Approximately $820.5 Million of Structured Securities Affected
New York, December 09, 2010 -- Moody's has confirmed two and downgraded nine classes of Notes issued
by RAIT CRE CDO I, 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), the sensitivity of the transaction
to recovery rates, and the cancellation of portions of the junior
Notes. Additionally, the downgrades are partly the result
of a correction in inputs that Moody's used in its prior analysis with
respect to the in-place interest rate hedge. Moody's previously
incorrectly prioritized the interest rate hedges within the cash flow
waterfall. The interest rate hedge acts as a fixed to floating
hedge where fixed rate collateral is swapped to a floating basis in order
to pay the floating rate Notes. We have corrected the input error
and today's rating action reflects the corrected hedge priority.
The rating action is the result of Moody's on-going surveillance
of commercial real estate collateralized debt obligation (CRE CDO) transactions.
Cl. A-1A, Confirmed at Aaa; previously on Sep
1, 2010 Aaa Placed Under Review Direction Uncertain
Cl. A-1B, Confirmed at Aaa; previously on Sep
1, 2010 Aaa Placed Under Review Direction Uncertain
Cl. A-2, Downgraded to A1; previously on Sep
1, 2010 Aaa Placed Under Review Direction Uncertain
Cl. B, Downgraded to Baa3; previously on Sep 1,
2010 Aa2 Placed Under Review Direction Uncertain
Cl. C, Downgraded to B1; previously on Sep 1,
2010 A1 Placed Under Review Direction Uncertain
Cl. D, Downgraded to B2; previously on Sep 1,
2010 A2 Placed Under Review Direction Uncertain
Cl. E, Downgraded to B3; previously on Sep 1,
2010 Baa1 Placed Under Review Direction Uncertain
Cl. F, Downgraded to Caa1; previously on Sep 1,
2010 Baa2 Placed Under Review Direction Uncertain
Cl. G, Downgraded to Caa1; previously on Sep 1,
2010 Baa3 Placed Under Review Direction Uncertain
Cl. H, Downgraded to Caa2; previously on Sep 1,
2010 Ba2 Placed Under Review Direction Uncertain
Cl. J, Downgraded to Caa3; previously on Sep 1,
2010 B1 Placed Under Review Direction Uncertain
RATINGS RATIONALE
RAIT CRE CDO I, Ltd. is a revolving CRE CDO transaction backed
by a portfolio A-Notes and whole loans (67.0% of
the pool balance), B-Notes (1.5%), and
mezzanine loans (31.5%). As of the November 22,
2010 Trustee report, the aggregate Note balance of the transaction
has decreased to $985.5 million from $1.02
billion at issuance, due to the cancellation of portions of the
Class D, Class F, Class G, and Class H Notes.
The revolving period ends in November 2011 at which point paydowns are
directed to the Class A1A and Class A1B notes.
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 CRE CDO I, 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 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 Classes B through J of 1 to 2 notches downward.
There are eighteen assets with par balance of $74.7 million
(7.5% of the current pool balance) that are considered Defaulted
Securities as of the November 22, 2010 Trustee report. Three
of these assets (46.2% of the defaulted balance) are A-Notes
or whole loans, one is a B-Note (7.4%),
and fourteen are mezzanine loans (46.5%). 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 assets. 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 (excluding Defaulted Securities) of
5,881 compared to 3,314 at last review. The distribution
of current ratings and credit estimates is as follows: Baa1-Baa3
(0.0% compared to 13.2% at last review),
Ba1-Ba3 (0.2% compared to 37.2% at
last review), B1-B3 (21.7% compared to 34.0%
at last review), and Caa1-C (78.1% compared
to 15.6% at last review).
WAL acts to adjust the probability of default of the collateral assets
in the pool for time. Moody's modeled to a WAL of 7.0 years
compared to 7.5 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 of 38.0% compared to 39.7% 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 20.8%
compared to 15.0% at last review.
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 38%
to 28% or up to 48% would result in average rating movement
on the rated tranches of 1 to 4 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 CRE CDO I, Ltd.
