Fitch Upgrades Talmage 2005-2

Fitch Ratings has upgraded one and affirmed three classes of Talmage Structured Real Estate Funding 2005-2 Ltd./LLC (Talmage 2005-2) reflecting Fitch's base case loss expectation of 51%. 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 reflects the deleveraging of the transaction which is the result of a 31% paydown since last review. The affirmations reflect stable performance of the remaining assets in the pool. Since the last rating action, two assets repaid in full, while others have amortized.

The portfolio is concentrated with only seven assets remaining and is comprised of non-senior CMBS tranches and B-notes (54.4%) and whole loans/A-notes (45.6%). The current percentages of defaulted assets and Loans of Concern are, 26.3% and 16.9%, respectively.

Talmage 2005-2 is a commercial real estate collateralized debt obligation (CRE CDO) managed by Talmage, LLC. The transaction exited its reinvestment period on Aug. 18, 2010. As of the December 2013 trustee report, all overcollateralization and interest coverage tests are passing.

Because the collateral pool is concentrated, Fitch assumed additional cash flow stresses and that 100% of the portfolio will default in the base case stress scenario, defined as the 'B' stress. In this scenario, the modeled average cash flow decline is 7% from, generally, trailing 12-month second or third quarter 2013.

The largest component of Fitch's base case loss expectation is related to a defaulted A-note loan (15.7%) secured by a development site in Orlando, FL. The loan became delinquent in 2009 and the servicer is pursuing remedies. Fitch modeled a term default in its base case scenario with a substantial modeled loss.

The next largest component of Fitch's base case loss expectation is related to a subordinate mortgage participation (10.6%) secured by three gaming properties located in Atlantic City, NJ; Robinsonville, MS; and Tunica, MS. The loan is 90-plus days delinquent. The estimated value of the portfolio is less than the senior debt amount. Fitch modeled a term default and a full loss on this overleveraged position in the base case scenario.

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 tests to project future default levels for the underlying portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. Cash flow modeling was not performed as part of the analysis due to the significant cushion between the base case expected loss of the transaction and the credit enhancement of each class. The credit enhancement for class C is consistent with the rating listed below.

The ratings on classes D through F are based on a deterministic analysis that considers Fitch's base case loss expectation for the pool and the current percentage of defaulted assets and Fitch Loans of Concern, factoring in anticipated recoveries relative to the class' credit enhancement.

RATING SENSITIVITIES

The Stable Outlook for class C reflects its seniority in the capital structure. The distressed classes are subject to downgrade if realized losses exceed Fitch's expectations.

Fitch has upgraded the following rating:

--$13.9 million class C upgrade to 'BBBsf' from 'BBsf'; Outlook Stable.

Fitch has affirmed the following ratings and assigned an RE as indicated:

--$22.5 million class D at 'CCCsf'; RE 100%.

--$10.7 million class E at 'CCCsf'; RE 90%.

--$10.0 million class F at 'CCsf'; RE 0%.

Classes S, A and B have paid in full.

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

Applicable Criteria and Related Research:

--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (November 2013);

--'Global Structured Finance Rating Criteria' (May 2013).

Applicable Criteria and Related Research:

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=723059

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816341

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Fitch Ratings
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