MBIA Capital Management Corp looks set to replace Vertical Capital, LLC as asset manager for Vertical CRE CDO 2006-1 Ltd.
MBIA Capital currently manages 11 CDOs issued since February 1997, four of which it acts as replacement manager, totaling $6.2 billion. Vertical would be its first commercial real estate (CRE) CDO.
Fitch Ratings has reviewed MBIA Capital as a potential replacement and said that the manager's capabilities are consistent with the current ratings assigned to the notes issued by Vertical.
Fitch added that the scope of its review was solely to determine that MBIA Capital meets Fitch's minimum guidelines to manage Vertical within the context of Fitch's stated review procedure for replacement managers. Its review was in the context of the current management responsibilities associated with Vertical and the current ratings assigned to the CDO by Fitch.
“Fitch is not a party to the transaction and therefore does not provide consent or approval, as that remains the sole preserve of the transaction parties,” said Fitch analysts. “Fitch expects to be notified by the trustee when or if the proposed transfer of asset management responsibilities is completed. “
Vertical is a revolving CRE CDO issued in May 2006. As of the July 2009 trustee report, and based on Fitch asset type categorizations, the CDO was substantially invested in commercial mortgage-backed securities (73.8%), CRE CDOs (19.9%), commercial mortgage B-notes (3.9%), and CRE mezzanine loans (2.4%).
The transaction has a five-year reinvestment period, ending April 2011, during which principal proceeds may be used to invest in substitute collateral. As of July 2009, however, the CDO was failing all of its interest coverage and overcollateralization tests as a result of six defaulted assets (14%), as well as overcollateralization haircuts associated with below-investment-grade collateral.
As long as these tests are failing, interest and principal proceeds are redirected to pay down the senior-most notes, and the asset manger's ability to reinvest is therefore constrained. As a result asset credit deterioration, resultant coverage test failures and portfolio concentration by industry and vintage, Fitch downgraded all classes of the transaction to below investment grade on March 5, 2009.