NEW YORK (July 2, 2010) Fitch Ratings has downgraded 19 classes from Credit Suisse First Boston Mortgage Securities Corp., Series 2006-TFL2, reflecting Fitch’s base case loss expectation of 8.2% for the pooled classes. The non-pooled junior component certificates were also downgraded to reflect Fitch’s significant loss expectations on these assets. Fitch’s performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. The Negative Rating Outlooks reflect additional sensitivity analysis related to further negative credit migration of the underlying collateral. A detailed list of rating actions follows at the end of this release.
Under Fitch’s methodology, approximately 79% of the pool is expected to default in the base case stress scenario, defined as the ‘B’ stress. In this scenario, the average cash flow decline is 12.7%, generally from fourth quarter 2009 cash flows. In its review, Fitch analyzed servicer reported operating statements and rent rolls, updated property valuations, and recent lease and sales comparisons. Given that the loan positions within the pooled portion of the CMBS are the lower leveraged A-notes (average base case LTV of 86.9%), Fitch estimates the average recoveries on the pooled loans will be approximately 89.6% in the base case, whereas the more highly leveraged non-pooled components have a lower modeled recovery of 43%. The defaults are determined considering the total leverage of each asset, including additional B-notes and mezzanine debt, however, a default may not result in a loss to the pooled portion given its lower leverage position. The base case term and refinance DSCR for the pooled A-notes is 2.23 times (x) and 1.39x, respectively.
The transaction is collateralized by nine loans, six of which are secured by hotel properties (79.5%), two of which are mixed use (18.4%), and one which is a condo conversion (2.1%). All of the final extension options on the loans are within the next three years and are as follows: 97.9% in 2011 and 2.1% in 2012.
Fitch identified four loans Loans of Concern within the pool: Kerzner Portfolio (38.3% of pooled trust), Beverly Hilton (15.9%), JW Marriott Starr Pass (8%), and The Westin San Francisco (Argent) (7.8%). Two of these loans, JW Marriott Starr Pass and Westin San Francisco, are in special servicing.
Fitch’s analysis resulted in loss expectations for three loans in the ‘B’ stress scenario. The contributors to losses (by unpaid principal balance) are Beverly Hilton (22.8% loss severity), JW Marriott Starr Pass (55.9%), and NH Krystals Hotel Portfolio (5.9%). All of the 12 junior non-pooled component classes resulted in a maturity default under Fitch’s base case stress.
The Beverly Hilton consists of a 569-room upscale hotel located at the corner of Wilshire Boulevard and Santa Monica Boulevard in Beverly Hills, CA. The hotel underwent an $80 million ($140,598/key) renovation from 2003-2006. The renovation upgraded and enlarged the guestrooms and added nine luxury suites and seven luxury king guestrooms. Performance is below expectations from issuance, largely due to the impacts of the weak economy on the hospitality sector. As of November 2009, occupancy, ADR, and RevPAR were 66.3%, $230.62, and $152.89, respectively, compared with 72.6%, $212.95, and $154.60 at issuance, and the underwritten figures of 73.9%, $345.32, and $255.19, respectively. However, the property’s penetration rates for occupancy, ADR, and RevPAR remain positive at 100.6%, 113.2%, and 113.9%, respectively. The loan had an initial maturity date on Aug. 9, 2008, and is currently in its second extension period. The loan, which matures on Aug. 9, 2011, has one one-year extension option remaining.
The JW Marriott Starr Pass consists of a 575-room full service hotel and a 27-hole Arnold Palmer-designed championship golf course, located in Tucson, AZ. The hotel opened in 2005 and is one of the newest hotels in the Tucson market. The subject offers 88,000 sf of meeting space including a 20,000 sf ballroom. The hotel is managed by Marriott Hotel Services. The property is part of a 1,356-acre master planned community named Starr Pass. In April 2010, the loan transferred to special servicing for imminent default. Performance has not met expectations from issuance, and as of year-end 2009, occupancy, ADR, and RevPAR were 56.9%, $157.72, and $89.81, respectively, compared with 70.3%, $175.37, and $123.34 in 2008, and the underwritten figures of 75%, $200.07, and $150.05. The servicer continues to discuss workout options with the borrower.
