Fitch Affirms Newcastle CDO VIII

  Fitch Affirms Newcastle CDO VIII

Business Wire

NEW YORK -- January 25, 2013

Fitch Ratings has affirmed all classes of Newcastle CDO VIII 1, Ltd./Newcastle
CDO VIII 2, Ltd./ Newcastle CDO VIII, LLC (collectively, Newcastle CDO VIII)
reflecting Fitch's base case loss expectation of 32.9%. 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.

SENSITIVITY/RATING DRIVERS

Since Fitch's last rating action, classes I-A and I-AR have paid down by $55.2
million primarily due to the full payoff of one asset, the discounted sale of
another asset, and the amortization of several other assets in the pool. The
transaction has realized losses of $17 million due to the sale of one
commercial real estate collateralized debt obligation (CRE CDO) bond at a
significant discount to par. Fitch has incorporated this loss into the ratings
assigned.

As of the December 2012 trustee report and per Fitch categorizations, the CDO
was substantially invested as follows: CRE mezzanine debt (37.5%), real estate
bank loans and corporate debt (22.5%), commercial mortgage-backed securities
(CMBS: 16.3%), residential mortgage-backed securities (RMBS: 8.3%), CRE CDOs
(7.7%), CRE B-notes (6.7%), and principal cash (1%). The CRE loan portion of
the collateral (44.2%) is comprised entirely of subordinate debt (either
mezzanine loans or B-notes). Fitch modeled significant to full losses upon
default of these assets, since they are generally highly leveraged debt
classes. Three assets (3%) were reported as defaulted, which include two CMBS
bonds (2.4%) and one RMBS bond (0.6%). Fitch classified three additional
assets (7.9%) as Loans of Concern.

Under Fitch's methodology, approximately 55.2% 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 is 5% from, generally,
trailing 12-month third and fourth quarter 2012. Modeled recoveries average at
40.3%.

Newcastle CDO VIII is a CRE CDO managed by Newcastle Investment Corp. The CDO
exited its reinvestment period in November 2011. The CDO was originally issued
as a $950 million CRE CDO; however, in April and September 2009, notes with a
face amount totaling $80.19 million were surrendered to the trustee for
cancellation, which has resulted in greater cushion to the
overcollateralization (OC) ratios. As of the December 2012 trustee report, all
OC and interest coverage tests were in compliance.

The largest component of Fitch's base case loss expectation is a mezzanine
loan (4.4%) secured by an interest in a portfolio of 12 full-service hotels
totaling 4,718 keys located in Puerto Rico, Jamaica, and Florida. Performance
has continually remained significantly below underwritten expectations at
issuance. The property cash flow reported by the asset manager as of the
trailing 12 months ended September 2012 still remains greater than 40% below
peak property performance. Fitch modeled a term default and a full loss on
this overleveraged position in its base case scenario.

The next largest component of Fitch's base case loss expectation is a
mezzanine loan (3.9%) secured by an interest in a portfolio of six office
properties totaling greater than 3.5 million square feet located across four
cities: Chicago, Dallas, Denver, and Atlanta. As of September 2012, the
portfolio occupancy was 87% with a diverse rent roll containing over 200
tenants. Net-operating income (NOI), as reported by the asset manager, has
been on the decline over the past two years. For the first nine months of
2012, the annualized NOI declined 4% when compared to year-end (YE) 2011 and
11% when compared to YE 2010. The annualized NOI for the first nine months of
2012 is 16% below the budget for 2012. The CDO holds the second loss position
in the loan capital structure. Fitch modeled a term default and a full loss on
this overleveraged position in its base case scenario.

The third largest component of Fitch's base case loss expectation is a
mezzanine loan (2.9%) secured by an interest in a portfolio of golf courses
located across the United States. The collateral was initially comprised of
more than 170 leased, owned, and managed golf courses; however, multiple golf
courses were released with the remaining collateral comprising 95 courses, as
reported by the asset manager. The initial loan matured in July 2010 and the
first mortgage was modified and granted forbearance until July 2012, which was
subsequently extended further until December 2012. A cash flow sweep has
currently been implemented with no payments made to the mezzanine debt. The
CDO holds the first loss position in the loan capital structure. The loan
remains of concern due to the unique nature of the collateral. Fitch modeled a
term default and a full loss on this position.

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. The structured finance bonds, real estate bank loans and
corporate debt portion of the collateral were analyzed in the Portfolio Credit
Model according to the 'Global Rating Criteria for Structured Finance CDOs'.
The combined 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'.

Based on this analysis, the breakeven rates for classes I-A through III are
generally consistent with the ratings assigned below. The Rating Outlooks for
classes I-A and I-AR remain Stable reflecting these classes' senior position
in the capital stack. The Rating Outlook for class I-B through III remains
Negative reflecting Fitch's expectation of further negative credit migration
of the underlying collateral and the concentration of subordinate CRE loan
positions in the portfolio.

The 'CCCsf' ratings on classes V through XII are based upon a deterministic
analysis that considers Fitch's base case expected loss for the pool and the
current percentage of defaulted assets and Fitch Loans of Concern factoring in
anticipated recoveries relative to each class' credit enhancement.

Fitch affirms the following classes as indicated:

-- $408,422,142 class I-A at 'BBsf'; Outlook Stable;

-- $52,984,494 class I-AR at 'BBsf'; Outlook Stable;

-- $38,000,000 class I-B at 'BBsf'; Outlook Negative;

-- $42,750,000 class II at 'BBsf'; Outlook Negative;

-- $42,750,000 class III at 'Bsf'; Outlook Negative;

-- $28,500,000 class V at 'CCCsf'; RE 0%;

-- $22,562,500 class VIII at 'CCCsf'; RE 0%;

-- $6,000,000 class IX-FL at 'CCCsf'; RE 0%;

-- $7,600,000 class IX-FX at 'CCCsf'; RE 0%;

-- $18,650,000 class X at 'CCCsf'; RE 0%;

-- $24,125,000 class XI at 'CCCsf'; RE 0%;

-- $28,500,000 class XII at 'CCCsf'; RE 0%.

Class S has paid in full. Fitch previously withdrew the ratings on classes IV,
VI, and VII. Fitch does not rate the preferred shares.

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);

-- 'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate
Transactions' (Nov. 29, 2012);

-- 'Global Rating Criteria for Structured Finance CDOs' (Oct. 3, 2012);

-- '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 Rating Criteria for Structured Finance CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=690203

Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate
Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695733

Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679923

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Contact:

Fitch Ratings
Primary Surveillance Analyst
Melissa Che, +1-212-908-9107
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Committee Chairperson
Mary MacNeill, +1-212-908-0785
Managing Director
or
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Elizabeth Fogerty +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com
 
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