CRE CDOs: Events of Default Triggered on Senior Notes for Missed Interest Payments

On Dec 8 (sorry for the delay!) Standard & Poor's lowered its ratings on 12 classes from LNR CDO V's series 2007-1 (LNR CDO V), which is a commercial real estate collateralized debt obligation. The downgrades "reflect liquidity interruptions to the transaction" after the outstanding classes did not "receive interest according to the trustee
remittance report dated Nov. 23, 2009." The most senior tranches, Classes A and B, are non-deferrable interest classes and they have each missed interest payments, which "resulted in an event of default (EOD) under the transaction's indenture," so S&P lowered the ratings on these classes to "D."

Ironically, the ratings on the 10 subordinate classes were lowered to a relatively higher grade of CC, because the interest due to the classes may be deferred for many years following the EOD. S&P indicated though that they "believe these classes will likely experience principal losses [..] due to principal losses on the underlying commercial mortgage-backed securities collateral."