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Rating Action:

Moody's Downgrades Six CRE CDO Classes of Guggenheim Structured Real Estate Funding 2005-2

Global Credit Research - 02 Sep 2010

Approximately $212.1 Million of Structured Securities Affected

New York, September 02, 2010 -- Moody's has downgraded six classes of Notes issued by Guggenheim Structured Real Estate Funding 2005-2 due to the deterioration in the credit quality of the underlying portfolio as evidenced by an increase in the weighted average rating factor (WARF), and increase in Defaulted Securities. The rating action is the result of Moody's on-going surveillance of commercial real estate collateralized debt obligation (CRE CDO) transactions.

Issuer: Guggenheim Structured Real Estate Funding 2005-2

Cl. A, Downgraded to Baa3 (sf); previously on Feb 26, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

Cl. B, Downgraded to B2 (sf); previously on Feb 26, 2010 Baa1 (sf) Placed Under Review for Possible Downgrade

Cl. C, Downgraded to Caa2 (sf); previously on Feb 26, 2010 Ba1 (sf) Placed Under Review for Possible Downgrade

Cl. D, Downgraded to C (sf); previously on Feb 26, 2010 B1 (sf) Placed Under Review for Possible Downgrade

Cl. E, Downgraded to C (sf); previously on Feb 26, 2010 Caa1 (sf) Placed Under Review for Possible Downgrade

Cl. F, Downgraded to C (sf); previously on Feb 26, 2010 Caa2 (sf) Placed Under Review for Possible Downgrade

RATINGS RATIONALE

Guggenheim Structured Real Estate Funding 2005-2 is a CRE CDO transaction backed by a portfolio A-Notes and whole loans (21.8% of the pool balance), B-Notes (36.6%), commercial mortgage backed securities (CMBS) (31.6%) and mezzanine loans (10.0%). As of the August 18, 2010 Trustee report, the aggregate Note balance of the transaction has decreased to $241.2 million from $305.8 million at issuance, with the paydown directed to the Class A Notes, as a result of paydown from the collateral pool as well as failing the Class C, D and E par value tests.

There are four assets with par balance of $65.8 million (27.3% of the current pool balance) that are considered Impaired Securities as of the August 18, 2010 Trustee report. One of these assets (23.1% of the impaired balance) is A-Note, one asset is B-Note (21.6%), one asset is C-Note (15.7%) and one assets is CMBS (39.6%). Impaired Assets that are not CMBS are defined as assets which are 30 or more days delinquent in their debt service payment. While there have been no realized losses to date, Moody's does expect significant losses to occur once they are realized.

Moody's has identified the following parameters as key indicators of the expected loss within CRE CDO transactions: WARF, weighted average life (WAL), weighted average recovery rate (WARR), and Moody's asset correlation (MAC). These parameters are typically modeled as actual parameters for static deals and as covenants for managed deals. Per the legal documentation as of August 2010 the transactions has ended its reinvestment period and is now deemed a static transaction.

WARF is a primary measure of the credit quality of a CRE CDO pool. We have completed updated credit estimates for the non-Moody's rated reference obligations. The bottom-dollar WARF is a measure of the default probability within a collateral pool. Moody's modeled a bottom-dollar WARF of 6,054 compared to 4,518 at last review. The distribution of current ratings and credit estimates is as follows: Aaa-Aa3 (4.4% compared to 0.0% at last review), A1-A3 (3.9% compared to .% at last review), Baa1-Baa3 (4.4% compared to 0.0% at last review), Ba1-Ba3 (6.1% compared to 12.9% at last review), B1-B3 (0.0% compared to 46.7% at last review), and Caa1-C (81.1% compared to 36.6% at last review).

WAL acts to adjust the probability of default of the reference obligations in the pool for time. Moody's modeled to a WAL of 1.6 years compared to 2.1 years at last review.

WARR is the par-weighted average of the mean recovery values for the collateral assets in the pool. Moody's modeled a fixed WARR of 21.8% compared to 23.4% at last review.

MAC is a single factor that describes the pair-wise asset correlation to the default distribution among the instruments within the collateral pool (i.e. the measure of diversity). Moody's modeled a MAC of 13.8% compared to 18.1% at last review. The low MAC is due to higher default probability collateral concentrated within a small number of collateral names.

Moody's review incorporated CDOROM® v2.6, one of Moody's CDO rating models, which was released on May 27, 2010.

The cash flow model, CDOEdge® v3.2, was used to analyze the cash flow waterfall and its effect on the capital structure of the deal.

Changes in any one or combination of key parameters may have have rating implications on certain classes of rated notes. However, in many instances, a change in assumptions of any one key parameter may be offset by a change in one or more of the other key parameters. Rated notes are particularly sensitive to changes in recovery rate assumptions. Holding all other key parameters static, changing the recovery rate assumption down from 21.8% to 16.8% or up to 26.8% would result in average rating movement on the rated tranches of 0 to 1 notch downward and 0 to 1 notch upward, respectively. Further, changing the recovery rate assumption down from 21.8% to 11.8% or up to 31.8% would result in average rating movement on the rated tranches of 0 to 2 notch downward and 0 to 2 notch upward, respectively

The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside the given range may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated when the related securities ratings were issued. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions. The decision to take (or not take) a rating action is dependent on an assessment of a range of factors including, but not exclusively, the performance metrics. Primary sources of assumption uncertainty are the current stressed macroeconomic environment and continuing weakness in the commercial real estate and lending markets. Moody's currently views the commercial real estate market as stressed with further performance declines expected in a majority of property sectors. The availability of debt capital is improving with terms returning towards market norms. Job growth and housing price stability will be necessary precursors to commercial real estate recovery. Overall, Moody's central global scenario remains "hook-shaped" for 2010 and 2011; we expect overall a sluggish recovery in most of the world's largest economies, returning to trend growth rate with elevated fiscal deficits and persistent unemployment levels.

The principal methodologies used in rating Guggenheim Structured Real Estate Funding 2005-2 were "U.S. CMBS: Moody's Approach to Rating Static CDOs Backed by Commercial Real Estate Securities" published in June 2004, and "Moody's Approach to Rating SF CDOs" published in August 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments related to the monitoring of this transaction in the past 6 months.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, confidential and proprietary Moody's Analytics' information.

Moody's considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's Investors Service adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from reliable sources; however, Moody's Investors Service does not and cannot in every instance independently verify, audit or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Zhonghui (Grace) Wu
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Deryk Meherik
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's Downgrades Six CRE CDO Classes of Guggenheim Structured Real Estate Funding 2005-2
No Related Data.

 

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