2008-11-09 04:44:01 -
- Fitch Ratings affirms and assigns Rating Outlooks to Resource Real Estate Funding CDO 2007-1 Ltd./LLC (RRE 2007-1) as follows:
--$180,000,000 class A-1 at 'AAA'; Outlook Stable;
--$50,000,000 class A-1R at 'AAA'; Outlook Stable;
--$57,500,000 class A-2 at 'AAA'; Outlook Stable;
--$22,500,000 class B at 'AA+'; Outlook Stable;
--$7,000,000 class C at 'AA'; Outlook Stable;
--$26,750,000 class D at 'AA-'; Outlook Stable;
--$11,875,000 class E at 'A+'; Outlook Stable;
--$11,875,000 class F at 'A'; Outlook Stable;
--$11,250,000 class G at 'A-'; Outlook Stable;
--$11,250,000 class H at 'BBB+'; Outlook Stable;
--$11,250,000 class J at 'BBB'; Outlook Stable;
--$10,000,000 class K at 'BBB-'; Outlook Stable;
--$18,750,00,000 class L at 'BB'; Outlook Stable;
--$28,750,000 class M at 'B'; Outlook Stable.
Fitch has affirmed and assigned a Stable Outlook to all classes due to the stable performance of the portfolio and adequate cushion in the Poolwide Expected Loss (PEL). The credit characteristics of the loans have improved since the last review as more loans within the pool progressed in the realization of their business plan. This improvement was dampened by the addition of two assets (2.9% of the collateral) contributed to the pool with a higher expected loss than the three loans that paid off or were sold at par and the downgrade of five CMBS bonds (3.9% of the pool) since last review. The PEL was further impacted by the application of the interim surveillance methodology for CMBS assets. The as-is PEL is 27.875% compared to a PEL covenant of 36%, which results in 8.125% of PEL reinvestment cushion.
This transaction remains Under Analysis reflecting the potential for ratings to be impacted by the proposed change to Fitch's rating methodology for CDOs with exposure to all types of structured finance assets, as announced on Oct. 14, 2008.
Transaction Summary:
RRE 2007-1 is a revolving commercial real estate (CRE) cash flow collateralized debt obligation (CDO) that closed on June 26, 2007. It was incorporated to issue $500,000,000 of floating and fixed rate notes and preferred shares. As of the Oct. 21, 2008 trustee report and based on Fitch categorizations, the CDO is substantially invested as follows: commercial mortgage whole loans and A-notes (63.4%), B-notes (11.2%), commercial real estate mezzanine loans (10.5%), commercial mortgage-backed securities (9.3%), and uninvested proceeds (5.5%). The CDO is also permitted to invest in real estate bank loans and REIT debt. As of Oct. 21, 2008, $35.4 million had been advanced from the A-1R class with $14.6 million remaining compared to $9.6 million in future funding commitments remaining on the loans within the transaction.
The portfolio is selected and monitored by Resource Real Estate, Inc. (RRE). RRE 2007-1 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 August 2012.
Performance Summary:
The CDO's PEL covenant varies depending on the in-place weighted average spread (WAS). The transaction has an 8.125% cushion to its maximum PEL covenant of 36%, based on the current WAS of 2.5%.
Since Fitch's last review in March 2008, the as-is PEL decreased to 27.875%. The improvement is attributed to the realization of sponsor business plans. However, this improvement was dampened by the addition of two assets with a higher weighted average expected loss than those repaid or removed and the application of the interim surveillance model for commercial real estate structured securities.
One new loan (1.9%) and one rated security (1%) were added which have a higher weighted average expected loss than the three loans (6.1%) that were repaid or sold. The newly added CRE loan is a mezzanine position secured by an interest in a portfolio of twelve luxury hotels located in resort locales including San Juan, Jamaica and the Florida Keys. The class K tranche of the JPMCC 2006-FL2 (rated 'BBB-' by Fitch) was also added. Two rated securities, WBCMT 2007-C30 Class K (1%) and MLCFC 2007-6 Class H (1%) were both recently downgraded due to their exposure to a loan secured by Stuyvesant Town - Peter Cooper Village. This loan accounts for 19% of the WBCMT transaction and 9.5% of the MLCFC transaction. The loan, which had a 'BBB-' shadow rating at issuance, is no longer considered investment grade.
