Fitch Downgrades Sandelman CRE CDO

2009-01-22 01:15:03 -

Fitch Ratings has downgraded Sandelman Realty CRE CDO I (Sandelman CRE CDO I) as follows:


--$250,000,000 class A-1 to 'AA' from 'AAA'; Outlook revised to Stable from Negative;


--$61,000,000 class A-2 to 'A' from 'AAA'; Outlook Negative;


--$37,250,000 class B to 'BBB+' from 'AA'; Outlook Negative;


--$26,000,000 class C to 'BBB' from 'A+'; Outlook Negative;


--$11,250,000 class D to 'BBB-' from 'A'; Outlook Negative;


--$11,750,000 class E to 'BB+' from 'A-'; Outlook Negative;


--$13,000,000 class F to 'BB' from 'BBB+'; Outlook Negative;


--$11,750,000 class G to 'BB-' from 'BBB'; Outlook Negative;


--$9,249,000 class H to 'B+' from 'BBB-'; Outlook Negative.


The following class is affirmed:


--$2,333,333 class S at 'AAA'; Outlook revised to Stable from Negative;


The rating actions above reflect Fitch's view on the credit risk of the rated tranches following the release of its new Structured Finance (SF) CDO rating criteria and credit deterioration to the collateral pool that has occurred since last review. Approximately 34.5% of Sandelman CRE CDO I is backed by rated securities that are now analyzed with the updated Portfolio Credit Model (PCM), which incorporates analytics for SF assets including CMBS, and corporate debt assets including REIT debt and Real Estate Bank Loans. Fitch has revised the Outlook for classes S and A-1 to Stable from Negative, while the Outlook for classes A-2 through H remains Negative due to stress test failures.


Due to the application of the new SF CDO rating criteria as well as portfolio credit deterioration, the poolwide expected loss (PEL) increased to 47.00% from 30.75% as of October 2008. This increase results in a negative reinvestment cushion of -14.00% to the transaction's current PEL covenant of 33.00%. The current PEL covenant is based upon the in-place weighted average spread (WAS) of 2.23%, according to the transaction's WAS/PEL matrix. While the primary driver of this increased PEL is Fitch's updated criteria for SF assets, the transaction also experienced a decrease in overall credit quality due to the default of a commercial real estate A-note (0.93%) and concern over another A-note (10.1%) backed by a similar property type; the downgrade of two CMBS bonds (1.1%) by two notches each; and the downgrade of a real estate bank loan (2.3%) to 'CC', Rating Watch Negative from 'BB'.


The defaulted loan is collateralized by the majority of the Yellowstone Club project, a private, 13,775 acre master-planned residential and recreational community/retreat located in Madison County, Montana. The sponsor filed for Chapter 11 bankruptcy protection and has been delinquent in its loan payments since October 2008. According to the asset manager, the project secured debtor-in-possession financing from an outside investor, and the sponsor is currently formulating a workout strategy. This loan was modeled assuming a 100% probability of default. Additionally, this loan's default highlighted the increased risk inherent in the CDO's largest asset, Spanish Peaks (10.1%), an A-note, which is secured by similar collateral located proximate to Yellowstone Club.


The portfolio is selected and monitored by Sandelman Partners, LP, which launched its multi-strategy master and feeder funds in July 2005. Since the transaction's closing in March 2007, the firm has restructured its investment management team, which has resulted in significant staffing turnover in the group that oversees this CDO.


Fitch will continue to monitor the transaction on an ongoing basis. For more information on the transaction, please refer to the press release, 'Fitch Affirms Sandelman Realty CRE CDO I; Assigns Outlooks' dated Oct 15, 2008. For a summary of the Fitch Assets of Concern and the 10 largest assets, please refer to the transaction's Surveyor Snapshot on the Fitch Ratings web site, which will be available starting Jan. 22, 2009.


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, New York

Stacey McGovern, 212-908-0722

Karen Trebach, 212-908-0215

or

Media Relations:

Sandro Scenga, 212-908-0278

Email: sandro.scenga@fitchratings.com