Fitch Downgrades Capital Trust 2004-1; Revises Outlooks; Assigns LS and Recovery Ratings

2009-11-10 23:19:03 -

Fitch Ratings downgrades all classes of Capital Trust RE CDO 2004-1 (CT 2004-1) reflecting Fitch's base case loss expectation of 38.5%. 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.

CT 2004-1 is mostly collateralized by subordinate commercial real estate (CRE)

debt (80% of total collateral is either B-notes or mezzanine loans). Fitch expects significant losses upon default for these assets since they are generally highly leveraged, thin debt classes. Further, six assets (22.6%) are currently defaulted, five (19%) of which are B-notes or mezzanine loans, and one (3.6%) of which is a real estate bank loan. Fitch expects nearly 100% loss on these defaulted assets.

Both the A/B and the C/D/E overcollateralization (OC) tests have breached their respective covenants. As a result, classes C and below are no longer receiving any proceeds as of the October 2009 trustee report. All excess interest proceeds (after class B) and any principal proceeds are currently being redirected to redeem the class A-1 notes.
Given its expectations of further defaults, Fitch considers it unlikely that classes below the C/D/E OC test will receive any further proceeds over the life of the transaction. Additionally, Fitch expects that classes C through E will receive minimal to no proceeds over the remaining life of the transaction.

CT 2004-1 is a $314.1 million CRE collateralized debt obligation (CDO) managed by CT Investment Management Co., LLC (CTIMCO). The transaction had a five-year reinvestment period which ended July 2008. As of the October 2009 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: B-notes (55.3%), CRE mezzanine loans (24.8%), commercial mortgage-backed securities (CMBS; 8.9%), a defeased CRE loan (7.3%), and a real estate bank loan (3.6%).

Under Fitch's updated methodology, approximately 43.6% 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 12.6% from first quarter 2009 trailing-12-month cash flows. Fitch estimates that average recoveries will be low at 11.7%, due to the highly leveraged and subordinate nature of the assets.

The largest component of Fitch's base case loss expectation is a B-note (7.7%) that matured in October 2009 and was not repaid. The loan is secured by a 374,000 square foot (SF) office park located in Menlo Park, California. The property is currently approximately 76% occupied; additionally, the leases of its two largest tenants (58% of net rentable SF), which are significantly above market, expire in early 2010.

The next largest component of Fitch's base case loss expectation is a term loan (4.7%) that became delinquent in July 2009. The loan is secured by first mortgages on three office properties and equity interests in another 18 office properties. The portfolio is located mostly in Washington, D.C., and partially in northern Virginia and suburban Maryland. While performance of the portfolio has been stable, the sponsor has stopped paying debt service and is seeking to restructure the highly leveraged loan.

The third largest component of Fitch's base case loss expectation is a B-note (3.3%) that became delinquent in July 2009. The loan is secured by three hotel/casinos. Two of the hotel/casinos are located in Mississippi, while the other is in Atlantic City, New Jersey. The Atlantic City hotel/casino has drastically underperformed expectations, causing the overall portfolio cash flow to decline significantly below debt service.

This transaction was analyzed according to the 'U.S. CREL CDO Surveillance Criteria', which applies stresses to property cash flows and uses 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 class A-1 notes' breakeven rates are generally consistent with the 'BBB' rating category; the class A-2 notes' breakeven rates are generally consistent with the 'BB' rating category; and the class B notes' breakeven rates are generally consistent with the 'B' rating category.

Ratings for classes C through G are generally based on a deterministic analysis, which considers the current percentage of defaulted assets factoring in anticipated recoveries relative to the credit enhancement of the respective class, as well as the likelihood for OC tests to cure.

Based on this analysis, class C is consistent with the 'CC' rating category, meaning default is probable given current defaulted assets of 22.6% and Fitch's base case loss expectation of 38.5%. Ratings for classes D through G are deemed to be consistent with the 'C' rating category, as Fitch considers a default on these classes to be inevitable. The current percentage of defaulted assets, factoring in anticipated recoveries, either exceeds or is very close to each of these classes' respective credit enhancement.

The class A-1 through B notes were each 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 ranging from 'LS4' to 'LS5'. 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 C through G were assigned Recovery Ratings (RR) to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities. The Recovery Ratings are calculated using Fitch's cash flow model, and incorporate Fitch's current 'B' stress expectation for default and recovery rates (43.6% and 11.7%, respectively), the 'B' stress USD LIBOR up stress, and a 24-month recovery lag to determine the present value of all future proceeds to that class. All modeled distributions are discounted at 10% to arrive at a present value and compared to the classes' tranche size to determine a Recovery Rating. The assumptions for the 'B' stress USD LIBOR up stress scenario are found in the report, 'Fitch USD LIBOR Stresses' (July 31, 2009), available on Fitch's web site at ' www.fitchratings.com : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. '.

The assignment of 'RR4' to class C reflects modeled recoveries of 35% of its outstanding balance. The expected recovery proceeds are broken down as follows.

--Present value of expected principal recoveries ($3.3 million);

--Present value of expected interest payments ($3.5 million);

--Total present value of recoveries ($6.8 million);

--Sum of undiscounted recoveries ($12.5 million).

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 the principal balance of the security.

Fitch has downgraded, assigned Loss Severity (LS) and Recovery (RR) ratings, and assigned Rating Outlooks as indicated to the following classes.

--$90,508,896 class A-1 to 'BBB' from 'AAA'; assigned 'LS4'; Outlook Negative;

--$79,398,000 class A-2 to 'BB' from 'AA'; assigned 'LS4'; Outlook Negative;

--$29,167,000 class B to 'B' from 'BBB'; assigned 'LS5'; Outlook Negative;

--$19,444,000 class C to 'CC' from 'B'; assigned 'RR4';

--$21,065,000 class D to 'C' from 'B'; assigned 'RR6';

--$3,241,000 class E to 'C' from 'B'; assigned 'RR6';

--$6,481,000 class F to 'C from 'CCC'; assigned 'RR6';

--$16,204,000 class G to 'C' from 'CCC'; assigned 'RR6'.

Additionally, classes A-1 through E are removed from Rating Watch Negative.

These rating actions reflect the application of Fitch's current criteria which are available at ' www.fitchratings.com : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. ' 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 : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. '.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS : cts.businesswire.com/ct/CT?id=smartlink&url=HTTP%3A%2F%2FFIT .. .

IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2FWWW .. '.

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