Fitch Upgrades RFC 2006-1

Fitch Ratings has upgraded one class and affirmed nine classes of RFC CDO 2006-1, Ltd. /LLC (RFC 2006-1), reflecting Fitch's base case loss expectation of 57.7%. Fitch's performance expectation incorporates prospective views regarding commercial real estate market value and cash flow declines. A detailed list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The upgrade of class A-2 to 'Asf' from 'BBsf' reflects the increased credit enhancement as a result of continued principal paydown. At the top of the capital structure, the principal balance on the class is now fully covered by high rated CUSIP collateral. Although credit enhancement on class B has also increased since last review, an upgrade is not warranted at this time due to the quality of the remaining collateral pool and the risk of the CDO's ability to make timely interest payments given the thickness of the class.

Since Fitch's last rating action, the CDO liabilities have paid down an additional $7.2 million. Total paydown since issuance has reached $402.5 million (67.1% of the original transaction balance). The paydowns since last review were due to the payoff of one commercial mortgage-backed securities (CMBS) asset, the partial payments of four CMBS assets, the amortization of two CMBS assets, and the diversion of interest proceeds from the failure of the OC/IC tests. Realized losses since last review totaled $1.4 million. The CDO is under-collateralized by $102.9 million.

The portfolio is concentrated with only nine assets remaining. As of the January 2016 trustee report and per Fitch categorizations, the CDO consists of the following: whole loans (50.1%), CMBS (28.8%), and mezzanine debt (21.1%). Currently, the defaulted assets and Fitch Loans of Concern combined make up 75.9% of the pool. In addition, the trustee classifies 81.2% of the collateral pool as impaired. The Fitch derived weighted average rating of the remaining CMBS bonds has improved to 'BB' from 'BB-' at last review.

Under Fitch's methodology, approximately 71.2% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. In this scenario, the modeled average cash flow decline from year-end 2015 is, in general, 10%. Fitch estimates that average recoveries will be low at 19%, primarily due to the concentration of defaulted assets, subordinate debt positions, and speculative-grade-rated CMBS bonds.

This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions', which applies stresses to property cash flows and debt service coverage ratio (DSCR) tests to project future default levels for the underlying portfolio. Recoveries for the loan assets are based on stressed cash flows and Fitch's long-term capitalization rates. Due to the high concentration nature of the pool, Fitch did not perform a standard cash flow modelling as it would not add additional value to the analysis. Instead, Fitch applied a deterministic analysis based on loss expectations on an asset-by-asset basis. The liquidated credit enhancement level for each class was then compared to the credit quality of the remaining assets.

The 'CCC' and below ratings assigned to classes B through K are based on a deterministic analysis that considers Fitch's loss expectation for the pool and the current percentage of defaulted assets and Fitch Loans of Concern, factoring in anticipated recoveries relative to each class's credit enhancement, as well as the likelihood for overcollateralization (OC) tests to cure.

The largest component of Fitch's base case loss expectation is the Night Hotel loan (34.7%), which is secured by a 72-room boutique hotel located in the Times Square area of New York City. In 2012, the loan was restructured into an A-note, B-note, and a Hope note, and the loan's maturity was extended to 2019. The B note was subsequently purchased by an investor related to the borrower and the proceeds have been applied to the CDO. Current property cash flow remains significantly below issuance and underwritten expectations.

The second largest component of Fitch's base case loss expectation is a mezzanine loan (19.6%) secured by an interest in the JW Marriott Hotel, a 575-room full-service hotel located in Tucson, Arizona. Fitch modeled a full loss on this highly leveraged position in its base case scenario.

RATING SENSITIVITIES

The ratings on class A-2 and B are expected to remain stable as future upgrades are unlikely due to concerns over the CDO's ability to make timely interest payments; the increasing concentration of the transaction; and the quality of the collateral pool. The classes C through K may be subject to further rating actions as losses are realized.

RFC 2006-1 is a commercial real estate CDO. The transaction exited its reinvestment period in April 2011. The CDO's asset manager is CV Holdings, Inc., formerly known as Realty Finance Corp. (RFC).

DUE DILIGENCE USAGE

No third-party due diligence was provided or reviewed in relation to this rating action

Fitch has upgraded/ the following class:

--$5.5 million class A-2 to 'Asf' from 'BBsf'; Outlook Stable.

Fitch has affirmed the following classes:

--$34.5 million class B at 'CCCsf'; RE100%';

--$15 million class C at 'CCCsf'; RE 0%;

--$13.5 million class D at 'CCsf'; RE 0%;

--$9 million class E at 'Csf'; RE 0%;

--$10.5 million class F at 'Csf'; RE 0%;

--$13.5 million class G a at 'Csf'; RE 0%;

--$4.5 million class H at 'Csf'; RE 0%;

--$24 million class J at 'Csf'; RE 0%;

--$20.3 million class K at 'Csf'; RE 0%.

Class A-1 has paid in full. Fitch does not rate the Preferred Shares.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Global Surveillance Criteria for Structured Finance CDOs (pub. 13 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867800

Surveillance Criteria for U.S. CREL CDOs (pub. 17 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873275

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999446

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999446

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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