New York, April 14, 2011 -- Moody's has assigned provisional ratings to the Series 2011-1 notes
to be issued by Velocity Commercial Capital Loan Trust 2011-1.
The transaction is a securitization of small balance commercial loans
sponsored by Velocity Commercial Capital, LLC. The sponsor
originates and purchases mortgage loans backed by commercial real estate.
The loans are backed by a mix of commercial, mixed use and multi-family
properties, both owner occupied and investor owned. The complete
rating action is as follows:
Issuer: Velocity Commercial Capital Loan Trust 2011-1
Series 2011-1 Notes, Assigned (P) A2 (sf)
RATINGS RATIONALE
The ratings are based primarily on an analysis of the credit quality of
the collateral, the collateral's historical performance, the
ability of Situs Asset Management LLC as servicer, the special servicing
ability of Velocity Commercial Capital, LCC (VCC), and the level of credit
enhancement available under the proposed capital structure. Credit
enhancement includes overcollateralization which is initially 18.5%
and targeted to grow to 20.5%, a non-declining, pre-funded
reserve account funded at 0.5% and excess spread for total
enhancement of in excess of 21%. The deal structure also
includes a cumulative default trigger that trips according to a schedule and redirects
monthly excess cash flow to pay down note principal when the trigger fails. Regardless of the trigger, principal collections on the loans are always used to pay principal on the notes until the notes are fully repaid.
The loans in the pool are a combination of fixed rate (43.1%)
and hybrid or floating rate (56.9%). All adjustable rate loans are indexed to 3 or 6 month Libor. Given that the notes are floating rate indexed to Libor;
this presents a potential mismatch in interest rates. Collateral
was directly originated by the sponsor (46.4%), originated by and purchased
from Lehman Brothers Small Business Finance (48.4%) or originated by and purchased
from LaSalle Bank (5.2%). The loans are significantly
seasoned with original WAM of 349 months and current WAM of 314 months.
Approximately 9.9% of the loans in the pool have either
been modified or experienced repeated delinquencies in the past.
All loans in the pool are current as of the cut-off date.
Moody's median cumulative gross loss expectation for the collateral pool
securitized in VCC 2011-1 is 9.00%. The expected
gross loss is based primarily on an analysis of the collateral's
historical performance -- including deal performance for C-BASS 2006-SC1
(a securitization of VCC originated small balance commercial mortgage
loans) and managed portfolio performance -- adjusted to reflect differences
between the economic conditions underlying the historical performance
and our expectation of future economic conditions. Moody's
Aaa volatility proxy for the deal is 45.00%.
Moody's V Score. The V Score for this transaction is Medium.
The V Score indicates "Medium" uncertainty about critical assumptions.
Moody's V Scores provide a relative assessment of the quality of available
credit information and the potential variability around the various inputs
to a rating determination. The V Score ranks transactions by the
potential for significant rating changes owing to uncertainty around the
assumptions that underlie the ratings within the categories of data quality,
historical performance and the level of disclosure for each of the asset
class sector and the issuer; transaction complexity, analytical
modeling and the market value risk; transaction governance,
backup servicing, alignment of interests and legal, regulatory
and other risks. V Scores apply to the entire transaction (rather
than individual tranches). While the overall score is Medium,
significant deviations from the sector within the individual categories
include the following: quality of historical data for the sponsor
which is medium-high versus medium, due to this being the
first sponsored securitization of the sponsor and there being limited
managed portfolio data; disclosure of securitization performance
which is medium-low versus medium due to monthly data disclosure
being more detailed than those seen generally in the sector; experience
and oversight of transaction parties is medium versus medium-low
due to this being the first managed securitization of the sponsor;
and alignment of interests which is medium-low due to the substantial
amount of equity in the transaction which is to be held by the sponsor.
Moody's Parameter Sensitivities: If the expected cumulative gross
losses used in determining the initial rating were changed to 12%,
15% or 185%, the initial model-indicated rating
for the notes might change from A2 to Baa1, Baa3,
and Ba2 respectively. Parameter Sensitivities are not intended
to measure how the rating of the security might migrate over time,
rather they are designed to provide a quantitative calculation of how
the initial rating might change if key input parameters used in the initial
rating process differed. The analysis assumes that the deal has
not aged. Parameter Sensitivities only reflect the ratings impact
of each scenario from a quantitative/model-indicated standpoint.
Qualitative factors are also taken into consideration in the ratings process,
so the actual ratings that would be assigned in each case could vary from
the information presented in the Parameter Sensitivity analysis.
Additional research including a pre-sale report for this transaction
is available at www.moodys.com. The special reports,
"Updated Report on V Scores and Parameter Sensitivities for Structured
Finance Securities" and "V Scores and Parameter Sensitivities in the U.S.
Equipment Lease and Loan ABS Sector" are also available on 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 instrument
in this transaction.
PRINCIPAL METHODOLOGY
The credit analysis used for this pool breaks down the pool into performing
and reperforming components. Loans which have been modified or
which have experienced repeated delinquencies in their pay histories
are considered to be reperforming whereas the remaining loans are considered
to be performing. VCC managed portfolio was analyzed in determining
expected gross defaults and the Aaa loss volatility proxy. Industry
comparable experience was used to arrive at expected loan modification
recidivism and severity of losses. Severity is assumed to be 30%
at the expected case and is assumed to be 60% in the Aaa scenario.
For the performing component of the pool, we use a two phase approach
similar to our approach used in the surveillance of small balance commercial
transactions. A "stress" phase is assumed where defaults
mirror those of the sponsor's managed portfolio for the previous
two years. Sixteen percent of the portfolio balance is assumed
to default during this initial stress period in the expected case.
In the Aaa scenario, it is assumed that 48% of loans default
during this "stress" phase. The post stress period
expectations are based on industry comparable experience in more historically
benign periods. Expected and Aaa cumulative gross defaults (remaining
deal life) are 14% and 38% respectively during this second
phase.
Based on industry experience with modifications to small balance commercial
loans, the reperforming component of the pool is in our expected
case assumed to have about 25% additional defaults beyond those
experienced on the performing loans. Given that these reperforming
loans will still be subject to ordinary economic pressures, those
loans which do not default due to their riskier reperforming status are
still assumed to have the same default rates as the performing portion
of the pool.
Because the structure is exposed to the interest rate mismatch between
notes and collateral, credit for excess spread was assessed assuming
a variety of interest rate and prepayment scenarios. Time to liquidation
has been very long in the small balance commercial space. In order
to prevent excess spread leaking from the deal if performance deteriorates
worse than expectations, the deal structure includes a default trigger
that trips according to a schedule and redirects monthly excess cash flow
to pay down note principal when the trigger fails.
Moody's considered a variety of factors in assessing variability
around the expected cumulative gross loss. These included:
historical performance data (including volatility of performance and performance
during distressed economic periods), pool characteristics,
and servicer capabilities and financial strength. This is a relatively
granular pool where no single underlying obligor is expected to affect
the overall pool performance significantly so a lognormal distribution
of loss probabilities is assumed. In this context, and given
the expected loss of 9% and the Aaa volatility proxy of 45%,
the capital structure's ability to insulate notes from losses on the defaulted
loans was assessed to be consistent with the rating A2.
Other methodologies and factors that may have been considered in the process
of rating this issue can be found at www.moodys.com.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
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
Michael Labuskes
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Michael McDermitt
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 has assigned provisional ratings to the Series 2011-1 notes to be issued by Velocity Commercial Capital, LLC
