Fitch Ratings has affirmed all classes of Newcastle CDO IX Ltd./
LLC (Newcastle CDO IX). A detailed list of rating actions follows
at the end of this release.
KEY RATING DRIVERS
The affirmation reflects sufficient credit enhancement relative
to Fitch's base case loss expectation of 56.3%, an increase from
37.9% at the last rating action. Fitch's performance expectation
incorporates prospective views regarding commercial real estate
market value and cash flow declines.
Since the last rating action and as of the November 2014 trustee
report, the transaction has paid down by $140.9 million from the
full repayment of four assets, the partial payoff of another asset,
and the amortization of several other assets in the pool. The
transaction has also realized losses of $5.1 million over the same
period from partial losses on a B-note and a real estate bank loan.
As of the December 2013 trustee report, all overcollateralization
(OC) and interest coverage tests were in compliance.
As of the November 2014 trustee report and per Fitch
categorizations, the collateralized debt obligation (CDO) was
substantially invested as follows: commercial real estate (CRE)
mezzanine debt (34.6%), REBL (15.8%), CRE CDOs (14.9%), commercial
mortgage-backed securities (CMBS; 12.7%), preferred equity (12.3%),
B-notes (5.5%), whole loans/A-notes (4%), principal cash (0.1%),
and residential mortgage-backed securities (RMBS; 0.1%). The CRE
loan portion of the collateral is comprised mostly of subordinate
debt (52.4% is comprised of mezzanine debt, B-notes, or preferred
equity) and of non-traditional property types, which include hotel
(16.4%), construction (12.3%), and golf (9.7%), all of which
typically exhibit greater performance volatility and uncertainty
than traditional property types.
The percentages of defaulted assets and Fitch Loans of Concern
have increased to 3.2% and 45.7%, respectively, compared to 2.4%
and 27.6% at the last rating action. Two assets (3.2%), both
secured by the same property, were reported as defaulted, which
include one CMBS rake bond (0.5%) and a mezzanine loan (2.7%).
Under Fitch's methodology, approximately 62.1% 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 recently available information,
generally, either from trailing 12-month (TTM) third and fourth
quarter 2013, year-end 2013, or TTM second quarter 2014. Modeled
recoveries are below average at 9.2% due to the high percentage of
subordinate debt.
The largest component of Fitch's base case loss expectation is
the non-CREL portion of the collateral (43.5% of the pool), which
includes CMBS, RMBS, CRE CDO, and real estate bank loans with a
Fitch weighted average rating factor (WARF) of 'B/B-', which has
remained the same since the last rating action.
The second largest component of Fitch's base case loss
expectation is preferred equity (12.3%) on a construction project
of a super-regional mall and retail/entertainment facility located
in East Rutherford, New Jersey. The project's original business
plan was stalled due to the economic downturn and multiple delays
and cost overruns. A replacement developer has been selected and
negotiations to secure minimum financing to continue the
construction of the project remain in progress. The original loan
was restructured whereby the existing lender debt in the CDO was
subordinated to additional debt from new construction financing and
new equity contributions by the replacement developer.
The third largest component of Fitch's base case loss
expectation is a mezzanine loan (9.7%) secured by an interest in a
portfolio of golf courses located across the United States. Fitch
modeled a term default and a 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', which applies stresses to property
cash flows and debt service coverage ratio tests to project future
default levels for the underlying portfolio. Recoveries for the CRE
loan portion of the collateral are based on stressed cash flows and
Fitch's long-term capitalization rates. The non-CRE loan portion of
the collateral was 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 Rating Criteria for Structured Finance CDOs'.
The breakeven rates for classes A-2 through G are generally
consistent with the ratings listed below.
The 'CCCsf' ratings for classes H through L are based on a
deterministic analysis that considers Fitch's base case expected
loss 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.
Newcastle CDO IX is a CRE CDO managed by Newcastle Investment
Corp. The CDO exited its reinvestment period in May 2012. The CDO
was originally issued as an $825 million CRE CDO; however, in April
and September 2009, notes with a face amount of $64.525 million
were surrendered to the trustee for cancellation, which has
resulted in greater cushion to the OC ratios.
RATING SENSITIVITIES
The CDO's asset manager, Newcastle Investment Corp., did not
provide updated information on the CRE loans and real estate bank
loan collateral (representing 72.1% of the pool) despite repeated
requests. Fitch made conservative assumptions in its modeling based
on the limited information available and on the publicly available
information on the remaining 27.7% of the pool, which is comprised
of CRE CDO, CMBS, and RMBS bonds. While the information available
for Fitch's rating actions today are sufficient relative to the
rating decision, the lack of updated information, in addition to
the increasing concentration of the pool and risk of adverse
selection, precluded any potential consideration for upgrades of
the senior class. Furthermore, with continued lack of updated
information from the asset manager, downgrades may be possible.
The Rating Outlook for class A-2 remains Stable to reflect the
class' seniority in the liability structure, the increasing credit
enhancement, and the expected continued paydown of the class. The
Rating Outlook for class B was revised to Stable from Negative as
well due to improving credit enhancement and cushion in the
modeling.
The Negative Outlooks on classes E through G reflects the pool's
collateral concentrations and the potential for future downgrades
if there is deterioration in loan performance or if the ratings of
the underlying rated securities migrate downward. The distressed
classes (those rated 'CCCsf') are subject to further downgrades as
losses are realized or if realized losses exceed Fitch's
expectations.
Fitch has affirmed and revised Rating Outlooks, where indicated,
on the following classes:
--$85.7 million class A-2 at 'BBsf'; Outlook Stable;
--$37.1 million class B at 'BBsf'; Outlook to Stable from
Negative;
--$24.8 million class E at 'BBsf'; Outlook Negative;
--$18.6 million class F at 'Bsf'; Outlook Negative;
--$11.3 million class G at 'Bsf'; Outlook Negative;
--$18.1 million class H at 'CCCsf'; RE 0%;
--$21.7 million class J at 'CCCsf'; RE 0%;
--$19.6 million class K at 'CCCsf'; RE 0%;
--$23.7 million class L at 'CCCsf'; RE 0%.
Class S and class A-1 have paid in full. Fitch has previously
withdrawn the ratings on classes C and D. Fitch does not rate class
M and the preferred shares.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 4,
2014);
--'Surveillance Criteria for U.S. CREL CDOs' (Nov. 24,
2014);
--'Global Rating Criteria for Structured Finance CDOs' (July 16,
2014).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389
Surveillance Criteria for U.S. CREL CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=811268
Global Rating Criteria for Structured Finance CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751136
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=957516
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Fitch RatingsSandro Scenga, New York,
+1-212-908-0278sandro.scenga@fitchratings.comorPrimary
AnalystMelissa Che, +1-212-612-7862DirectorFitch Ratings, Inc.33
Whitehall St.New York, NY 10004orCommittee ChairpersonKaren
Trebach, +1-212-908-0215Senior Director