Approximately $772 Million of Structured Securities Affected
New York, March 30, 2011 -- Moody's has downgraded three and affirmed nine classes of Notes issued
by N-Star Real Estate CDO IX, 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), a decrease in the
weighted average recovery rate (WARR), and an increase in defaulted
assets since last review. The rating action is the result of Moody's
on-going surveillance of commercial real estate collateralized
debt obligation (CRE CDO) transactions.
Cl. A-1, Downgraded to Ba3 (sf); previously on
Apr 28, 2010 Downgraded to Baa2 (sf)
Cl. A-2, Downgraded to Caa1 (sf); previously
on Apr 28, 2010 Downgraded to B2 (sf)
Cl. A-3, Downgraded to Caa2 (sf); previously
on Apr 28, 2010 Downgraded to Caa1 (sf)
Cl. B, Affirmed at Caa2 (sf); previously on Apr 28,
2010 Downgraded to Caa2 (sf)
Cl. C, Affirmed at Caa3 (sf); previously on Apr 28,
2010 Downgraded to Caa3 (sf)
Cl. D, Affirmed at Caa3 (sf); previously on Apr 28,
2010 Downgraded to Caa3 (sf)
Cl. E, Affirmed at Caa3 (sf); previously on Apr 28,
2010 Downgraded to Caa3 (sf)
Cl. F, Affirmed at Caa3 (sf); previously on Apr 28,
2010 Confirmed at Caa3 (sf)
Cl. G, Affirmed at Caa3 (sf); previously on Apr 28,
2010 Confirmed at Caa3 (sf)
Cl. H, Affirmed at Caa3 (sf); previously on Apr 28,
2010 Confirmed at Caa3 (sf)
Cl. J, Affirmed at Caa3 (sf); previously on Apr 28,
2010 Confirmed at Caa3 (sf)
Cl. K, Affirmed at Caa3 (sf); previously on Apr 28,
2010 Confirmed at Caa3 (sf)
RATINGS RATIONALE
N-Star Real Estate CDO IX, Ltd. is a revolving CRE
CDO transaction with the reinvestment period ending in June 2012.
The collateral pool contains 60.3% commercial mortgage backed
securities (CMBS) of which approximately 90% was issued between
2005 and 2008. The remaining collateral includes CRE CDO (28.0%),
CMBS rake bonds (4.1%), real estate investment trust
(REIT) debt (1.3%), and commercial real estate loans
(6.3%).
As of the March 1, 2011 trustee report, the outstanding note
balance was $800 million, the same as at securitization.
However, the current collateral par balance has increased to over
$1.0 billion dollars from $942 million at last review.
The increase in overcollateralization is the result of discount collateral
purchases.
The pool contains 41 assets totaling $252 million (27.7%
of the collateral pool balance) that are listed as Defaulted Securities
as of the March 1, 2011 trustee report. Seventeen of these
assets (49.4% of the defaulted balance) are CRE CDO,
19 assets are CMBS (40.1%), two assets are commercail
real estate loans (7.4%), and five assets are CMBS
rake bonds (3.1%). 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 assets. The bottom-dollar WARF is a measure of the
default probability within a collateral pool. For non-CUSIP
collateral, Moody's is eliminating the additional default probability
stress applied to corporate debt in CDOROM® v2.8 as we expect
the underlying non-CUSIP collateral to experience low default rates
and higher recovery due to the nature of the secured real estate collateral.
Moody's modeled a bottom-dollar WARF of 3,822,
which is the WARF excluding defaulted collateral, compared to 3,087
at last review. The distribution of current ratings and credit
estimates is as follows: Aaa-Aa3 (3.8% compared
to 8.8% at last review), A1-A3 (7.7%
compared to 10.1% at last review), Baa1-Baa3
(19.1% compared to 15.8% at last review),
Ba1-Ba3 (19.8% compared to 26.4% at
last review), B1-B3 (12.7% compared to 13.0%
at last review), and Caa1-C (37.0% compared
to 25.9% at last review).
WAL acts to adjust the probability of default of the assets in the pool
for time. Moody's modeled to the covenant WAL of 6.0 years
compared to 7.0 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 18.6% compared to a WARR of 20.0%
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 pooled transactions.
Moody's modeled a MAC of 10.2% compared to 11.2%
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 18.6%
to 8.6% or up to 28.6% would result in average
rating movement on the rated tranches of 0 to 2 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 Revolving Facilities in CDOs Backed by Commercial
Real Estate Interests" published in July 2004.
Further information on Moody's analysis of this transaction is available
on www.moodys.com.
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 Investor 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 Downgrades Three and Affirms Nine CRE CDO Classes of N-Star Real Estate CDO IX, Ltd.