Fitch Ratings has downgraded all classes of Wachovia CRE CDO 2006-1, Ltd. (Wachovia CRE CDO 2006-1) reflecting Fitch's base case loss expectation of 24.1%. 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.
The transaction is primarily collateralized by senior commercial real estate (CRE) debt: 62.3% of the collateral is either whole loans or A-notes, per Fitch categorizations. Fitch expects lower than average losses upon default for the assets due to the high concentration of senior loans, which generally experience better recoveries than subordinate debt. Eight loans (10.7%) are currently defaulted while nine other loan interests (7.4%) are considered Fitch Loans of Concern. Fitch expects significant losses on the defaulted assets and Fitch Loans of Concern.
Wachovia CRE CDO 2006-1 is a $1.3 billion CRE collateralized debt obligation (CDO) managed by Structured Asset Investors, LLC with Wells Fargo Bank, N.A., successor-by-merger to Wachovia Bank, N.A., as sub-advisor to the Collateral Manager. The transaction has a five-year reinvestment period that ends in September 2011. As of the April 2010 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: CRE whole loans/A-notes (62.3%), B-notes (5.5%), mezzanine debt (4%), commercial mortgage-backed securities (CMBS; 5%), real estate investment trust (REIT) debt (1%), and a substantial amount of cash (22.2%). For modeling purposes, Fitch conservatively assumed that the cash would be invested in like-kind collateral with the same loss profile as the current portfolio assets.
As of the April 2010 trustee report, the F/G/H par value test was failing by 1.7%. Further, the C/D/E test has only a tight cushion remaining of 0.9%. Should any test be failing at the next payment date in June, interest proceeds and principal will be redirected to redeem the class A-1 and A-2 notes until the test is cured.
Under Fitch's updated methodology, approximately 53.9% 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 12.3% from generally fourth quarter 2009 cash flows. Fitch estimates that recoveries will average 55.2% in this scenario.
The largest component of Fitch's base case loss expectation is a defaulted whole loan (2.4% of the portfolio) secured by a 506,000 square foot industrial/flex property located in Berkeley, California. The property was master leased to U.C. Berkeley; however, its lease matured in April 2010 and the tenant has vacated the majority of the property. Fitch modeled a significant loss on this loan in its base case scenario.
The next largest component of Fitch's base case loss expectation is a defaulted whole loan (3.3% of the portfolio) secured by land located in South Gate, California. The original business plan to develop a retail center on the site has stalled and the property is now in foreclosure. Fitch modeled a significant loss on this loan in its base case scenario.
The third largest component of Fitch's base case loss expectation is a defaulted A-note (2.4% of the portfolio) secured by approximately 2,700 acres located on the North Shore of Oahu. The original business plan to complete entitlements sufficient to subdivide the property into as many as 80 residential lots has stalled. Fitch modeled a significant loss on this loan interest in its base case scenario.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs', which applies stresses to property cash flows and uses 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 credit characteristics for class A-2A are generally consistent with the 'A' rating category while the credit characteristics for class A-1A, A-1B and A-2B are generally consistent with the 'BB' rating category.
The ratings for classes B through O are based on a deterministic analysis, which 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. Based on this analysis, classes B through H are consistent with the 'CCC' rating category, meaning default is a real possibility. Fitch's base case loss expectation of 24.1% exceeds these classes' respective current credit enhancement levels.
The ratings for classes J though L are deemed to be consistent with the 'CC' rating category, meaning default appears probable given that losses expected on the current defaulted assets and Fitch Loans of Concern in the pool generally exceed these classes' respective credit enhancement levels. The ratings for classes M through O are deemed to be consistent with the 'C' rating category, meaning Fitch considers default to be inevitable based on Fitch's base case expected losses from defaulted loans.
Classes A-1A and A-2A were assigned a Stable Rating Outlook reflecting their senior positions in the capital stack and the significant cash balance in the principal collection account. Classes A-1B and A-2B were 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 of 'LS3' for class A-1A, A-2A, and A-2B and 'LS5' for class A-1B. 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 does not assign Rating Outlooks or LS ratings to classes rated 'CCC' or lower.
Classes B through O were assigned Recovery Ratings (RR) to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities. Recovery Ratings are calculated using Fitch's cash flow model, and incorporate Fitch's current 'B' stress expectation for default and recovery rates (53.9% and 55.2%, respectively), the 'B' stress USD LIBOR up-stress, and a 24-month recovery lag. Due to the significant cash exposure in the portfolio, Fitch scaled down the size of the outstanding liabilities (pro rata) for modeling purposes, which effectively reflects reinvestment in like-kind collateral. All modeled distributions are discounted at 10% to arrive at a present value and compared to the class' tranche size to determine a Recovery Rating. The assumptions for the 'B' stress USD LIBOR up-stress scenario are found in Fitch's report, 'Criteria for Interest Rate Stresses in Structured Finance Transactions' (April 26, 2010), available on Fitch's web site at 'www.fitchratings.com'.
The assignment of 'RR3' to class B reflects modeled recoveries of 59% of its outstanding balance. The expected recovery proceeds are broken down as follows:
--Modeled class size: $41.4 million;
--Present value of expected principal recoveries ($15.9 million);
--Present value of expected interest payments ($8.3 million);
--Total present value of recoveries ($24.2 million);
--Sum of undiscounted recoveries ($45.8 million).
Classes C through O are assigned a Recovery Rating of 'RR6' as the present value of the recoveries in each case is less than 10% of each class' principal balance.
Fitch has downgraded and assigned Rating Outlooks, LS and RRs to the following classes, as indicated:
--$616,500,000 class A-1A notes downgrade to 'BB/LS3' from 'AAA'; Outlook Stable;
--$68,500,000 class A-1B notes downgrade to 'BB/LS5' from 'AAA'; Outlook Negative;
--$145,000,000 class A2A notes downgrade to 'A/LS3' from 'AAA'; Outlook Stable;
--$145,000,000 class A-2B notes downgrade to 'BB/LS3' from 'AAA'; Outlook Negative;
--$53,300,000 class B notes downgrade to 'CCC/RR3' from 'AA';
--$39,000,000 class C notes downgrade to 'CCC/RR6' from 'A+';
--$12,350,000 class D notes downgrade to 'CCC/RR6' from 'A';
--$13,650,000 class E notes downgrade to 'CCC/RR6' from 'A-';
--$24,700,000 class F notes downgrade to 'CCC/RR6' from 'BBB+';
--$16,900,000 class G notes downgrade to 'CCC/RR6' from 'BBB';
--$35,100,000 class H notes downgrade to 'CCC/RR6' from 'BBB-';
--$13,000,000 class J notes downgrade to 'CC/RR6' from 'B';
--$14,950,000 class K notes downgrade to 'CC/RR6' from 'B';
--$9,100,000 class L notes downgrade to 'CC/RR6' from 'B';
--$34,450,000 class M notes downgrade to 'C/RR6' from 'B';
--$16,250,000 class N notes downgrade to 'C/RR6' from 'B';
--$6,500,000 class O notes downgrade to 'C/RR6' from 'B-'.
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);
--'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs' (Nov. 9, 2009);
--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009);
--'Criteria for Structure Finance Recovery Ratings' (Aug. 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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