Fitch Downgrades Gramercy 2007-1; Assigns Outlooks, LS & RR Ratings

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has downgraded all classes of Gramercy Real Estate CDO 2007-1 Ltd./LLC (Gramercy 2007-1) reflecting Fitch's base case loss expectation of 18.3%. 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 release.

The transaction is collateralized primarily by commercial mortgage backed securities (CMBS) and both senior and subordinate commercial real estate (CRE) debt: 74.5% are CMBS, 7.8% are either whole loans or A-notes and 17.7% are either B-notes or mezzanine loans. Fitch expects significant losses upon default for the subordinate positions since they are generally highly leveraged debt classes. Two loans (5.9%) are currently defaulted while one loan (5.4%) is considered a Fitch Loan of Concern. Fitch expects full losses on the defaulted assets.

Gramercy 2007-1 is a $1.1 billion CRE collateralized debt obligation (CDO) managed by GKK Manager LLC, an affiliate of Gramercy Capital Corp. The transaction has a five-year reinvestment period which ends in August 2012.

As of the March 2010 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: CMBS, primarily A-J bonds, (74.5%), CRE whole loans/A-notes (7.8%), mezzanine loans (12.2%), and B-notes (5.5%). All principal coverage tests are now failing, meaning that beginning with the next payment period, all interest (after class B) and principal proceeds will be redirected to redeem the class A-1 notes.

Under Fitch's updated methodology, approximately 25.5% 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 for the CRE loan assets is 14% from the most recent available cash flows (generally third or fourth quarter 2009). Fitch estimates that recoveries will average 28.3% in the base case.

The largest component of Fitch's base case loss expectation is a defaulted mezzanine loan (4%) secured by ownership interests in a multifamily property located in New York, NY. The property contains over 11,000 residential units and approximately 120,000 square feet of office and retail space. The sponsors' plan was to convert the majority of rent controlled units to market rates; however, the plan has faced significant economic and legal hurdles. The loan became delinquent in January 2010, and the special servicer is attempting to gain control of the property via judicial foreclosure. Fitch modeled no recovery on this highly leveraged mezzanine position.

The next largest component of Fitch's base case loss expectation is a defaulted B-note (1.9%) secured by a jewelry show room building located in Los Angeles, CA. While occupancy was above 90% as of September 2009, the sponsor had granted lease concessions to the tenants in light of recessionary pressures. The loan is currently 90+ days delinquent and the special servicer has initiated foreclosure. Fitch modeled a full loss in the base case.

The next largest component of Fitch's base case loss expectation is a whole loan secured by a full service hotel located in Anaheim, CA. The property has experienced steep cash flow declines as a result of the deterioration in group and leisure travel. Fitch modeled a term default with a partial loss in its base case scenario.

This transaction was analyzed according to 'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs,' which, for the CRE loan assets, applies stresses to property cash flows and uses debt service coverage ratio (DSCR) tests to project future default levels. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. For the CMBS assets, the analysis uses the Portfolio Credit Model to project portfolio default levels. Recoveries are based on the tranche thickness and seniority of each security. The blended default levels were then compared to the breakeven levels generated by Fitch's cash flow model under the various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs.' Based on this analysis, the credit characteristics of classes A-1 are generally consistent with the 'BB' rating category. The credit characteristics of A-2 are generally consistent with the 'B' rating category.

The ratings for classes A-3 through J are based on a deterministic analysis, which 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.

Based on this analysis, classes A-3 through C-FL/C-FX are consistent with the 'CCC' rating category, meaning default is a real possibility. Fitch's base case loss expectation of 18.3% exceeds these classes' respective current credit enhancement levels. The ratings for classes D through F are deemed to be consistent with the 'CC' rating category, meaning default appears probable given that these classes' credit enhancement levels are below the total losses expected from the currently defaulted assets and Loans of Concern in the pool. The ratings for classes G-FL/G-FX through J are deemed to be consistent with the 'C' rating category, meaning default appears inevitable given that these classes' credit enhancement levels are below the total losses expected from the currently defaulted assets.

