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Rating Action:

Moody's Affirms Notes issued by SMA Portfolio, Series 2012-LV1

Global Credit Research - 17 Oct 2013

Approximately $56.3 Million of Structured Securities Affected

New York, October 17, 2013 -- Moody's Investors Service has affirmed Notes issued by SMA Portfolio, Series 2012-LV1

Cl. A Notes, Affirmed Baa3 (sf); previously on Dec 28, 2012 Definitive Rating Assigned Baa3 (sf)

RATINGS RATIONALE

The affirmation is due to the Notes performing within the range of expectations at securitization.

Commercial real estate (CRE) liquidating vehicles monetize recoveries from pools of nonperforming loans secured by mortgages on real estate via the liquidation of assets. In previously securitized NPL transactions, proceeds from liquidations of the resolved loans backing the securities were generally used to pay down rated debt before returning capital to the sponsors, incentivizing sponsors to execute timely and efficient resolutions. The transaction referenced in this press release introduced the feature of equity leakage subject to certain performance tests, which is expected to prolong the ultimate recovery timing of the rated proceeds.

As of the September 20, 2013 payment date, the Note is collateralized by 7 mortgage loans secured by 8 properties, one real estate owned (REO) condominium property and one REO retail property. The total unpaid principal balance (UPB) of the loans and properties represented in the pool is approximately $221.1 million compared to $351.7 Million at securitization. The Sponsors purchased the assets for approximately $262.0 Million (or 74.5% of UPB) and currently have a basis of approximately $153.8 Million (or 69.6% of the UPB). The performance status of underlying assets varies as it consists of performing loans (73% of total UPB), nonperforming loans (4.5%), and REO properties (23%). This compares to a mix of performing loans (71% of total UPB), nonperforming loans (21%), and REO properties (9%) at securitization. In aggregate, 9 distinct borrowing relationships exist compared to 13 at securitization.

Five loans (four properties) have liquidated resulting in approximately $108.3 million in net liquidation proceeds. Three mortgage loans (71% of the liquidated UPB) were paid off at par and one mortgage loan (29% of liquidated UPB) paid off via a discounted pay off ("DPO"). Additionally, loan amortization, cash flow from REO properties and condominium sales have resulted in a cumulative $125.3 million paydown to date, a 69.0% decrease to the initial principal Note amount

All loans currently underlying the portfolio were originated between 2004 and 2008. The weighted average maturity date for the remaining loans in the pool is February 2015 with the longest dated loan scheduled to mature by August 2018. The loans carry three to ten year durations from their respective origination dates.

Moody's approach to analyzing this transaction focuses on three main performance drivers: (1) the net recovery rate after resolution, (2) the timing of resolution and (3) the potential for allocation of excess cash flow between bondholders and sponsors if performance hurdles are satisfied. The recovery rate net of transaction costs primarily determines the proceeds that can be used to repay noteholders or equity. The condition of the collateral and the market in which it is located affects this recovery rate. A slower-than-expected resolution time reduces proceeds available for principal repayments to the extent that additional property protection expenses and interest must be paid during the holding period.

Given that some of the collateral backing the transaction is distressed, the valuation techniques used to assess conduit collateral (notably applying a stabilized capitalization rate to Moody's adjusted cash flow), often did not apply. Moody's instead considered and reconciled several indicators of recovery value to determine a Moody's value at time of disposition (Moody's disposition value). These indicators included, but were not limited to: (i) the sponsor's purchase price for the collateral; (ii) the sponsor's loan level recovery strategy and net proceeds expectations; (iii) third-party valuations such as recent broker opinions of value (BOVs) or appraisals; and (iv) Moody's assessment of stabilized cash flow and its value implications.

Moody's LTV ratio for this transaction (initial principle Note amount / Moody's value) is 30.4% compared to 58.5% at securitization. However, Moody's UPB LTV ratio (UPB / Moody's value) and Moody's purchase price LTV ratio (purchase price / Moody's value) are 119.8% and 83.4%, respectively, compared to 113.4% and 84.5%at securitization.

The transaction structure provides for scheduled payments of interest and ultimate repayment of principal through a "fast pay" waterfall, with the added wrinkle of a 70% / 30% split of excess cash flow with the Sponsor's equity ("equity leakage") if certain performance hurdles are satisfied. The equity leakage feature is expected to prolong the weighted average maturity of the bond and provide a return of some equity to the Sponsors prior to bondholders getting paid off. Moody's has considered this additional feature of equity leakage in its analysis.

Performance hurdles that allow for a allocation split between the Sponsors and bondholders include both an advance rate test and a debt yield test. In order for proceeds to leak to the Sponsors, both tests must be satisfied at any given determination date. If at any determination date, either test is not met, the structure will revert to sequential pay between bondholders and Sponsors until both tests are satisfied. Additionally, in the event that there are only three (3) assets remaining in the pool, and the bond is not paid in full, the structure will automatically become sequential. The advance rate and debt yield tests are as follows:

• Advance Rate Test: Deemed satisfied if the outstanding rated note balance over the outstanding basis for purchase of the collateral is less than 60% in months 1-12 from securitization; less than 55% in months 13-24, less than 40% in months 25-36; and less than 30% in months 37-48. For months 49 and beyond, the structure reverts to sequential pay.

• Debt Yield Test: Deemed satisfied if the aggregate annualized trailing six month net operating income (NOI) of the outstanding underlying collateral over the outstanding rated note balance is greater than 11%.

Moody's approach to testing the proposed sizing of proceeds is ultimately leveraged based. Each leverage target corresponds to a rating, similar to what is practiced in the Single Borrower/ Large Loan universe.

Moody's considers both loan level diversity and property level diversity when analyzing non-performing loan pools. With respect to loan level diversity, the pool's loan level Herfindahl Index is 9 compared to 13 at securitization. The transaction's loan-level and property-level diversity profile is low compared to most Hefindahl scores found in other CMBS transactions since 2009.

Moody's analysis employs the excel-based NPL Template_V1.0 which projects revenues and costs at the asset level, and discount these cash flow streams using a dispersion of discount rates. Credit enhancement levels were based on an aggregation of adjusted loan level proceeds derived from Moody's discounted LTV ratios. Major adjustments to determining proceeds include loan structure, property type, sponsorship and diversity. Moody's approach to rating this transaction is further detailed in Moody's Pre-Sale report found here:http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF296374.

Other methodologies and factors that may have been considered for the rating(s) can also be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.

REGULATORY DISCLOSURES

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthew Halpern
Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael Gerdes
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Affirms Notes issued by SMA Portfolio, Series 2012-LV1
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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