Fitch Upgrades RRE CDO 2006-1

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded three classes and affirmed one class of Resource Real Estate Funding CDO 2006-1 Ltd./LLC (RRE 2006-1). A detailed list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The upgrades reflect significant delevering of the capital structure and better than expected recoveries on several loans no longer in the pool. Since the last rating action, classes D through F were repaid in full and Class G was reduced by 35% primarily from the full payoff of five assets. The CDO is over collateralized by $10 million. The affirmation reflects the pool's concentration with only nine assets remaining. Fitch's base case loss expectation is 57.2% Fitch's performance expectation incorporates prospective views regarding commercial real estate market values and cash flow declines.

Per Fitch categorizations, commercial real estate loans (CREL) comprise approximately 78.6% of the collateral of the CDO. Approximately 52.2% of the pool is comprised of whole loans or A-notes and the remainder of B-notes or mezzanine loans. Commercial mortgage backed securities (CMBS), which have an average Fitch derived rating of CCC, represent 21.4% of the total collateral. Per the Jan. 19, 2016 trustee report, the transaction passes all interest coverage and overcollateralization tests.

Under Fitch's methodology, approximately 98.2% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch estimates that overall recoveries will average 43.6%.

The largest component of Fitch's base case loss expectation is a mezzanine loan (26.4%) secured by a portfolio of two luxury resorts consisting of 1,320 keys located in beachfront and waterfront locations in Puerto Rico. Six assets were sold since last rating action. After several modifications, the loan has a current maturity date in May 2016. However, the mezzanine position remains undercollateralized. Fitch modeled a full loss in its base case scenario on this over leveraged position.

The second largest component to Fitch's base case loss expectation is a whole loan (19.1%) secured by a 163 room hotel located in Palm Springs, CA. The hotel underwent a $17 million renovation and re-opened under a new brand in 2014. Fitch modeled a significant loss on this loan based on its current cash flow.

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 (DSCR) tests to project future default levels for the underlying portfolio. Recoveries for the loan assets are based on stressed cash flows and Fitch's long-term capitalization rates. Cash flow modeling and the Portfolio Credit Model were not performed as no material impact from the analysis was anticipated. Fitch rates the four CMBS bonds in the transaction with 91.4% rated 'CCC' and 8.6% rated 'AAA'.

The ratings for classes G 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 the credit enhancement of each class.

RATING SENSITIVITIES

The Stable Outlook on classes G through J reflects sufficient credit enhancement and the respective classes' seniority in the liability structure. The distressed class K is subject to further downgrades should further losses be realized.

DUE DILIGENCE USAGE

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

Fitch has upgraded the following classes:

--$6.2 million class G to 'BBBsf' from 'Bsf'; Outlook Stable;

--$12.9 million class H to 'BBsf' from 'CCCsf'; Outlook Stable Assigned;

--$14.7 million class J to 'Bsf' from 'CCsf'; Outlook Stable Assigned.

Fitch has affirmed the following classes:

--$28.5 million class K at 'CCsf'; RE 50%.

Classes A-1, A-2 FL, A-2 FX, C, D, E and F were paid in full. Fitch previously withdrew its ratings of class B following the full surrender of those certificates. Fitch does not rate the $36.3 million 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

Surveillance Criteria for U.S. CREL CDOs (pub. 17 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873275

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999079

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999079

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/20160204006514/en/

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

Source: Fitch Ratings

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