New York, November 09, 2012 -- Moody's has affirmed the ratings of all classes of Notes issued by Arbor Realty Mortgage Series 2004-1. The affirmations are due to the key transaction parameters performing within levels commensurate with the existing ratings levels. The rating action is the result of Moody's on-going surveillance of commercial real estate collateralized debt obligation (CRE CDO CLO) transactions.
Moody's rating action is as follows:
Cl. A, Affirmed at A1 (sf); previously on Dec 1, 2010 Downgraded to A1 (sf)
Cl. B, Affirmed at Ba2 (sf); previously on Dec 1, 2010 Downgraded to Ba2 (sf)
Cl. C, Affirmed at Caa2 (sf); previously on Dec 1, 2010 Downgraded to Caa2 (sf)
Cl. D, Affirmed at Caa3 (sf); previously on Dec 1, 2010 Downgraded to Caa3 (sf)
Arbor Realty Mortgage Securities Series 2004-1 is a currently static (reinvestment period ended in April 2009) cash transaction backed by a portfolio of a-notes and whole loans (41.9% of the pool balance), b-notes (31.3%), mezzanine loans (26.6%), and commercial mortgage backed securities (CMBS) (0.2%). As of the October 15, 2012 Trustee report, the aggregate Note balance of the transaction, including preferred shares, has decreased to $326.3 million from $469.0 million at issuance, with the paydown currently directed to the Class A Notes. The paydown was directed to Class C and Class D during the reinvestment period as a result of a turbo feature that directed excess interest proceeds as principal to those classes. Since the end of the reinvestment period, the paydown has been directed in a senior sequential priority.
There are seven assets with a par balance of $36.2 million (11.4% of the current pool balance) that are considered defaulted securities as of the October 15, 2012 Trustee report. While there have been limited realized losses on the underlying collateral to date, Moody's does expect moderate to significant losses to occur on the defaulted securities once they are realized.
Moody's has identified the following parameters as key indicators of the expected loss within CRE CDO transactions: weighted average rating factor (WARF), weighted average life (WAL), weighted average recovery rate (WARR), and Moody's asset correlation (MAC). These parameters are typically modeled as actual parameters for static deals and as covenants for managed deals.
WARF is a primary measure of the credit quality of a CRE CDO pool. We have completed updated assessments for the non-Moody's rated collateral. Moody's modeled a bottom-dollar WARF of 8,177 compared to 7,402 at last review. The current distribution of Moody's rated collateral and assessments for non-Moody's rated collateral is as follows: Aaa-Aa3 (0.5% compared to 0.0% at last review), Baa1-Baa3 (0.0% compared to 4.4% at last review), B1-B3 (1.1% compared to 0.0% at last review), and Caa1-C (98.4% compared to 95.6% at last review).
Moody's modeled a WAL of 2.7 years compared to 2.8 years at last review. Moody's modeled a fixed WARR of 21.7% compared to 21.6% at last review.Moody's modeled a MAC of 99.9%, the same as that at last review.
Moody's review incorporated CDOROM® v2.8, one of Moody's CDO rating models, which was released on March 22, 2012.
The cash flow model, CDOEdge® v22.214.171.124, was used to analyze the cash flow waterfall and its effect on the capital structure of the deal.
Changes in any one or combination of the key parameters may have rating implications on certain classes of rated notes. However, in many instances, a change in key parameter assumptions in certain stress scenarios may be offset by a change in one or more of the other key parameters. Rated notes are particularly sensitive to changes in recovery rate assumptions. Holding all other key parameters static, changing the recovery rate assumption down from 21.7% to 11.7% or up to 31.7% would result in a modeled rating movement on the rated tranches of 0 to 9 notches downward and 1 to 4 notches upward, respectively.
The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside the given range may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated when the related securities ratings were issued. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions. The decision to take (or not take) a rating action is dependent on an assessment of a range of factors including, but not exclusively, the performance metrics.
Primary sources of assumption uncertainty are the extent of growth in the current macroeconomic environment and commercial real estate property markets. Commercial real estate property values are continuing to move in a positive direction along with a rise in investment activity and stabilization in core property type performance. Limited new construction and moderate job growth have aided this improvement. However, a consistent upward trend will not be evident until the volume of investment activity steadily increases for a significant period, non-performing properties are cleared from the pipeline, and fears of a Euro area recession are abated.
The hotel sector is performing strongly with eight straight quarters of growth and the multifamily sector continues to show increases in demand with a growing renter base and declining home ownership. Slow recovery in the office sector continues with minimal additions to supply. However, office demand is closely tied to employment, where growth remains slow and employers are considering decreases in the leased space per employee. Also, primary urban markets are outperforming secondary suburban markets. Performance in the retail sector continues to be mixed with retail rents declining for the past four years, weak demand for new space and lackluster sales driven by discounting and promotions. However, rising wages and reduced unemployment, along with increased consumer confidence, is helping to spur consumer spending resulting in increased sales. Across all property sectors, the availability of debt capital continues to improve with robust securitization activity of commercial real estate loans supported by a monetary policy of low interest rates.
Moody's central global macroeconomic scenario maintains its forecast of relatively robust growth in the US and an expectation of a mild recession in the euro area for 2012. Downside risks remain significant, and elevated downside risks and their materialization could pose a serious threat to the outlook. Major downside risks include: a deeper than expected recession in the euro area; the potential for a hard landing in major emerging markets; an oil supply shock; and material fiscal tightening in the US given recent political gridlock. Healthy but below-trend growth in GDP is expected through the rest of this year and next with risks trending to the downside.
The methodologies used in this rating were "Moody's Approach to Rating SF CDOs" published in May 2012, and "Moody's Approach to Rating Commercial Real Estate CDOs" published in July 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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Romina PadhiAsst Vice President - Analyst Structured Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Deryk Meherik VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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