Fitch Affirms Nomura CRE CDO 2007-2

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed all classes of Nomura CRE CDO 2007-2, Ltd. /LLC (Nomura 2007-2). A detailed list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The affirmations reflect the delevering of the capital structure which offsets the increasing concentration and expected losses. Since the last rating action, the transaction has paid down by $12.8 million from two full loan payoffs as well as scheduled amortization and interest diversion. Class A-2 was paid down by 35.5% (61.6% of its original balance). There were no realized losses over the same period.

The CDO is very concentrated with only 14 assets remaining. The percentage of defaulted assets increased to 42.3% compared to 37.7% at the last rating action primarily due to the pool's balance reduction, as no new assets have defaulted since the last rating action. Fitch Loans of Concern (FLOC) increased to 37.7% compared to 20.4% at last review, as three new loans were added: one loan has 30% NRA expiring in 2017 and two loans did not pay off at their 2016 scheduled maturities with both receiving an extension to allow the borrower additional time to sell their respective properties.

Per Fitch categorizations, the CDO is substantially invested as follows: whole loans/A-note (52%), B-notes (28.9%), CRE CDO (16.7%) and cash (2.4%). The CDO exited its reinvestment period in February 2013.

As of the July 2016 trustee report, the CDO is failing all overcollateralization tests. The transaction is undercollateralized by approximately $208 million. Classes D and below are not receiving any interest payments. Interest is being capitalized on these classes.

Under Fitch's methodology, approximately 85.7% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. Fitch modeled average recoveries of 46.1%.

The largest component of Fitch's base case loss expectation is the B-note of the Beacon DC and Seattle Portfolio (28.9%), which was originally secured by a portfolio of 20 office properties located in Washington, D.C. and Seattle, WA. The pool currently consists of 13 properties after a modification which allowed for the release of properties over time. The senior loan and B-note were both transferred to special servicing in April 2010 for imminent default and was returned to the master servicer on May 7, 2012 after the modification. Given the post-modification waterfall, the B-note will not receive any payments until the A-notes are paid in full. Fitch modeled a full loss on this B-note position.

The next largest component of Fitch's base case loss expectation is Llikai Waikiki Hotel A-note (15.1%), which is secured by a 353-room hotel property located in Honolulu, HI. The loan was transferred to special servicing in 2011, and back to the master servicer in October 2012 after a loan modification. The $5 million interest reserve created at the closing of the modification has been depleted. Cash flow remains low but has improved since the Fitch's last rating action. Fitch modeled a significant loss on this overleveraged position.

The third largest component of Fitch's base case loss expectation is the modeled losses on the rated securities, which have a Fitch-derived weighted average rating of 'CC/C'.

This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs', which applies stresses to property cash flows and debt service coverage ratio tests to project future default levels for the underlying portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. The default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under the various defaults timing and interest rate stress scenarios as described in the report 'Global Rating Criteria for Structured Finance CDOs'. The breakeven rates for class A-2 generally pass the cash flow model at the rating listed below. The 'CCCsf' and below ratings for classes B through O are based on a deterministic analysis that considers Fitch's base case loss expectation for the pool and the current percentage of defaulted assets, and Fitch assets of concern factoring in anticipated recoveries relative to each classes credit enhancement. Further, classes G through O have negative credit enhancement. Nomura 2007-2 is a commercial CRE CDO managed by C-III Investment Management LLC.

RATING SENSITIVITIES

Upgrades to class A-2 may be limited due to the increasing concentration of the portfolio and significant percentage of defaulted loans and assets of concern. Should the two FLOCs, which are past their maturity dates repay, pay off of class A-2 is possible. The distressed classes B through O are subject to downgrade as losses are realized or if realized losses exceed Fitch's expectations.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

Fitch has affirmed the following ratings and revised Outlooks as indicated:

--$23.3 million class A-2 at 'BBsf'; Outlook to Stable from Positive;

--$70.5 million class B at 'CCCsf'; RE 100%;

--$26.6 million class C at 'Csf'; RE 0%;

--$28.6 million class D at 'Csf'; RE 0%;

--$21.6 million class E at 'Csf'; RE 0%;

--$23 million class F at 'Csf'; RE 0%;

--$26.9 million class G at 'Csf'; RE 0%;

--$22.1 million class H at 'Csf'; RE 0%;

--$28 million class J at 'Csf'; RE 0%;

--$28.6 million class K at 'Csf'; RE 0%;

--$11.4 million Class L at 'Csf'; RE 0%;

--$7.7 million Class M at 'Csf'; RE 0%;

--$11.6 million Class N at 'Csf'; RE 0%;

--$20.2 million Class O at 'Csf'; RE 0%.

Fitch does not rate the $48.5 million preferred shares. Classes A-1 and A-R were paid in full.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)

https://www.fitchratings.com/site/re/884963

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)

https://www.fitchratings.com/site/re/879815

Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 May 2016)

https://www.fitchratings.com/site/re/880522

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Global Surveillance Criteria for Structured Finance CDOs (pub. 05 Jul 2016)

https://www.fitchratings.com/site/re/883201

Surveillance Criteria for U.S. CREL CDOs (pub. 17 Nov 2015)

https://www.fitchratings.com/site/re/873275

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011057

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011057

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160831006346/en/

Fitch Ratings
Primary Analyst
Tiffany Pierce
Associate Director
+1-212-908-9107
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Mary MacNeill
Managing Director
+1-212-908-0785
or
Media Relations
Sandro Scenga
+1-212-908-0278
New York
[email protected]

Source: Fitch Ratings

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