Fitch Takes Various Actions on Nomura CRE CDO 2007-2

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded one, downgraded two and affirmed the remaining 11 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 upgrade and affirmations reflect the delevering of the capital structure. The downgrades reflect the pool's increased concentration. Since the last rating action and as of the August 2015 trustee report, the transaction has paid down by $126.7 million from the disposal of nine assets as well as scheduled amortization and interest diversion. Classes A-1 and A-R were paid in full, while class A-2 was partially paid down by 40.5% of its the original balance. There were no realized losses over the same period.

The percentage of defaulted assets increased to 37.7% compared to 26.6% primarily due to the pool's reduction, as no new assets defaulted since the last rating action. Nomura 2007-2 is a commercial CRE CDO managed by C-III Investment Management LLC. Per Fitch categorizations, the CDO is substantially invested as follows: whole loans/A-note (56.5%), B-notes (27.4%) and CRE CDO (16.1%). The CDO exited its reinvestment period in February 2013.

As of the August 2015 trustee report, the CDO is failing all overcollateralization tests. The transaction is undercollateralized by approximately $200 million. Classes D and below are not receiving any interest payments. Interest is being capitalized on these classes; total capitalized interest to date is $26.7 million.

Under Fitch's methodology, approximately 69.8% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. In this scenario, the modeled average cash flow decline is 7.0% from trailing 12-month first-quarter 2015. Fitch modeled average recoveries of 35.5%.

The largest component of Fitch's base case loss expectation is a B-note (27.4%) originally secured by a portfolio of 20 office properties located in Washington, D.C. and Seattle, WA. The senior loan and B-note were both transferred to special servicing in April 2010 for imminent default. The portfolio was returned to the Master Servicer on May 7, 2012 and contained 13 properties. Given the post-default 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 the modeled losses on the rated securities, which have a Fitch-derived weighted average rating of 'CC/C '.

The third largest component of Fitch's base case loss expectation is an A-note (14.3%) secured by a 353-room hotel property located in Honolulu, HI. The loan was transferred back to the Master Servicer in October 2012. The $5 million interest reserve created at the closing of the modification has been depleted. At last rating action, cash flow was distressed due to higher operating expenses, and has since demonstrated minimal recovery. Fitch modeled a significant loss on this overleveraged position.

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'. While the breakeven rates for class A-2 pass the cash flow model above the rating listed below, an upgrade was limited due to the increasing concentration of the portfolio and significant percentage of defaulted loans and assets of concern. The 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 Loans of Concern factoring in anticipated recoveries relative to each classes credit enhancement.

RATING SENSITIVITIES

The Positive Outlook on class A-2 reflects the potential for an upgrade should the transaction continue to delever (at least 27.3% of the pool is scheduled to mature within the next year). The distressed classes B through O are subject to downgrade as losses are realized or if realized losses exceed Fitch's expectations.

DUE DILIGENCE USAGE

No third-party due diligence was provided or reviewed in relation to this rating action.

Fitch upgrades the following classes:

-- $36.1 million class A-2 to 'BBsf'; Outlook Positive assigned, from 'CCCsf'; RE 100%.

Fitch downgrades the following classes:

-- $26.6 million class C to 'Csf' from 'CCCsf'; RE 0%;

-- $28.3 million class D to 'Csf' from 'CCsf'; RE 0%.

Fitch affirms the following classes:

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

-- $21.4 million class E at 'Csf'; RE 0%;

-- $22.8 million class F at 'Csf'; RE 0%;

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

-- $21.8 million class H at 'Csf'; RE 0%;

-- $27.5 million class J at 'Csf'; RE 0%;

-- $27.6 million class K at 'Csf'; RE 0%;

-- $11 million Class L at 'Csf'; RE 0%;

-- $7.3 million Class M at 'Csf'; RE 0%;

-- $11 million Class N at 'Csf'; RE 0%;

-- $18.9 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

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Global Surveillance Criteria for Structured Finance CDOs (pub. 13 Jul 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867800

Surveillance Criteria for U.S. CREL CDOs (pub. 24 Nov 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=811268

Additional Disclosures

Dodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990962

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990962

Endorsement Policyhttps://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/20150917006542/en/

Fitch Ratings, Inc.
Primary Analyst
Tiffany Pierce, +1-212-908-9107
Associate Director
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Christopher Bushart, +1-212-908-0606
Senior Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
[email protected]

Source: Fitch Ratings

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