Approximately $338.4 Million of Structured Securities Affected
New York, February 23, 2011 -- Moody's has downgraded one and affirmed eight classes of Notes issued
by Lenox Street CDO 2007-1, 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), increase in collateral
interest shortfalls, and increase in Defaulted Securites.
The rating action is the result of Moody's on-going surveillance
of commercial real estate collateralized debt obligation (CRE CDO) transactions.
Moody's rating action is as follows:
Cl. A, Downgraded to C (sf); previously on Mar 5,
2010 Downgraded to Ca (sf)
Cl. B, Affirmed at C (sf); previously on Mar 5,
2010 Downgraded to C (sf)
Cl. C, Affirmed at C (sf); previously on Mar 5,
2010 Downgraded to C (sf)
Cl. D, Affirmed at C (sf); previously on Mar 5,
2010 Downgraded to C (sf)
Cl. E, Affirmed at C (sf); previously on Mar 5,
2010 Downgraded to C (sf)
Cl. F, Affirmed at C (sf); previously on Mar 5,
2010 Downgraded to C (sf)
Cl. G, Affirmed at C (sf); previously on Mar 5,
2010 Downgraded to C (sf)
Cl. H, Affirmed at C (sf); previously on Mar 5,
2010 Downgraded to C (sf)
Cl. J, Affirmed at C (sf); previously on Nov 13,
2009 Downgraded to C (sf)
RATINGS RATIONALE
Lenox Street CDO 2007-1, Ltd. is a revolving hybrid
CRE CDO transaction backed by a portfolio commercial mortgage backed securities
(CMBS) collateral (20% of the pool balance) and synthetic reference
obligations on CMBS collateral (80% of the pool balance).
However, due to an Event of Default (EOD) caused by a failure in
the Default Par Value Coverage Ratio test as reported by the Trustee report
dated October 26, 2009, the Trustee halted the reinvestment
feature of transaction. As of the January 26, 2011 Trustee
report, the aggregate Notes balance of the transaction, including
the Subordinate Notes, has decreased to $349.4 million
from $350.0 million at issuance, due to approximately
$0.6 million in pay-downs to the Class G, H
and J Notes given a provision that 20% of excess interest of the
deal goes to pay the Class G, H and J Notes pro rata in each payment
period.
Per the January 26, 2011 Trustee report, the transaction failed
the Super Senior Par Value Coverage test, Default Par Value Coverage
test as well as the Class A/B, the Class C/D and the Class E/F Overcollateralization
Tests. There are 91 assets with par balance of $861.9
million (86.2% of the current pool balance) that are considered
Defaulted Securities, compared to only 15 Defaulted Securities with
11.0% of the pool balance at last review. According
to Indenture, a Defaulted Security is defined as any security that
experiences a payment default, or rating downgrade, or a realized
loss.
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 and 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 9,416 compared
to 5,027 at last review. The distribution of current ratings
and credit estimates is as follows: Baa1-Baa3 (0.0%
compared to 3.1% at last review), Ba1 --Ba3 (0.0%
compared to 12.6% at last review), B1-B3 (2.0%
compared to 47.7% at last review), and Caa1-Caa3
(98.0% compared to 36.6% 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 5.1 years
compared to 6.0 years at last review.
WARR is the par-weighted average of the mean recovery values for
the collateral assets in the pool. Due to the majority of the collateral
currently within the Caa and below categories, Moody's modeled
a WARR of 0.2% compared to 3.9% 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 0.0% compared to 50.2% at
last review. The low MAC is due to high default probability collateral
concentrated within a small number of collateral names.
Moody's review incorporated CDOROM® v2.8, one of Moody's
CDO rating models, which was released on January 24, 2011.
The cash flow model, CDOEdge® v3.2.1.0,
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 up from 0%
to 5% would not result in any rating movement on the rated tranches.
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 sluggish macroeconomic environment
and varying performance in the commercial real estate property markets.
However, Moody's expects to see increasing or stabilizing property
values, higher transaction volumes, a slowing in the pace
of loan delinquencies and greater liquidity for commercial real estate
in 2011 The hotel and multifamily sectors are continuing to show signs
of recovery, while recovery in the office and retail sectors will
be tied to recovery of the broader economy. The availability of
debt capital continues to improve with terms returning toward market norms.
Moody's central global macroeconomic scenario reflects an overall sluggish
recovery through 2012, amidst ongoing individual, corporate
and governmental deleveraging, persistent unemployment, and
government budget considerations.
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, "U.S. CMBS:
Moody's Approach to Rating Synthetic CMBS Resecuritizations" published
in December 2005 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's 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 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
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
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Downgrades One and Affirms Eight CRE CDO Classes of Lenox Street CDO 2007-1, Ltd