The largest loan in the pool, Kerzner Portfolio, is secured by a diverse portfolio of real estate. The main collateral interests consist of: 3,023-key Atlantis Resort and casino, Paradise Island; 106-key One & Only Ocean Club and 18-hole Ocean Club Golf Course; water treatment and desalinization facility; 63-slip Marina at Atlantis and associated retail at Marina Village. Additional collateral interests consist of sales proceeds from the sale of condominium units, timeshare units, and land parcels. At issuance it was expected that Phase III of the Atlantis Island development would add a 600-room all-suite hotel tower, a 495-unit condominium hotel, and approximately 40 acres of new water attractions. In addition, the casino, convention, retail, children’s area, and restaurant facilities were to be expanded. These developments were completed as anticipated; construction related to Phase III was completed mid-2007.
At issuance, a $100 million interest reserve was established to fund any debt service shortfalls related to the Kerzner loan. The remaining amount of this interest reserve is $5.2 million (as of April 2010). As of Sept. 30, 2009, the Atlantis Resort’s TTM occupancy and RevPAR were 61% and $194.48, respectively, compared to 81.4% and $221.09 at issuance. The issuer’s initial projections for the properties were occupancy, ADR and RevPAR of 81%, $323, and $262, respectively. The loan had an initial maturity date of Sept. 9, 2008 and has three one-year extension options. The loan, which is currently in its second extension option, has a final maturity in September 2011. Given the significant size of the total collateral and the associated leverage, if credit market dislocations persist, the loan could default at final maturity; however, no losses are currently expected in Fitch’s base case.
Fitch removes the following classes from Rating Watch Negative and downgrades, assigns Rating Outlooks, Loss Severity (LS) Ratings, and Recovery Ratings (RR), as indicated to the pooled classes:
- $41 million class C to ‘A/LS4′ from ‘A+'; Outlook Stable;
- $33 million class D to ‘BBB/LS5′ from ‘A'; Outlook Stable;
- $25 million class E to ‘BBB/LS5′ from ‘A-‘; Outlook Negative;
- $19 million class F to ‘BB/LS5′ from ‘BBB+'; Outlook Negative;
- $19 million class G to ‘CCC/RR2′ from ‘BBB';
- $19 million class H to ‘C/RR6′ from ‘BBB-‘;
- $20 million class J to ‘C/RR6′ from ‘BB+';
- $22 million class K to ‘C/RR6′ from ‘BB';
- $16.1 million class L to ‘D/RR6′ from ‘BB-‘.
In addition, affirms the following pooled class, assigns an LS Rating, and revises the Rating Outlook as indicated:
- $183 million class A-1 at ‘AAA/LS3′; Outlook to Stable from Negative.
In addition, Fitch removes from Rating Watch Negative and affirms the following classes, assigns LS Ratings, and Rating Outlooks as indicated to the following pooled classes:
- $42.6 million class KER-B to ‘BBB’ from ‘BBB+'; Outlook Negative;
- $37.3 million class KER-C to ‘BB’ from ‘BBB-‘; Outlook Negative;
- $46 million class KER-D to ‘BB’ from ‘BB+'; Outlook Negative;
- $46.3 million class KER-E to ‘B’ from ‘BB-‘; Outlook Negative;
- $61.6 million class KER-F to ‘CCC/RR4′ from ‘B';
- $11 million class BEV-A to ‘C/RR6′ from ‘BB-‘;
- $7 million class ARG-A to ‘CC/RR6′ from ‘B';
- $5.5 million class ARG-B to ‘CC/RR6′ from ‘B';
- $4 million class NHK-A to ‘CCC/RR6′ from ‘BB-‘.
Additionally, Fitch affirms and assigns Rating Outlooks to the following non-pooled junior component classes:
- $59.8 million class KER-A at ‘A-‘; Outlook Negative;
- $5.6 million class MW-A at ‘B'; Outlook Negative;
- $3.4 million class MW-B at ‘B'; Outlook Negative.
