Fitch Affirms Newcastle CDO VIII
NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed all classes of Newcastle CDO VIII 1, Ltd./Newcastle CDO VIII 2, Ltd./ Newcastle CDO VIII, LLC (collectively, Newcastle CDO VIII) reflecting Fitch's base case loss expectation of 36.5%, a slight increase from 36%, at the last rating action. 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.
The collateralized debt obligation (CDO) exited its reinvestment period in November 2011. As of the January 2012 trustee report, the transaction has paid down by $5.2 million. Since last rating action, 11 assets were removed from the pool and nine assets were added. Realized losses since Fitch's last rating action were approximately $20 million, while par building was approximately $8 million. In addition, the CDO is holding approximately $1.2 million in principal cash.
As of the January 2012 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: commercial mortgage-backed securities (CMBS; 15.4%), real estate bank loans and corporate debt (22.4%), commercial real estate (CRE) mezzanine debt (37.3%), CRE CDOs (10%), residential mortgage-backed securities (RMBS; 8.5%), B notes (6.3%), and principal cash (0.1%). The loan portion of the collateral (43.6%) is entirely subordinate debt (either B-notes or mezzanine debt). Fitch modeled significant losses upon default for these assets since they are generally highly leveraged debt classes.
Four assets (5.6%) were reported as defaulted or delinquent, including one B-note (2.7%), two CMBS bonds (2.4%), and one RMBS bond (0.5%). Fitch modeled significant to full losses on these assets. Fitch has also designated one mezzanine loan (2.5%) as a Fitch Loan of Concern.
Newcastle CDO VIII was issued as a $950 million CRE CDO managed by Newcastle Investment Corp. In April and September 2009, notes with a face amount totaling $80,187,500 were surrendered to the trustee for cancellation. As of the January 2012 trustee report, all overcollateralization and interest coverage ratios were in compliance.
Under Fitch's methodology, approximately 61.4% 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 5% from, generally, trailing 12-month second and third quarter 2011.
The largest component of Fitch's base case loss expectation is a mezzanine loan (4.1%) secured by interests in a portfolio of 12 full service hotels totaling 4,718 keys located in Puerto Rico, Jamaica, and Florida. Performance remains significantly below expectations at issuance. Fitch modeled a term default and full loss on this overleveraged position in its base case scenario.
The next largest component of Fitch's base case loss expectation is a mezzanine loan (1.8%) secured by an interest in a 424-room full-service hotel located in Boston, MA. Fitch modeled a term default and full loss on this overleveraged position in its base case scenario.
The third largest component of Fitch's base case loss expectation is a mezzanine loan (3.8%) secured by interests in a portfolio of 13 full service hotel properties located across 10 states and Canada. The hotels are under the Westin, Hilton, Sheraton, and Marriott flags. Fitch modeled a term default and full loss on this overleveraged position in its base case scenario.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions', which applies stresses to property cash flows and debt service coverage ratio (DSCR) tests to project future default levels for the underlying portfolio. Recoveries for the loan assets are based on stressed cash flows and Fitch's long-term capitalization rates. The structured finance bonds, real estate bank loans and corporate debt portion of the collateral were analyzed in the Portfolio Credit Model according to the 'Global Rating Criteria for Structured Finance CDOs'. The combined 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 breakeven rates for classes I-A through III are generally consistent with the ratings assigned below. The Rating Outlooks for classes I-A and I-AR remain Stable reflecting the classes' senior position in the capital stack. The Outlook remains Negative for classes I-B through III reflecting Fitch's expectation of further negative credit migration of the underlying collateral.
The 'CCC' ratings for classes V through XII are based on a deterministic analysis that considers Fitch's base case loss expectation for the pool and the current percentage of defaulted assets and Fitch Loans of Concern factoring in anticipated recoveries relative to each classes credit enhancement.
Fitch affirms the following classes and revises Recovery Estimates (REs) as indicated:
--$457,306,355 class I-A at 'BBsf'; Outlook Stable;
--$59,326,230 class I-AR at 'BBsf'; Outlook Stable;
--$38,000,000 class I-B at 'BBsf'; Outlook Negative;
--$42,750,000 class II at 'BBsf'; Outlook Negative;
--$42,750,000 class III at 'Bsf'; Outlook Negative;
--$28,500,000 class V at 'CCCsf'; RE to 0% from 25%;
--$22,562,500 class VIII at 'CCCsf'; RE to 0% from 10%;
--$6,000,000 class IX-FL at 'CCCsf'; RE to 0% from 10%;
--$7,600,000 class IX-FX at 'CCCsf'; RE to 0% from 10%;
--$18,650,000 class X at 'CCCsf'; RE to 0% from 10%;
--$24,125,000 class XI at 'CCCsf'; RE to 0% from 10%;
--$28,500,000 class XII at 'CCCsf'; RE to 0% from 10%.
Class S has paid in full. Fitch has previously withdrawn the ratings on classes IV, VI, and VII. Fitch does not rate the preferred shares.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 4, 2011);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Dec. 1, 2011);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 6, 2011);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 21, 2011);
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 16, 2011).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646569
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657734
Global Criteria for Cash Flow Analysis in CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=650717
Global Rating Criteria for Structured Finance CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651560
Criteria for Interest Rate Stresses in Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605426
Structured Finance Recovery Estimates for Distressed Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656557
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