Fitch Ratings has downgraded all classes of Arbor Realty Mortgage Securities Series 2005-1 Ltd./LLC (ARMSS 2005-1) reflecting Fitch's base case loss expectation of 40%. Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. A detailed list of rating actions follows at the end of this release.
ARMSS 2005-1 is primarily collateralized by a combination of senior (47%) and subordinate commercial real estate (CRE) debt (48%). Fitch expects significant losses upon default for these assets since they are generally highly leveraged. Further, three loans (8.4%) are currently defaulted. Fitch expects significant to full losses on these loan interests.
ARMSS 2005-1 is a $470 million CRE collateralized debt obligation (CDO) managed by Arbor Realty Trust, Inc. The transaction has a five-year reinvestment period that ends in April 2011. As of the October 2009 trustee report and per Fitch categorizations, the CDO was substantially invested in 33 assets as follows: multifamily (39.5%), office (29.7%), hotel (4.7%), land (13.3%), mixed use (1.9%), CRE CDOs (5%), and uninvested proceeds (1%). All overcollateralization (OC) and interest coverage ratios are currently in compliance.
Under Fitch's updated methodology, approximately 67.6% 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 9.7% from either trailing 12-month (T12) third or fourth quarter 2008 or T12 first quarter 2009 cash flows. Fitch estimates that average recoveries will be 40.8% as many of the assets are highly leveraged and subordinate in nature.
The largest component of Fitch's base case loss expectation is a defaulted mezzanine loan secured by an interest in a five property multifamily portfolio located in Phoenix, Arizona. The sponsorship is currently in Chapter 11 bankruptcy, and the loan is over 90+ days delinquent. A full loss on the position is expected.
The next largest component of Fitch's base case loss expectation is a pari passu A-note secured by a 116,000 square foot (sf) condominium interest in four floors of an office building located in midtown Manhattan. The space is occupied by four full floor tenants at below market average rents. Cash flow from the property is insufficient to support debt service. While Fitch applied no haircut to property cash flow in the base case stress scenario due to the below market rents and stability of the tenant base, the loan is still expected to suffer a term default in the 'B' stress.
The third largest component of Fitch's base case loss expectation consists of two CMBS rake bonds secured by a subordinate interest in a 1,090,000 sf office property located in downtown Manhattan. The property is expected to experience leasing challenges in the next few years due to significant rollover risk associated with the two largest tenants. The loan matures in November 2009, and the borrower has indicated that default is imminent. Fitch assumed 100% probability of default for this loan.
This transaction was analyzed according to the 'U.S. CREL CDO Surveillance Criteria', which applies stresses to property cash flows and debt service coverage ratio (DSCR) tests to project future default levels for the underlying portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. The default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under the various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. Based on this analysis, the class A and B notes' breakeven rates are generally consistent with the 'BBB' rating category; the class B through E notes' breakeven rates are generally consistent with the 'BB' rating category; and the class F through H notes' breakeven rates are generally consistent with the 'B' rating category.
The class A through H notes were each assigned a Negative Rating Outlook reflecting Fitch's expectation of further negative credit migration of the underlying collateral. These classes were also assigned Loss Severity (LS) ratings ranging from 'LS4' to 'LS5'. The LS ratings indicate each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the expected loss for the collateral under the 'B' stress. LS ratings should always be considered in conjunction with probability of default indicated by a class' long-term credit rating.
Fitch has downgraded, assigned Loss Severity (LS) ratings, and Rating Outlooks to the classes as follows:
--$161,500,000 class A-1 to 'BBB/LS4' from 'AAA'; Outlook Negative;
--$40,375,000 class A-2 to 'BBB/LS5' from 'AAA'; Outlook Negative;
--$57,000,000 class B to 'BB/LS5' from 'AA'; Outlook Negative;
--$24,291,159 class C to 'BB/LS5' from 'A+'; Outlook Negative;
--$8,356,159 class D to 'BB/LS5' from 'A'; Outlook Negative;
--$7,384,512 class E to 'BB/LS5' from 'A-'; Outlook Negative;
--$14,380,366 class F to 'B/LS5' from 'BBB+'; Outlook Negative;
--$10,688,110 class G to 'B/LS5' from 'BBB'; Outlook Negative;
--$14,574,695 class H to 'B/LS5' from 'BBB-'; Outlook Negative.
Additionally, all classes are removed from Rating Watch Negative.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Global Structured Finance Rating Criteria' (Sept. 30, 2009);
--'U.S. CREL CDO Surveillance Criteria' (Nov. 9, 2009);
--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009);
--'Global Criteria for Cash Flow Analysis in CDOs' (Nov. 9, 2009).
Additional information is available at 'www.fitchratings.com'.
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