Fitch Ratings has affirmed all classes of Marathon Real Estate CDO
2006-1, Ltd./LLC (Marathon 2006-1) reflecting Fitch's base case loss
expectation of 26.7%, which is in line with the expected loss at the
last review. Fitch's performance expectation incorporates prospective
views regarding commercial real estate market value and cash flow
declines. A detailed list of rating actions follows at the end of this
Since last review, five assets are no longer in the pool, including
three B-notes that paid in full, and a loan and mezzanine interest that
took full losses. Total paydown to class A-1 from loan payoffs,
scheduled amortization, and asset sales since last review was $83.1
million, resulting in increased credit enhancement to all the rated
classes. As of the June 2012 trustee report, all overcollateralization
and interest coverage tests are in compliance.
Approximately 44.7% of the total collateral is whole loans or A-notes,
while 10.2% is B-notes and 2.5% mezzanine debt. With respect to CUSIP
securities, commercial mortgage backed securities (CMBS) represent 24.6%
of the collateral, followed by CRE CDOs (9.7%), REIT debt (3.5%), real
estate bank loans (0.9%), and other rated debt (3.3%). Since last
review, the weighted average Fitch-derived rating for the underlying
CMBS collateral declined to 'BB-' from 'BB+/BB'.
Under Fitch's methodology, approximately 49.6% 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 6.9%
from, generally, year-end 2010 or 2011 reporting. Recoveries were
modeled at 46.2% in the base case. The asset manager provided limited
information on the collateral at the time of the review; Fitch made
conservative assumptions in the modeling of the pool.
The largest component of Fitch's base case loss expectation is the
modeled losses on the rated debt collateral (42.1% of the pool).
The next largest component of Fitch's base case loss expectation is a
whole loan (6.7%) secured by a 363-key limited service hotel located on
Manhattan's Upper West Side. The sponsor has been converting the
property's single-occupancy rooms into traditional rooms on an ongoing
basis, and further planned an extensive property improvement plan in
order to convert the hotel into a full-service hotel to be operated
under a major flag. The renovations fell behind schedule during the
recession, and the property continues to struggle. Cash flow remains
below expectations from issuance.
The third largest component of Fitch's base case loss expectation is a
B-note (1.8%) secured by a 190-key hotel in Boston, MA, located between
Boston's Financial District and the Beacon Hill/Back Bay areas. The
property experienced a significant decline in cash flow through the
recession. Performance has since improved, but remains below
expectations from issuance. The loan was recently modified, which
included an extension to May 2014, and a borrower contribution of
equity, which delevered the A-note slightly. Asset performance will
continue to be monitored.
This transaction was analyzed according to the 'Surveillance Criteria
for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions',
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 default timing and interest rate stress scenarios, as
described in the report 'Global Criteria for Cash Flow Analysis in
CDOs'. The breakeven rates for classes A-1 through E are generally in
line with the ratings assigned below.
The 'CCC' and below ratings for classes F through K 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
class' credit enhancement.
Fitch affirms the following classes and revises Recovery Estimates as
--$434,990,243 class A-1 at 'BBBsf'; Outlook Stable;
--$50,000,000 class A-2 at 'BBBsf'; Outlook Stable;
--$99,000,000 class B at 'BBsf'; Outlook Negative;
--$51,500,000 class C at 'Bsf'; Outlook Negative;
--$16,000,000 class D at 'Bsf'; Outlook Negative;
--$14,000,000 class E at 'Bsf'; Outlook Negative;
--$23,500,000 class F at 'CCCsf'; RE 100%;
--$15,500,000 class G at 'CCCsf'; RE 10%;
--$26,000,000 class H at 'CCCsf', RE 0%;
--$56,300,000 class J at 'CCCsf', RE 0%;
--$26,700,000 class K at 'CCCsf', RE 0%.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--' Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan
Floating-Rate Transactions' (Dec. 1, 2011);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);
--'Criteria for Interest Rate Stresses in Structured Finance
Transactions' (March 20, 2012);
--'Structured Finance Recovery Estimates for Distressed Securities'
(Nov. 16, 2011).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Structured Finance Recovery Estimates for Distressed Securities
Criteria for Interest Rate Stresses in Structured Finance Transactions
Global Criteria for Cash Flow Analysis in CDOs
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan
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