(The following statement was released by the rating agency)
Oct 3 - Fitch Ratings has upgraded one class and affirmed three classes of Arbor Realty Mortgage Securities Series 2004-1, Ltd. / LLC (ARMSS 2004-1) reflecting Fitch's base case loss expectation of 61%. 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 upgrade reflects increased credit enhancement to the senior class from continuing paydown of the capital structure. Since Fitch's last rating action, Class A has been paid down by an additional $27.6 million primarily due the full payoff or removal at par of four CDO assets.
ARMSS 2004-1 is a CRE collateralized debt obligation (CDO) managed by Arbor Realty Collateral Management, LLC (Arbor). As of the August 2012 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: B-notes (51%), whole loans/A-notes (20%), preferred equity (14%), mezzanine debt (13%), CMBS (0.2%), and cash (2%). Approximately 7% of the pool is currently defaulted while a further 53% are considered assets of concern. Fitch expects significant losses on many of the assets as they are highly leveraged subordinate positions.
The CDO exited its reinvestment period in April 2009. As of the August 2012 trustee report, all par value and interest coverage test are in compliance.
Under Fitch's methodology, approximately 97% 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 8.7% from, generally, year-end 2011 or trailing 12-month first quarter 2012. Modeled recoveries are average at 37.1%.
The largest component of Fitch's base case loss expectation is a preferred equity position (12.1% of the pool) on a 230 property multifamily portfolio located across 10 states. As of Dec. 31, 2011, occupancy was 83%. The senior debt is currently in special servicing. Fitch modeled a full loss in its base case scenario on this overleveraged position.
The next largest component of Fitch's base case loss expectation is related to an A-note and B-note (10.2%) 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. While new management has been installed at the properties, it is expected to take time for performance at all six properties to stabilize. Fitch modeled a term default and a substantial loss on these loan interests 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 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'. The breakeven rates for classes A and B are generally consistent with the ratings listed below.
The Stable Outlook on class A generally reflects the class's seniority in the capital stack and expectation of continued further paydown over the near term.
The ratings for classes C and D 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 upgrades the following class:
--$75.2 million class A to 'BBBsf' from 'BBsf'; Outlook Stable.
Fitch affirms the following classes:
--$51.6 million class B at 'Bsf'; Outlook Negative;
--$27.6 million class C at 'CCCsf'; RE 10%;
--$11.2 million class D at 'CCCsf'; RE 0%.
Additional information is available at ''. 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' (June 6, 2012);
--'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. 13, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012);
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 16, 2011).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
Global Criteria for Cash Flow Analysis in CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Structured Finance Recovery Estimates for Distressed Securities
(New York Ratings Team)