Fitch downgrades Class X court action notes

Fitch has downgraded two classes of notes from the contentious Titan Europe 2006-2 CMBS, which is currently subject to court action by its Class X noteholder.

The ratings agency downgraded the deal’s €9.4 million Class F from CCC to C, and the €29.3 million Class G from CC also to C.

Titan Europe 2006-2 is secured by two loans backed by German multi-family housing. Fitch said that the downgrade reflects the very limited time to legal final maturity in January 2016 for any further recovery proceeds from the loans – known as Margaux and Labrador – meaning that the F and G classes are expected to default. A further downgrade of the notes to D and the subsequent withdrawal of the rating is expected after the legal final maturity.

Titan Europe 2006-2 is one of four deals issued by the Titan CMBS conduit which are subject to legal action from its Class X noteholder, Credit Suisse Asset Management, which claims it was underpaid because of a miscalculation in the interest due to it. Credit Suisse AM says it is entitled to default interest payments from the Titan 2006-1, 2006-2, 2007-2 and 2007-CT1X deals, plus interest accrued on the Class X strip.

Among other reasons for the downgrade, Fitch said that the legal proceedings brought by Credit Suisse AM pose a risk. Assuming gross future recoveries of €46 million, Fitch said that €30 million will be deducted to cover costs associated with borrower unwind, class X litigation and the liquidity facility repayment, leaving €16 million for the class F and G notes.

Fitch said that €248.5 million of the proceeds from the sale of the underlying Margaux Properties in 2014 have been released to the issuer by the special servicer, but added that there is uncertainty about the timing and level of the remaining proceeds, with €15.9 million of cash currently held back.

The €43.8 million Labrador portfolio loan has been in German insolvency for almost three years. A real estate advisor has been appointed to aim for higher recoveries, although Fitch said that it expects a significant loss on the loan.

The recovery estimate for Class F is 10 percent, with Class G at 20 percent. The recovery estimates recognise the small remaining balance of the class F notes compared with the expected recovery proceeds from the Labrador loan. The G notes will likely make a significant loss given the possibility of additional expenses, including those resulting from litigation from the class X noteholder.

A hearing on the Class X action is scheduled for February 2016 at the High Court in London.