decline below 109.66%, interest will be diverted from the below investment grade notes and preferred shares in order to redeem the class A-1 notes and subordinate classes sequentially until the OC test is satisfied.
Collateral Analysis:
The portfolio is comprised of 80% CREL and 20% rated securities. As of the August trustee report and per Fitch categorizations, the CDO is within all its property type covenants. Office loans have the highest concentration at 43.0%. The CDO is also within all its geographic covenants with California representing the highest concentration at 25.1%. Since last review, whole loans continue to be the largest asset type concentration in the pool at 55.8%, increasing from 52.6% at last review. The concentration of B-notes increased to 12.9% from 11.0%, while mezzanine loans decreased to 11.1% from 15.6%.
The Fitch Loan Diversity Index increased slightly to 252 from 251 at last review, compared to the covenant of 268. The CDO's LDI represents better diversity as compared to other CRE CDOs.
For a summary of CDO collateral, including the 10 largest assets, please refer to the CBRE Realty Finance CDO 2007-1 CREL Surveyor Snapshot, which will be available on the Fitch web site beginning Oct. 8, 2008.
Asset Manager:
CBRE Realty Finance Management, LLC (CBRF) was established in June 2005 and serves as collateral manager for CBRE Realty Finance CDO 2006-1, Ltd. and CBRE Realty Finance CDO 2007-1 Ltd. CBRF is a direct subsidiary of CBRE|Melody & Co., which is in turn a subsidiary of CB Richard Ellis (NYSE: CBG). In addition to serving as a collateralized debt obligation (CDO) manager, CBRF is also the external manager for CBRE Realty Finance, Inc., a publicly traded real estate investment trust (REIT) (NYSE: CBF).
For more details, please refer to Fitch's Asset Manager Profile on CBRE Realty Finance Management, LLC, available on the Fitch web site at www.fitchratings.com.
Rating Definitions:
The ratings of the class A-1, A-1R, A-2 and A-2R notes (together, the class A notes) and B notes address the likelihood that investors will receive full and timely payments of interest, 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 and L notes address the likelihood that investors will receive ultimate interest payments, as well as the aggregate outstanding amount of principal, by the stated maturity date, per the governing documents.
Ongoing Surveillance:
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% property 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, 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
Sandro Scenga, +1-212-908-0278 (Media Relations)