Additionally, Fitch removes from Rating Watch Negative, downgrades, and assigns a Rating Outlook to the following non-pooled component of the trust:
–$39 million class SV-K to ‘BB’ from ‘BBB-‘ Outlook Negative.
Furthermore, Fitch affirms the following classes, and assigns Rating Outlooks to the non-pooled components of the trust:
- $375.7 million class SV-A1 at ‘AAA’ Outlook Stable
- $126 million class SV-A2 at ‘AAA’ Outlook Stable;
- Interest-only SV-AX at ‘AAA’ Outlook Stable;
- $61 million class SV-B at ‘AA+’ Outlook Stable;
- $31 million class SV-C at ‘AA’ Outlook Stable;
- $31 million class SV-D at ‘AA-‘ Outlook Stable;
- $30 million class SV-E at ‘A+’ Outlook Stable;
- $31 million class SV-F at ‘A’ Outlook Stable;
- $30 million class SV-G at ‘A-‘ Outlook Stable;
- $54 million class SV-H at ‘BBB+’ Outlook Stable;
- $34 million class SV-J at ‘BBB’ Outlook Negative.
Fitch withdraws the ratings of the interest-only classes A-X-1, A-X-2, A-X-3, and SV-AX (for additional information, please see ‘Fitch Revises Practice for Rating IO & Pre-Payment Related Structured Finance Securities’, dated June 23, 2010).
This transaction was analyzed according to the ‘Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs’. It applies stresses to property cash flows and uses 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. This methodology was used to review this transaction as floating-rate CMBS loan pools are concentrated and similar in composition to CREL CDO pools. In many cases, the CMBS notes are senior portions of notes held in CDO transactions. The assets are generally transitional in nature, frequently underwritten with pro forma income assumptions that have not materialized as expected. Overrides to this methodology were applied on a loan-by-loan basis if the senior position of the CMBS note or property specific performance warranted an alternative analysis.
For bonds rated ‘B-‘ or better, the current credit enhancement levels were compared to the expected losses generated in each rating category divided by the total deal size. These classes were assigned LS ratings, which 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.
Rating Outlooks were determined by further stressing the cash flows and fully recognizing all maturity defaults in all ratings stresses. The credit enhancements were then compared to the expected losses generated in each rating category to determine potential credit migration over the next two years. If the Rating Outlook scenario would imply a lower rating, then the class was assigned a Negative Outlook.
The ratings for bonds rated ‘CCC’ or lower, are based on a deterministic analysis. Bonds are rated ‘C’ when the expected losses on currently defaulted loans exceed a classes’ respective credit enhancement level. Bonds are rated ‘CC’ when the combined base case expected losses on the currently defaulted loans and loans likely to default exceed a classes’ respective credit enhancement level. Bonds are rated ‘CCC’ when the base case expected loss exceeds a classes’ respective credit enhancement level.
Bonds rated ‘CCC’ and below were assigned Recovery Ratings (RR) in order to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities. Recovery Ratings are calculated by subtracting the base case expected losses in reverse sequential order from the pooled certificates. Any principal recoveries first pay interest shortfalls on the bonds and then sequentially through the classes. The remaining bond principal amount is divided by the current outstanding bond balance. The resulting percentage is used to assign the Recovery Ratings on the bonds.
These rating actions reflect the application of Fitch’s current criteria which are available at ‘www.fitchratings.com’ and specifically include the following reports:
- ‘Global Structured Finance Rating Criteria’ (Sept. 30, 2009);
- ‘Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs’ (Nov. 9, 2009);
- ‘Criteria for Structured Finance Loss Severity Ratings’ (Feb. 17, 2009);
- ‘Criteria for Structure Finance Recovery Ratings’ (Aug. 17, 2009).
Additional information is available at ‘www.fitchratings.com‘.
Chris Bushart, +1-212-908-0606 (New York)
Britt Johnson, +1-312-606-2341 (Chicago)
Sandro Scenga, +1-212-908-0278 (Media Relations, New York)
SOURCE: Fitch Ratings