Fitch Ratings has taken the following rating actions on the CNL Funding Franchise Loan Transactions as seen below:
CNL Funding 1998-1, LP
--Classes B-1 and B-2 affirmed at 'AA', Outlook Stable;
--Classes C-1 and C-2 affirmed at 'A', Outlook Stable;
--Classes D-1 and D-2 affirmed at 'BB', Outlook Negative;
--Class E-1 downgraded to 'CC/RR4' from 'CCC/RR5';
--Class E-2 downgraded to 'CCC/RR4' from 'B';
--Classes F-1 and F-2 downgraded to 'D/RR6' from 'CC/RR6';
--Classes G-1 and G-2 affirmed at 'D/RR6'.
CNL Funding 1999-1, LP
--Class A-2 affirmed at 'AAA', Outlook Stable;
--Class B affirmed at 'AA', Outlook Negative;
--Class C affirmed at 'A', Outlook Negative;
--Class D affirmed at 'A-', Outlook Negative.
Credit support was found to be consistent with the current ratings for the class B, C, and D notes in CNL 1998-1. While credit enhancement is growing for these classes, the Negative Outlook on the class D notes is reflective of current interest shortfalls which may worsen if additional obligors were to default. The downgrade to the class E notes reflects their susceptibility to writedowns upon the occurrence of future realized losses. The 'D' rating for the class F and G notes reflects the writedowns incurred to date.
In CNL 1999-1, credit support was found to be consistent with the current ratings on all classes of notes. The Negative Outlook for the subordinate notes reflects Fitch's concern regarding low coverage ratios for certain large obligors in the pool. The potential default of these borrowers may expose the subordinate notes to future payment disruptions.
In reviewing the transactions, Fitch took into account analytical considerations outlined in Fitch's 'Global Structured Finance Rating Criteria,' dated Sept. 30, 2009, including asset quality, credit enhancement, financial structure, legal structure, and originator and servicer quality.
Fitch's analysis first incorporated anticipated losses on currently defaulted collateral, if any, given Fitch's recovery expectations. Fitch's recovery expectations are based on historical collateral-specific recoveries experienced in the franchise asset backed securities (ABS) sector since 1994. The resulting anticipated collateral losses were then applied to the transaction structure, enabling Fitch to assess the impact of the expected losses on the securities and available credit enhancement.
Next, to assess the structure's ability to withstand additional loan defaults, Fitch assumed additional borrowers would default based on their current fixed charged coverage ratios (FCCRs). Under specific scenarios for each rating category, borrowers with an FCCR below a defined level were assumed to default and realize a loss in the near future. If a class was able to withstand the assumed defaults without incurring a loss, it was considered to have passed that particular scenario. These FCCR 'hurdles' for the respective scenarios ranged from 1.0 times (x) for the 'B' case to 2.0x for the 'AAA' case. FCCR default levels were based on an analysis of historical franchise loan obligor FCCR data from 2005-2009 and particularly focused on the level of borrower deterioration that occurred in the most recent economic downturn.
Additionally, to review possible concentration risks within the pool, Fitch evaluated the impact of the default of the largest performing obligors. Similar to the analysis detailed above, Fitch applied loss and recovery expectations to the performing obligors based on collateral type and historical recovery performance. The expected loss assumption was then compared to the credit support available to the outstanding notes given Fitch's expected losses on the currently defaulted loans, if any. Consistent with the obligor approach detailed in 'Rating US Equipment Lease and Loan Securitizations,' dated June 16, 2008, Fitch applied losses from the largest performing obligors commensurate with the individual rating category. The number of obligors ranges from 1.5 at 'BB' up to 5-6 at 'AAA'.
Fitch will continue to closely monitor these transactions and may take additional rating actions in the event of changes in performance and credit enhancement measures.
Applicable criteria available on Fitch's web site at www.fitchratings.com:
--'Global Structured Finance Rating Criteria', dated Sept.30, 2009;
--'Criteria for Structured Finance Recovery Ratings', dated Aug. 17, 2009.
Additional information is available at 'www.fitchratings.com'.
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