(The following statement was released by the rating agency)
Aug 10 - Fitch Ratings has downgraded one of the two real estate loans extended to GK Frangipani, due April 2013 to 'BBBsf' from 'Asf' and placed both loans on Rating Watch Negative (RWN). The transaction is a Japanese single-borrower type CMBS securitisation. The rating actions are as follows:
JPY4.04bn* senior loan; downgraded to 'BBBsf' from 'Asf'; placed on RWN
JPY0.46bn* mezzanine loan; 'BBBsf'; placed on RWN
*as of 9 August 2012
The downgrade of the senior loan and the RWN on both of the rated loans reflect the uncertainty over the timing of full repayment of the rated loans. There are only eight months to the legal final maturity and Fitch believes that the property sales for the full repayment should be completed well in advance of the legal final maturity to support higher investment grade ratings.
The transaction is currently in the workout stage, following the default of the sole underlying loan in February 2010. The asset manager has sold many properties to date and as a result, the total outstanding balance of the rated loans has been reduced to 5% of its original balance and the Fitch LTV is now less than 30%. In addition, Fitch believes that the equity investor in GK Frangipani has a strong incentive to avoid the default of the rated loans on or before legal final maturity.
If the remaining property sales were to be delayed beyond current expectations, the loans may no longer be commensurate with an investment grade rating. This is because the timing of the full repayment of the rated loans would be much closer to the legal final maturity, and thus more exposed to execution risks. Fitch will closely monitor the workout progress and aims to resolve the RWN status at the latest by end-2012.
Fitch first rated the transaction in January 2008. The rated loans were backed by one underlying loan asset collateralised by 41 properties at closing. The transaction is now ultimately backed by a total of 11 properties.