As of the October 2008 trustee report, the CDO was in compliance with all but two of its reinvestment covenants. The CDO has exceeded the maximum Fitch Loan Diversity Index (LDI) covenant with a current LDI of 350 as compared to the covenanted maximum of 345. Additionally, the CDO has a maximum of 0% below investment grade securities. Currently, the pool has 2.9%. Both the concentration of the assets and the credit quality of the securities are factored into the determination of the pool's as-is PEL.
The WAS has remained consistent at 2.5% as compared to 2.51% at last review, maintaining a slight cushion to its covenant of 2.45%. The weighted average coupon has also remained consistent at 7.27% as compared to 7.28% at last review, also above its covenant of 6.5%. The overcollateralization (OC) and interest coverage (IC) ratios of all classes have remained above their covenants, as of the October 2008 trustee report.
Collateral Analysis:
The majority of the collateral continues to be whole loans and A-notes loans at 63.4%. As of the October 2008 trustee report, the CDO is within all its property type covenants. Based upon Fitch categorizations, loans on multifamily and office properties, representing 23.7% and 18.7% of the portfolio respectively, remain as the largest property type categories. There is one loan representing 2% of the pool that is backed by a condominium conversion. The CDO is also within all of its geographic location covenants with the highest percentage of assets located in California at 28.6% and New York at 14% of the portfolio.
The Fitch Loan Diversity Index (LDI) increased to 350 from 343 at last review, which represents average diversity as compared to other CRE CDOs. The LDI covenant is 345 and no single obligor or group of affiliated obligors may represent more than 8% of the portfolio. Based upon the trustee report, the largest obligor currently represents 6.2% of the transaction.
For a summary of the Fitch Loans of Concern and the 10 largest assets, please refer to the Resource Real Estate Funding CDO 2007-1 Surveyor Snapshot on the Fitch Ratings web site, which will be available beginning Nov. 12, 2008.
Collateral Asset Manager:
Resource Real Estate Inc. (RRE and affiliates) originates, acquires, invests in, and manages a diversified portfolio of commercial real estate loans (CRELs) and securities, including whole loans, B notes, mezzanine loans, and commercial mortgage-backed securities (CMBS) investments on behalf of Resource Capital Corp. (RCC; NYSE: RSO), an externally managed real estate investment trust. RRE has $1.8 billion of assets under management. RRE's business lines also include the resolution of a portfolio of one-off restructured commercial mortgages acquired between 1991 and 1998, the sponsorships of private equity funds that invest in stable multifamily properties on a nationwide basis, and the structuring and management of tenant-in-common investment interests in real property.
RRE is a wholly owned subsidiary of Resource America, Inc. (RAI). RAI is a publicly traded specialized asset management company managing $18.8 billion as of June 30, 2008; this includes 38 collateralized debt obligations (CDOs) within its core competency sectors: financial institutions, real estate, asset-backed securities, syndicated loans, and leasing.
For more details, refer to Fitch's Asset Manager Profile on Resource Real Estate Inc., available on the Fitch Ratings web site at www.fitchratings.com.
Ongoing Surveillance:
Upgrades during the reinvestment period are unlikely given the pool could still migrate to the PEL covenant. Fitch will consider assigning Negative Outlooks or 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 assigned Negative Outlooks, 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 pool-wide 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, quarterly, or semi-annually.
The ratings of the class A-1, A-1R, A-2, B, C, and D notes address the likelihood that investors will receive full and timely payments of interest, as per the governing documents, as well as the aggregate outstanding amount of principal by the stated maturity date. The ratings of the class E, F, G, H, J, K, L, and M notes address the likelihood that investors will receive ultimate interest and deferred interest payments, as per the governing documents, as well as the aggregate outstanding amount of principal by the stated maturity date.
Fitch introduced Rating Outlooks for U.S. structured finance in September 2008 to provide investors with forward-looking analysis for a structured finance tranche's credit performance. Fitch's Rating Outlook indicates the likely direction of any rating change over a one- to two-year period and may be Positive, Negative, Stable or, occasionally, Evolving. More information is available in Fitch's Sept. 11, 2008 report 'Introducing Rating Outlooks for U.S. Structured Finance Bonds'.
For CREL CDOs, a Negative Outlook may be assigned to any class that fails Fitch's stress testing. Fitch's stress testing assumes various property value declines for each rating stress. Based on these results, any loan whose loan-to-value ratio is greater than 100% is assumed to default with the recovery calculated based on the property value in that rating stress.
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
Gregg Katz, +1-312-606-2343 (Chicago)
Karen Trebach, +1-212-908-0215 (New York)
Sandro Scenga, +1-212-908-0278
(Media Relations, New York)
sandro.scenga@fitchratings.com 