Classes A-1 and A-2 were assigned a Negative Outlook reflecting Fitch's expectation of further negative credit migration of the underlying collateral. These classes were also assigned Loss Severity (LS) ratings ranging from 'LS3' to 'LS4' indicating each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the expected loss for the collateral under the 'B' stress. LS ratings should always be considered in conjunction with probability of default indicated by a class' long-term credit rating. Fitch does not assign Outlooks or LS ratings to classes rated 'CCC' or lower.

Classes A-3 through J were assigned Recovery Ratings (RR) to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities. Recovery Ratings are calculated using Fitch's cash flow model and incorporate Fitch's current 'B' stress expectation for default and recovery rates (25.5% and 28.3%, respectively), the 'B' stress USD LIBOR up-stress, and a 24-month recovery lag. All modeled distributions are discounted at 10% to arrive at a present value and compared to the class' tranche size to determine a Recovery Rating. The assumptions for the 'B' stress USD LIBOR up-stress scenario are found in Fitch's report, 'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Feb. 17, 2010), available on Fitch's web site at 'www.fitchratings.com'.

The assignment of 'RR3' to class A-3 reflects modeled recoveries of 50%-70% of its outstanding balance. The expected recovery proceeds are broken down as follows:

--Present value of expected principal recoveries ($47 million);

--Present value of expected interest payments ($34.6 million);

--Total present value of recoveries ($81.5 million);

--Sum of undiscounted recoveries ($146.4 million).

The assignment of 'RR4' to class B-FL reflects modeled recoveries of 30%-50% of its outstanding balance. The expected recovery proceeds are broken down as follows:

--Present value of expected principal recoveries ($0);

--Present value of expected interest payments ($10.1 million);

--Total present value of recoveries ($10.1 million);

--Sum of undiscounted recoveries ($15.8 million).

The assignment of 'RR4' to class B-FX reflects modeled recoveries of 30%-50% of its outstanding balance. The expected recovery proceeds are broken down as follows:

--Present value of expected principal recoveries ($0);

--Present value of expected interest payments ($6.8 million);

--Total present value of recoveries ($6.8 million);

--Sum of undiscounted recoveries ($10.2 million).

Classes C-FL/C-FX through J are assigned a Recovery Rating of 'RR6' as the present value of the recoveries in each case is less than 10% of each class' principal balance.

Fitch has downgraded, assigned Outlooks, LS and RR ratings to the following classes as indicated:

--$701,920,398 class A-1 notes to 'BB/LS3' from 'A'; Outlook Negative;

--$121,000,000 class A-2 notes to 'B/LS4' from 'BBB'; Outlook Negative;

--$116,600,000 class A-3 notes to 'CCC/RR3' from 'BB';

--$29,500,000 class B-FL notes to 'CCC/RR4' from 'B';

--$20,000,000 class B-FX notes to 'CCC/RR4' from 'B';

--$20,150,000 class C-FL notes to 'CCC/RR6' from 'B-';

--$3,500,000 class C-FX notes to 'CCC/RR6' from 'B-';

--$4,400,000 class D notes to 'CC/RR6' from 'CCC';

--$4,950,000 class E notes to 'CC/RR6' from 'CCC';

--$9,350,000 class F notes to 'CC/RR6' from 'CCC';

--$2,950,000 class G-FL notes to 'C/RR6' from 'CCC';

--$2,000,000 class G-FX notes to C/RR6' from 'CCC';

--$2,000,000 class H-FL notes to 'C/RR6' from 'CC';

--$5,150,000 class H-FX notes to 'C/RR6' from 'CC';

--$13,750,000 class J notes to 'C/RR6' from 'CC'.

Additionally, classes A-1 through C are removed from Rating Watch Negative.

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:

--'Global Structured Finance Rating Criteria' (Sept. 30, 2009);

--'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs' (Nov. 9, 2009);

--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009);

--'Criteria for Structure Finance Recovery Ratings' (Aug. 17, 2009);

--'Global Criteria for Cash Flow Analysis in CDOs' (Nov. 9, 2009).

Additional information is available at 'www.fitchratings.com'.

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