Fitch Downgrade Debt Securities Worth $775 Million To Junk

Fitch Ratings has downgraded all classes of LNRs, CDOs, VI LTDs and LLCs (LNR VI) as a result of increased interest shortfalls and negative credit migration on the underlying portfolio. Fitch believes that default is inevitable.

“100% of the portfolio now has a Fitch derived rating below investment grade.”

Fitch Ratings


Fitch Ratings has downgraded all classes of LNR, CDO, VI LTD, and LLC (LNR VI) as a result of increased interest shortfalls and negative credit migration on the underlying portfolio. Since Fitch’s last rating action in February 2009, the credit quality of the portfolio has declined to a current weighted average Fitch derived rating of ‘CCC-‘, down from ‘B-/CCC+’ at last review.

Further, 100% of the portfolio now has a Fitch derived rating below investment grade; 75.4% has a rating in the ‘CCC’ category and below. As of the June 2010 trustee report, 85% of the portfolio is experiencing interest shortfalls.

As a result of these shortfalls and the CDO’s substantial hedge termination obligation, classes C and below are deferring interest payments, the rating agency says in a statement.

This transaction was analyzed under the framework described in the report ‘Global Rating Criteria for Structured Finance CDOs’ using the Portfolio Credit Model (PCM) for projecting future default levels for the underlying portfolio.

However, given that the total percentage of assets experiencing interest shortfalls exceeds the credit enhancement to all classes, and that Fitch expects minimal principal recoveries on these assets, Fitch believes that default is inevitable.

As such, all classes have been downgraded to ‘C’.

LNR VI is backed by 131 tranches from 28 commercial mortgage-backed securities (CMBS) obligors, all of which are from the 2006 or 2007 vintages.

The transaction closed in August 2007, and is considered a CMBS B-piece resecuritization (also referred to as first loss CRE CDO) as it primarily includes junior bonds of CMBS transactions.

Fitch has downgraded the following classes as indicated:

–$242,084,000 class A-1 to ‘C’ from ‘BB+’;

–$132,558,000 class B to ‘C’ from ‘B’;

–$149,951,000 class C to ‘C’ from ‘CCC’;

–$25,995,000 class D to ‘C’ from ‘CCC’;

–$21,476,000 class E to ‘C’ from ‘CC’;

–$44,195,000 class F to ‘C’ from ‘CC’;

–$28,825,000 class G to ‘C’ from ‘CC’;

–$24,631,000 class H to ‘C’ from ‘CC’;

–$55,280,000 class J to ‘C’ from ‘CC’;

–$39,459,000 class K preferred shares to ‘C’ from ‘CC’;

–$15,456,000 class L preferred shares to ‘C’ from ‘CC’.

The Rating Outlooks for classes A-1 and B were Negative prior to today’s downgrades. Fitch does not assign Rating Outlooks to classes rated ‘CCC’ or lower.

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);

* ‘Global Rating Criteria for Structured Finance CDOs’ (Dec. 16, 2008).

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