NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed all classes of N-Star REL CDO VI, Ltd./LLC (N-Star VI) reflecting Fitch's base case loss expectation of 47.1%. 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.

Since Fitch's last review, the disposal of 10 assets from the collateralized debt obligation (CDO) resulted in realized losses to par of approximately $25 million. These losses were offset by par building of approximately $90 million from the purchase of new assets, predominantly highly leveraged subordinate positions. Fitch modeled these positions with substantial to full losses in its base case.

N-Star VI is collateralized by both senior and subordinate commercial real estate (CRE) debt: 41.6% of total collateral is either whole loans or A-notes and 37% is either B-notes or mezzanine loans. Fitch expects significant losses upon default for the subordinate positions since they are generally highly leveraged. Defaulted assets comprise 6.8% of the total collateral and include two mezzanine loans (1.3%), one CRE CDO bond (2.5%), and one commercial mortgage-backed security (CMBS) bond (3%). An additional five loans (19%) were identified as Loans of Concern. These loans include one mezzanine loan (6.2%), one B-note (3.4%), and three whole loans/A-notes (9.4%). Fitch modeled significant to full losses on the defaulted assets and Loans of Concern.

N-Star VI was initially issued as a $450 million CRE CDO managed by NS Advisors, LLC. The transaction has a five-year reinvestment period during which principal proceeds may be used to invest in substitute collateral. The reinvestment period ended in June 2011. In November 2009, $8 million of notes were surrendered to the trustee for cancellation. All overcollateralization and interest coverage ratios remain above their covenants as of the June 2011 trustee report.

As of the June 2011 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: whole loans/A-notes (41.6%), mezzanine loans (20.7%), CRE CDOs (13.8%), B-notes (12.9%), CMBS (7.6%), and preferred equity (3.4%).

Under Fitch's surveillance methodology, approximately 69.8% 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 7% from the most recent available cash flows (generally from year-end 2010). Fitch estimates that average recoveries will be at 32.6%.

The largest component of Fitch's base case loss expectation is a mezzanine loan (6.2%) secured by interests in a 400-unit multifamily property located in Ventura, California. Although performance has been relatively stable, the loan is highly leveraged. Further, the sponsor of the loan is reported to be under financial strain. Fitch modeled a term default with a full loss under its base case scenario.

The next largest component of Fitch's base case loss expectation is a mezzanine loan (6.2%) secured by interests in a 647-room hotel located in Las Vegas, Nevada as well as the developments on an adjacent 12-acre parcel of land. The business plan was to expand the hotel, casino, retail, and food and beverage components at the property. While progress has been made on the development and hotel performance continues to stabilize, property cash flow remains significantly below original projections. Fitch modeled a term default with a full loss under its base case scenario.

The third largest component of Fitch's base case loss expectation is an A-note (5%) secured by over 2,000 acres of land located in the Pocono Mountains of Pennsylvania. The initial business plan was to develop the site in multiple phases, but due to economic downturn, the plan was not realized. Fitch modeled a term default with a significant loss under 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, A-R, and A-2 are generally consistent with the ratings assigned below.

The 'CCC' and below ratings for classes B through K 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.

The Rating Outlooks on classes A-1 and A-R were revised to Stable based upon their senior position in the capital structure and the expectation of paydown as the transaction exits its reinvestment period. Class A-2 maintains a Negative Rating Outlook reflecting Fitch's expectation for further potential negative credit migration of the underlying collateral.

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

--$174,800,000 class A-1 at 'BBsf; Outlook to Stable from Negative;

--$70,000,000 class A-R at 'BBsf'; Outlook to Stable from Negative;

--$27,225,000 class A-2 at 'Bsf'; Outlook Negative;

--$21,825,000 class B at 'CCCsf'; RR to 'RR5' from 'RR4';

--$11,775,000 class C at 'CCCsf/RR6';

--$10,000,000 class D at 'CCCsf/RR6';

--$10,125,000 class E at 'CCCsf/RR6';

--$7,650,000 class F at 'CCCsf/RR6';

--$6,900,000 class G at 'CCCsf/RR6'.

Additional information is available at 'www.fitchratings.com'.

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);

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

--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 17, 2010).

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

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=557485

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