Published: March 10, 2010
Fitch Downgrades Guggenheim 2006-3; Assigns Outlooks, LS & Recovery Ratings
NEW YORK - (BUSINESS WIRE) - Fitch Ratings has downgraded eight classes of Guggenheim Structured Real
Estate Funding 2006-3 Ltd./LLC (Guggenheim 2006-3) reflecting Fitch's
base case loss expectation of 34.2%. 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.
Guggenheim 2006-3 is primarily collateralized by commercial real estate
(CRE) debt of which approximately 50% is subordinate debt and 18.4% is
non-senior commercial mortgage backed securities (CMBS) or CRE CDO
tranches. Fitch expects significant losses upon default for the
subordinate positions since they are generally highly leveraged debt
classes. Further, two loans (6.1%) are currently defaulted and two loans
(22.4%) are considered Fitch Loans of Concern. Fitch expects significant
to full losses on the defaulted assets.
Guggenheim 2006-3 is a CRE collateralized debt obligation (CDO) managed
by Guggenheim Structured Real Estate Advisors (GSREA) with approximately
$330 million of collateral. The transaction has a five-year reinvestment
period, which ends in August 2011.
As of the January 2010 trustee report and per Fitch categorizations, the
CDO was substantially invested as follows: CRE subordinate debt (49.6%),
A-notes/whole loans (23.7%), CMBS (13.7%), and CRE CDOs (12.5%).
Following the January 2010 trustee reporting period, the CDO sold two
bank loan positions at a discount and now holds 0.4% in uninvested
principal proceeds. In general, Fitch treats non-senior, single-borrower
CMBS as CRE B-notes.
All overcollateralization (OC) and interest coverage (IC) tests, except
for the class E OC test, are passing, as of the January 2010 trustee
report. However, as a result of the class E OC test failure, interest
and principal proceeds (after class E) are being redirected to redeem
class A-1.
Under Fitch's updated methodology, approximately 55.9% 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
10.2% from the most recent available cash flows (generally from third
quarter 2009). Fitch estimates that recoveries will average 38.8%.
The largest component of Fitch's base case loss expectation is a
mezzanine position (9.1%) on a 1.2 million square foot office tower
located in midtown Manhattan. While performance at the property has been
relatively stable, cash flow is currently unable to support debt
service. Further, the debt service requirement is expected to increase
beginning in late 2010 as the interest only period expires. Fitch
modeled a full loss on this overleveraged position.
The next largest component to Fitch's base case loss expectation is a
highly leveraged whole loan (12.1%) on a full service hotel located one
block east of Chicago's Magnificent Mile. The hotel's most recently
reported trailing twelve month net cash flow is 72% lower than the prior
year. Although the hotel is still covering its debt service payments,
given historically low Libor, and benefits from a new reservation
system, Fitch modeled a term default in its base case scenario.
The third largest component of Fitch's base case loss expectation is a
B-note (14.3%) secured by a portfolio of 105 limited-service hotels
across 26 states. Net cash flow for the portfolio has declined
significantly since last year. Based on current performance, a financial
covenant was triggered and all excess cash flow after debt service is
being swept into a lender controlled reserve account as excess
collateral for the loan. Fitch is modeling a maturity default in its
base case scenario.
This transaction was analyzed according to the 'U.S. CREL CDO
Surveillance Criteria,' 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-1 are generally consistent with the
'A' rating category. The credit characteristics for class A-2 are
generally consistent with the 'BBB' rating category. The credit
characteristics for class B are generally consistent with the 'BB'
rating category. The credit characteristics for class C are generally
consistent with the 'B' rating category.
The ratings for classes D through G are generally based on a
deterministic analysis, which considers Fitch's base case loss
expectation for the pool, defaulted assets and Fitch Loans of Concern
relative to each class's credit enhancement. Based on this analysis, the
rating for classes D and E is consistent with the 'CCC' rating, meaning
default is a real possibility given the credit enhancement to each class
falls below Fitch's base case loss expectation of 34.2%, but above the
expected loss on the defaulted assets and Fitch Loans of Concern. With
respect to classes F and G, although their credit enhancement still
offers cushion to the expected loss from current defaulted assets, their
credit enhancement is below the total expected losses from defaulted
assets and loans of concern. Therefore, the rating of classes F and G is
consistent with the 'CC' rating, meaning that default is probable.
Class S is an interest-only class with a notional balance of $20
million. The interest amount is paid monthly out of CDO cash flows and
is pari passu in priority to class A-1. As such, class S credit
characteristics are consistent with a 'A' rating, and the class is
assigned a Negative Outlook.
Classes S, A through C were each assigned a Negative Outlook reflecting
Fitch's expectation of further negative credit migration of the
underlying collateral. Except for class S, these classes were also
assigned Loss Severity (LS) ratings ranging from 'LS4' to 'LS5'
indicating 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 Outlooks or LS ratings to
classes rated 'CCC' or lower.
Classes D through G 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 (55.9% and 38.8%,
respectively), the 'B' stress USD LIBOR up-stress, and a 24-month
recovery lag. All modeled distributions are discounted at 10% to arrive
at a present value and compared to the class's 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' (Feb. 17, 2010),
available on Fitch's web site at 'www.fitchratings.com'.
Classes D through G are assigned a Recovery Rating of 'RR6' as the
present value of the recoveries in each case is less than 10% of each
class's principal balance.
Fitch has downgraded and assigned LS and RR ratings and Outlooks to the
following classes as indicated:
--$20,000,000 class S to 'A' from 'AAA'; Outlook Negative;
--$115,433,000 class A-1 to 'A/LS4' from 'AAA'; Outlook Negative;
--$22,800,000 class A-2 to 'BBB/LS5' from 'AAA'; Outlook Negative;
--$42,052,000 class B to 'BB/LS5' from 'AA'; Outlook Negative;
--$42,053,000 class C to 'B/LS5' from 'A'; Outlook Negative;
--$24,029,000 class D to 'CCC/RR6' from 'BBB+';
--$28,139,056 class E to 'CCC/RR6' from 'BBB-';
--$18,457,651 class F to 'CC/RR6' from 'B';
--$20,744,926 class G to 'CC/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);
--'U.S. CREL CDO Surveillance Criteria' (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'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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
Jenny Story, 212-908-0302
Steven
Caldwell, 212-908-0565
Karen Trebach, 212-908-0215
or
Media
Relations:
Sandro Scenga, 212-908-0278
Email: sandro.scenga@fitchratings.com
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