Fitch Downgrades 4 and Affirms 5 Classes of N-Star Real Estate CDO III Ltd.

NEW YORK--()--Fitch Ratings has downgraded four and affirmed five classes of N-Star Real Estate CDO III Ltd. (N-Star III) as a result of significant negative credit migration on the underlying collateral. A complete list of rating actions follows at the end of this release.

Since Fitch's last rating action in November 2011, approximately 32.4% of the collateral has been downgraded and 2.9% has been upgraded. Currently, 93.2% of the portfolio has a Fitch-derived rating below investment grade and 73.6% has a rating in the 'CCC' category and below, compared to 72.5% and 43.7%, respectively, at the last rating action. Similarly, the percentage of the portfolio considered defaulted per the trustee has increased since the last rating action to 33.1% from 11%. Over this period, the class A-1 notes have received $131.5 million in pay-downs, of which approximately $118.1 million of the proceeds are from the sale of credit risk securities.

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. The default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under the various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. Fitch also analyzed the structure's sensitivity to the assets that are distressed, experiencing interest shortfalls, and those with near-term maturities. Based on this analysis, the class A notes' breakeven rates are generally consistent with the ratings assigned below.

For the class B through D notes, Fitch analyzed the class' sensitivity to the default of the distressed assets ('CCC' and below). Given the high probability of default of the underlying assets and the expected limited recovery prospects upon default, the class B and C-1 notes have been downgraded and the class C-2 and D notes affirmed at 'CCsf', indicating that default is probable. The class C through D notes are currently receiving interest paid in kind (PIK) whereby the principal amount of the notes is written up by the amount of interest due.

N-Star III is a collateralized debt obligation (CDO) that closed on March 10, 2005. The transaction is backed by 58 securities from 54 obligors. The current portfolio consists of 87.1% commercial mortgage backed securities (CMBS) from the 1999 through 2009 vintages, 7.6% are commercial real estate loans (CRELs), and 5.3% are structured finance CDOs (SF CDOs).

Fitch has taken the following actions as indicated:

--$113,179,372 class A-1 notes downgraded to 'CCCsf' from 'Bsf';

--$14,872,148 class A-2A notes affirmed at 'CCCsf';

--$4,957,383 class A-2B notes affirmed at 'CCCsf';

--$14,872,148 class B notes downgraded to 'CCsf' from 'CCCsf';

--$4,994,735 class C-1A notes downgraded to 'CCsf' from 'CCCsf';

--$6,123,596 class C-1B notes downgraded to 'CCsf' from 'CCCsf';

--$9,313,215 class C-2A notes affirmed at 'CCsf';

--$2,044,563 class C-2B notes affirmed at 'CCsf';

--$9,582,839 class D notes affirmed at 'CCsf'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (June 6, 2012);

--'Global Rating Criteria for Structured Finance CDOs' (Oct. 6, 2011);

--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012).

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

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (June 6, 2012);

--'Global Rating Criteria for Structured Finance CDOs' (Oct. 6, 2011);

--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012).

Applicable Criteria and Related Research:

Global Criteria for Cash Flow Analysis in CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688518

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679923

Global Rating Criteria for Structured Finance CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=690203

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Contacts

Fitch Ratings
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Matthew McGowan, +1 212-908-0733
Analyst
Fitch, Inc.
One State Street Plaza
New York, NY 10004
Matthew.mcgowan@fitchratings.com
or
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Mary MacNeill, +1 212-908-0785
Managing Director
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Email: sandro.scenga@fitchratings.com