NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed all classes of Arbor Realty Mortgage Securities series 2006-1 Ltd/LLC (ARMSS 2006-1) reflecting Fitch's slightly improved base case loss expectation of 26.7% compared to 28.2% at last review. Fitch's performance expectation incorporates prospective views regarding commercial real estate market values and cash flow declines. A detailed list of rating actions follows at the end of this release.

Since last review, six loans were disposed of with realized losses totaling approximately $6.9 million. Further, three new loans were contributed as well as investments in loans already held by the CDO; building par by an estimated $3.5 million. The CDO exits its reinvestment period in January 2012. While the CDO currently holds approximately $36 million in uninvested proceeds, those funds are expected to be fully redeployed into new assets by the end of the reinvestment period.

As of the September 2011 trustee report and per Fitch categorizations, the collateral pool consists of 77% whole loans and A-notes, 11% B-notes, 4% mezzanine debt, 2% preferred equity, and 6% uninvested principal proceeds. There are 4.8% defaulted assets and 19.8% Fitch loans of concern, which are in line with the totals at last review of 4.8% and 22.4%.

ARMSS 2006-1 is managed by Arbor Realty Collateral Management, LLC. As of the September 2011 trustee report, all par value and interest coverage test are in compliance.

Under Fitch's surveillance methodology, approximately 78.3% 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 6.9% from the most recent available cash flows (generally year-end 2010 or trailing 12 months [TTM] first quarter 2011). Fitch estimates that average recoveries will be better than average at 65.9% due to the significant portion of senior debt in the pool.

The largest component of Fitch's base case loss expectation is an A-note (10.2%) secured by a large student housing property located on the Upper East Side of Manhattan. In 2011, the master tenant cancelled its master lease obligation for the entire property and now directly leases only a portion of the space. While the borrower has successfully leased the property to 87%, cash flow is still significantly below expectations. Fitch modeled a term default and a substantial loss on this position in its base case scenario.

The next largest component of Fitch's base case loss expectation is related to an A-note (7.3%) secured by a portfolio of six full and limited service hotels located in Daytona Beach, FL. The portfolio was previously in bankruptcy, and an Arbor affiliate took title to the properties in February 2011. Fitch modeled a term default and a substantial loss on this A-note in its base case scenario.

The third largest component of Fitch's base case loss expectation is related to a defaulted whole loan (4.1%) secured by 22.8 acres of waterfront land located in Jacksonville, FL. Due to the economic downtown, plans for a mixed use development have stalled. Fitch modeled a substantial loss on this loan 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 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 breakeven rates for classes A-1 through C are generally consistent with the ratings assigned below. Stable Rating Outlooks are assigned to classes A-1 through A-2 reflecting their senior position in the capital structure and adequate cushion in the cash flow modeling. Class B and C maintain a Negative Rating Outlook reflecting Fitch's expectation of further potential negative credit migration of the underlying collateral.

The 'CCC' ratings for classes D through H 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 class' credit enhancement. These classes were assigned Recovery Ratings (RR) in order to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities.

Fitch has affirmed the following classes and revised Outlooks as indicated:

--$230,000,000 class A1-A at 'BBBsf'; Outlook to Stable from Negative;

--$100,000,000 class A-1R at 'BBBsf'; Outlook to Stable from Negative;

--$72,900,000 class A-2 at 'BBsf'; Outlook to Stable from Negative;

--$41,100,000 class B at 'BBsf'; Outlook Negative;

--$31,200,000 class C at 'Bsf'; Outlook Negative;

--$13,350,000 class D at 'CCCsf/RR5';

--$14,250,000 class E to 'CCCsf/RR6' from 'CCCsf/RR5';

--$13,650,000 class F at 'CCCsf/RR6';

--$16,950,000 class G at 'CCCsf/RR6';

--$14,100,000 class H at 'CCCsf/RR6'.

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. 2, 2010);

--'Global Rating Criteria for Structured Finance CDOs' (Oct. 6, 2011);

--'Criteria for Structured Finance Recovery Ratings' (July 12, 2011).

--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 21, 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=579165

Global Rating Criteria for Structured Finance CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651560

Criteria for Structured Finance Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=644902

Global Criteria for Cash Flow Analysis in CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=650717

Criteria for Interest Rate Stresses in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605426

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