The FINANCIAL — Tokyo-29 August 2011: Fitch Ratings has downgraded G.K. Orso Funding CMBS 7's class B to F notes and affirmed class A notes, all due May 2014.
The transaction is a Japanese multi-borrower type CMBS securitisation. The rating actions are as follows:
JPY16.24bn Class A notes affirmed at 'AAAsf'; Outlook Stable
JPY5bn Class B notes downgraded to 'Asf' from 'AAsf'; Outlook Stable
JPY5bn Class C notes downgraded to 'BBsf' from 'BBBsf'; Outlook Negative
JPY5bn Class D notes downgraded to 'CCCsf' from 'BB-sf'; assigned a Recovery Rating of 'RR3'
JPY5.47bn Class E notes downgraded to 'CCsf' from 'CCCsf'; Recovery Rating revised to 'RR6' from 'RR4'
JPY0.83bn Class F notes downgraded to 'CCsf' from 'CCCsf'; Recovery Rating revised to 'RR6' from 'RR5'
The downgrade of the class B to F notes reflects Fitch's downward revision of the value of the portfolio's 26 of the 27 underlying properties since the agency's previous rating action in September 2010. The agency has revised its estimated cash flow on eight properties, taking into account their recent weak cash flow performance. The agency also adopted higher capitalization rates for all the properties, as two underlying loans have defaulted and the remaining three loans are approaching their maturity, in turn negatively affecting the property valuations. With regard to one defaulted loan, the servicer is carrying out the property sale in accordance with its workout plan, which allows selling the property at a price lower than the current loan balance.
The downgrade of the class B notes also reflects Fitch's view that this class may not be repaid in full by mid-2013, in advance of the legal maturity. This is because the agency expects that the full repayment of the class B notes would require selling most of the remaining properties, including those that are less marketable, which may take longer-than-expected.
The affirmation of the class A notes reflects that all future loan repayment proceeds will be applied to the notes on a sequential basis, as all remaining underlying loans are either in default or breaching loan-to-value tests. Most loan repayment proceeds to date have also been applied on a sequential basis, with only a small amount repaying the notes principal on a pro rata basis following the sale of properties prior to loan maturity. Fitch expects that the class A notes will likely be repaid in full well before the legal final maturity date, as expected sales proceeds from marketable multi-family residential properties can cover the majority of the current balance.
At closing the transaction was a securitisation of four non-recourse loans and two Tokutei Mokuteki Kaisha specified bonds (TMK bonds), which were ultimately backed by 42 real estate properties. The transaction is now backed by four loans and one TMK bond, ultimately backed by a total of 27 properties.
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