Approximately $962.5 Million of Structured Securities Affected
New York, April 12, 2011 -- Moody's has downgraded one and affirmed five classes of Notes issued by
Sorin Real Estate CDO III Ltd. due to an increase in weighted average
rating factor (WARF), an increase in Defaulted Securities,
and the current and forecasted levels of interest shortfalls. The
rating action is the result of Moody's on-going surveillance
of commercial real estate collateralized debt obligation (CRE CDO) transactions.
Cl. A-1B, Downgraded to Caa2 (sf); previously
on Aug 13, 2010 Assigned B3 (sf)
Cl. A-2, Affirmed at C (sf); previously on May
19, 2010 Downgraded to C (sf)
Cl. B, Affirmed at C (sf); previously on May 19,
2010 Downgraded to C (sf)
Cl. D, Affirmed at C (sf); previously on May 19,
2010 Downgraded to C (sf)
Cl. C-FX, Affirmed at C (sf); previously on May
19, 2010 Downgraded to C (sf)
Cl. C-FL, Affirmed at C (sf); previously on May
19, 2010 Downgraded to C (sf)
RATINGS RATIONALE
Sorin Real Estate CDO III Ltd. is a CRE CDO transaction backed
by a portfolio of commercial mortgage backed securities (CMBS) (63.4%
of the pool balance), asset backed securities (25.4%)
that are primarily subprime residential mortgage-backed securities,
CRE CDOs (10.0%) and real estate investment trust bond (REITs)
(1.4%).
As of the March 7, 2011 Trustee report, the aggregate Note
balance of the transaction has decreased to $962.5 million
from $971.3 million at issuance, with the paydown
directed to the Class A-1B Notes; a result of failing the
Class A/B overcollateralization test. A portion of the principal
proceeds is currently being used to pay interest and counterparty payments
on the transaction, diverting money that would be utilized to pay
principal on Class A-1B.
There are nineteen assets with par balance of $152.7 million
(16.2% of the current pool balance) that are considered
Non-Performing Securities as of the March 7, 2011 Trustee
report. Fourteen of these assets (72.4% of the defaulted
balance) are ABS, two assets are CMBS (19.3%),
and three assets are CDOs (8.4%). Defaulted Securities
are defined as assets which are in default of regular principal or interest
receipt or are rated Ca or below. While there have been limited
realized losses 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: weighted average recovery
rate (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 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 2,625 compared to 1,811
at last review. The distribution of current ratings and credit
estimates is as follows: Aaa-Aa3 (13.7% compared
to 20.0% at last review), A1-A3 (11.1%
compared to 20.3% at last review), Baa1-Baa3
(22.7% compared to 19.1% at last review),
Ba1-Ba3 (14.9% compared to 9.7% at
last review), B1-B3 (14.7% compared to 13.7%
at last review), and Caa1-C (23.0% compared
to 17.2% 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 5.0 years
compared to 5.5 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 25.6% compared to 28.4% 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 9.5% compared to 6.7% at
last review.
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 down from 26%
to 16% or up to 36% would result in average rating movement
on the rated tranches of 0 to 1 notches downward and 0 to 1 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 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 "Moody's
Approach to Rating SF CDOs" published in November 2010", and
"CMBS: Moody's Approach to Rating Static CDOs Backed by Commercial
Real Estate Securities published on June 17, 2004" published
in July 2004.
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
Edward Siegel
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 Five CRE CDO Classes of Sorin Real Estate CDO III Ltd.