Fitch Affirms Marathon 2006-1

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded two classes and affirmed nine classes of Marathon Real Estate CDO 2006-1. A detailed list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The upgrades and affirmations reflect stable pool performance, deleveraging of the capital structure and anticipated upcoming repayments (52.6% of the pool excluding defaulted collateral matures in 2016). Since the last rating action in November 2014, class A-1 received paydown of approximately $84.5 million primarily from eleven assets that repaid in full and scheduled amortization. Realized losses totalled approximately $12.3 million over the same period.

The percentage of defaulted assets increased to 16.4% compared to 7.2% and Fitch loans of concern (FLOC) remained relatively flat at 12.8% compared to 12.2% at last review. There were three newly defaulted assets, two of which were flagged as FLOCs at the prior rating action. The Fitch derived weighted average rating for the CUSIP collateral declined to 'B+/B' from 'BB-/B+' and represents 46.6% of the pool.

Per the October 2015 trustee report, and per Fitch categorization, approximately 52.3% of the total collateral is whole loans or A-notes, while 1.1% is B-notes. With respect to CUSIP collateral, commercial mortgage backed securities (CMBS) represent 38.4% of the collateral, followed by CRE CDOs (2.4%), REIT debt (2.3%), and other rated debt (3.5%).

Under Fitch's methodology, approximately 54.7% 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 10% from, generally year-end 2014 and 2015 reporting. Fitch modeled average recoveries of 42.3%.

The largest component of Fitch's base case loss expectation is the modeled losses on the CUSIP collateral (46.6% of the pool).

The second largest component of Fitch's base case loss expectation is a whole loan (10.8%) secured by a 363-key limited service hotel located on Manhattan's Upper West Side. The sponsor has been converting the property's single-occupancy rooms into traditional rooms on an ongoing basis, and further planned an extensive property improvement plan in order to convert the hotel into a full-service hotel to be operated under a major flag. The renovations fell behind schedule during the recession, and the property continues to struggle. Cash flow remains below expectations from issuance.

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 are based on stressed cash flows and Fitch's long-term capitalization rates. The rated securities (CUSIP) portion of the collateral was analyzed according to the 'Global Rating Criteria for Structured Finance CDOs', whereby the default and recovery rates are derived from Fitch's Structured Finance Portfolio Credit Model. Rating default rates and rating recovery rates from both the CREL and CUSIP portions of the collateral are then blended on a weighted average basis. The default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under the various defaults timing and interest rate stress scenarios. The breakeven rates for classes A-1 through E pass or exceed the cash flow model at the ratings listed below. Further upgrades were not warranted at this time given the transaction's increasing concentration and the lower Fitch derived weighted average rating for the CUSIP collateral.

The Positive Outlook on class B reflects the likelihood of increasing credit enhancement from further paydowns over the near term. The 'CCC' and below ratings for classes F through K are based on a deterministic analysis that considers Fitch's base case loss expectations 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.

RATING SENSITIVITIES

An additional stress scenario against the current cash flows of the underlying collateral was considered in Fitch's ratings. If the collateral continues to repay at or near par, upgrades will be considered to the classes. Should realized losses increase from current expectations, further downgrades to the distressed classes may occur.

DUE DILIGENCE USAGE

No third-party due diligence was provided or reviewed in relation to this rating action.

Fitch has upgraded the following classes:

--$101,626,718 class A-1 to 'AAsf' from 'Asf'; Outlook Stable;

--$50,000,000 class A-2 to 'Asf' from 'BBBsf'; Outlook revised to Stable from Positive.

Fitch has affirmed the following classes:

--$99,000,000 class B at 'BBsf'; Outlook Positive;

--$51,500,000 class C at 'Bsf'; Outlook Stable;

--$16,000,000 class D at 'Bsf'; Outlook Stable;

--$14,000,000 class E at 'Bsf'; Outlook Stable;

--$23,500,000 class F at 'CCCsf'; RE 100%;

--$15,500,000 class G at 'CCCsf'; RE 100%;

--$26,000,000 class H at 'CCCsf'; RE 75%;

--$56,300,000 class J at 'CCCsf'; RE 50%;

--$26,700,000 class K at 'CCCsf'; RE 0%.

Fitch does not rate the $101,500,000 preferred shares.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Global Surveillance Criteria for Structured Finance CDOs (pub. 13 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867800

Surveillance Criteria for U.S. CREL CDOs (pub. 24 Nov 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=811268

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993821

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993821

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151111006127/en/

Fitch Ratings
Primary Analyst
Tiffany Pierce
Associate Director
+1-212-908-9107
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Mary MacNeill
Managing Director
+1-212-908-0785
or
Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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