Approximately $717.8 Million of Structured Securities Affected
New York, December 09, 2010 -- Moody's has confirmed two and downgraded nine classes of Notes issued
by RAIT Preferred Funding II. Ltd. due to the deterioration
in the credit quality of the underlying portfolio as evidenced by an increase
in the weighted average rating factor (WARF), an increase in Defaulted
Securities, the sensitivity of the transaction to recovery rates,
and the cancellation of portions of the junior Notes. The rating
action is the result of Moody's on-going surveillance of
commercial real estate collateralized debt obligation (CRE CDO) transactions.
Cl. A-1T, Confirmed at Aaa (sf); previously on
Sep 1, 2010 Aaa (sf) Placed Under Review Direction Uncertain
Cl. A-1R, Confirmed at Aaa (sf); previously on
Sep 1, 2010 Aaa (sf) Placed Under Review Direction Uncertain
Cl. A-2, Downgraded to A2 (sf); previously on
Sep 1, 2010 Aa1 (sf) Placed Under Review Direction Uncertain
Cl. B, Downgraded to Ba1 (sf); previously on Sep 1,
2010 A3 (sf) Placed Under Review Direction Uncertain
Cl. C, Downgraded to B2 (sf); previously on Sep 1,
2010 Baa3 (sf) Placed Under Review Direction Uncertain
Cl. D, Downgraded to Caa1 (sf); previously on Sep 1,
2010 Ba1 (sf) Placed Under Review Direction Uncertain
Cl. E, Downgraded to Caa1 (sf); previously on Sep 1,
2010 Ba2 (sf) Placed Under Review Direction Uncertain
Cl. F, Downgraded to Caa2 (sf); previously on Sep 1,
2010 B1 (sf) Placed Under Review Direction Uncertain
Cl. G, Downgraded to Caa3 (sf); previously on Sep 1,
2010 B2 (sf) Placed Under Review Direction Uncertain
Cl. H, Downgraded to Caa3 (sf); previously on Sep 1,
2010 B3 (sf) Placed Under Review Direction Uncertain
Cl. J, Downgraded to Caa3 (sf); previously on Sep 1,
2010 Caa2 (sf) Placed Under Review Direction Uncertain
RATINGS RATIONALE
RAIT Preferred Funding II. Ltd. is a revolving CRE CDO transaction
backed by a portfolio A-Notes and whole loans (84.0%
of the pool balance), B-Notes (5.9%),
and mezzanine loans and preferred equity positions (10.1%).
As of the November 26, 2010 Trustee report, the aggregate
Note balance of the transaction has decreased to $827.9
million from $832.9 million at issuance, due to the
cancellation of portions of the Class D, Class E, Class F,
and Class G Notes. The revolving period ends in June 2012 at which
point paydowns are directed to the Notes in senior sequential order.
On August 26, 2010, Moody's received "Notice of
Abandonment of Notes" from the Trustee, indicating the cancellation
of portions of the junior Notes in RAIT Preferred Funding II. Ltd.
Per Moody's special comment, "Junior CDO Note Cancellations Should
Concern Senior Noteholders in Structured Transactions", dated June
14, 2010, there is concern that the cancellation of junior
notes can divert cash flow from away from the senior notes in the event
of a Par Value Test Failure. Holding all key parameters static,
the partial cancellations of the junior Notes results in average rating
movement on Class C, Class D, and Class E of 1 notch downward.
There are four assets with par balance of $34.6 million
(4.4% of the current pool balance) that are considered Defaulted
Securities as of the November 26, 2010 Trustee report. One
of these assets (57.7% of the defaulted balance) is a B-Note,
and three assets are mezzanine loans (42.3%). Defaulted
Securities are defined as assets which are 60 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.
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 collateral. For non-CUSIP collateral, Moody's
is eliminating the additional default probability stress applied to corporate
debt in CDOROM® v2.6 as we expect the underlying non-CUSIP
collateral to experience lower default rates and higher recovery compared
to corporate debt due to the nature of the secured real estate collateral.
The bottom-dollar WARF is a measure of the default probability
within a collateral pool. Moody's modeled a bottom-dollar
WARF of 5,441 compared to 3,392 at last review. The
distribution of current ratings and credit estimates is as follows:
Aaa-Aa3 (0.1% compared to 0.0% at last
review), Baa1-Baa3 (0.7% compared to 0.5%
at last review), Ba1-Ba3 (2.0% compared to
2.7% at last review), B1-B3 (25.5%
compared to 96.8% at last review), and Caa1-C
(71.7% compared to 0.0% at last review).
WAL acts to adjust the probability of default of the collateral in the
pool for time. Moody's modeled to a WAL of 5.5 years compared
to 5.5 years at last review. The modeled WAL includes the
remaining revolving period.
WARR is the par-weighted average of the mean recovery values for
the collateral assets in the pool. Moody's modeled a fixed
WARR (excluding defaulted collateral) of 52.0% compared
to 48.8% 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). For non-CUSIP
collateral, Moody's is reducing the maximum over concentration stress
applied to correlation factors due to the diversity of tenants,
property types, and geographic locations inherent in the pooled
transactions. Moody's modeled a MAC of 17.0%
compared to 25.7% at last review. The lower MAC is
a result of a larger number of high risk collateral assets in the pool.
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 the key parameters may have rating
implications on certain classes of rated notes. However,
in many instances, a change in key parameter assumptions in certain
stress scenarios 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 52%
to 42% or up to 62% would result in average rating movement
on the rated tranches of 1 to 5 notches downward and 1 to 4 notches 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 these ratings were "CMBS: Moody's
Approach to Revolving Facilities in CDOs Backed by Commercial Real Estate
Securities" published in July 2004, and "Moody's Approach to Rating
SF CDOs" published in November 2010.
Further information on Moody's analysis of this transaction is available
on www.moodys.com. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our website, at www.moodys.com/SFQuickCheck.
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 six 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 Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify 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
Scott Epperson
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
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Confirms Two and Downgrades Nine CRE CDO Classes of RAIT Preferred Funding II. Ltd.
