Fitch Upgrades 3 & Affirms 18 Classes of MLMT 2007-C1
OREANDA-NEWS. Fitch Ratings has upgraded three and affirmed 18 classes of Merrill Lynch Mortgage Trust commercial mortgage pass-through certificates, series 2007-C1 (MLMT 2007-C1). A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrades to classes A-3, A-3FL, and A-SB are the result of increased defeasance since Fitch's last rating action; these classes are expected to payoff from defeased collateral. The affirmations reflect the relatively stable pool performance and the sufficient credit enhancement relative to Fitch-modeled loss expectations. Overall, Fitch's loss projections are relatively unchanged since the last rating action. Fitch modeled losses of 24% of the remaining pool; expected losses on the original pool balance total 22%, including $354.1 million (8.7% of the original pool balance) in realized losses to date. Fitch has designated 71 loans (54%) as Fitch Loans of Concern, which includes 10 specially serviced assets (28.6%). There are also 49 loans, representing 57% of the pool balance that are interest only for the full term.
As of the June 2016 distribution date, the pool's aggregate principal balance has been reduced by 44.7% to $2.24 billion from $4.05 billion at issuance. Per the servicer reporting, 18 loans (7.7% of the pool) are defeased. Interest shortfalls are currently affecting classes AJ through Q.
The largest two contributors to expected losses are the specially-serviced Empirian Multifamily Portfolio Pool 1 (13.1% of the pool) and Pool 3 (10.7%) loans. Both loans were transferred back to the special servicer in March 2016 due to Imminent Monetary Default due to concerns over cash flow, required capital expenditures, and value of the underlying collateral. Previously, the loans were returned back to the master servicer in February 2013 after being modified. The modifications consisted of bifurcating both loans into an A and a B note with a 70/30 split. Pool 1 was originally secured by 78 multifamily properties (7,964 units) located across eight states. Pool 3 was originally secured by 79 multifamily properties (6,864 units) located across eight states. The borrower is permitted to release a limited amount of properties from the portfolio prior to full payoff of the loans. Pool 1 has released 38 properties while Pool 3 has released 44 properties to date. The properties within the two portfolios are generally of class B and C collateral quality, many of which were constructed in the 1980s and lack common amenities. Most of the properties have significant deferred maintenance and only a small amount of the required repair obligations have been completed on the remaining portfolio. As of January 2016, the occupancy for Pool 1 and Pool 3 were approximately 91% and 93%, representing an increase from the 87% and 89% reported at year-end 2013. The year-end 2015 net operating income (NOI) debt service coverage ratio (DSCR) for Pool 1 is 1.47x and Pool 3 is 1.13x.
The next largest contributor to expected losses is the Office Max Headquarters loan (2.2% of the pool). The interest-only loan is secured by a five-story, 354,098 square foot (sf) single-tenanted office property located in Naperville, IL. The property served as the world headquarters for Office Max but is now 100% vacant. Office Max's lease expires in May 2017 which is nearly coterminous with the loan's maturity in July 2017. According to the servicer there have been inquiries from potential tenants but a lease has not been signed. Fitch will continue to monitor this loan to see if it transfers to the special servicer.
RATING SENSITIVITIES
Rating Outlooks on classes A-3, A-3FL, and A-SB remain Stable due to the bonds being fully covered by defeased collateral. Classes A-4 and A-1A remain Negative as downgrades are possible if losses to the Empirian Portfolios or other large assets in pool increase. Fitch will continue to monitor property releases from the Empirian Portfolios and DRA Colonial Office Portfolio, paying attention to the remaining collateral to ensure the asset quality and performance reflects Fitch's views from the current review. The distressed classes (those rated below 'B') are expected to be subject to further downgrades as losses are realized on specially serviced loans.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch upgrades the following classes as indicated:
--$10.5 million class A-3 to 'AAAsf' from 'Asf'; Outlook Stable;
--$4.2 million class A-3FL to 'AAAsf' from 'Asf'; Outlook Stable;
--$17.9 million class A-SB to 'AAAsf' from 'Asf'; Outlook Stable.
Fitch affirms the following classes as indicated:
--$442.2 million class A-4 at 'Asf'; Outlook Negative;
--$905.2 million class A-1A at 'Asf'; Outlook Negative;
--$405 million class AM at 'CCCsf'; RE 85%;
--$134.1 million class AJ at 'Csf'; RE 0%;
--$85 million class AJ-FL at 'Csf'; RE 0%;
--$86.1 million class B at 'Csf'; RE 0%;
--$35.7 million class C at 'Dsf'; RE 0%;
--$0 class D at 'Dsf'; RE 0%;
--$0 class E at 'Dsf'; RE 0%;
--$0 class F at 'Dsf'; RE 0%;
--$0 class G at 'Dsf'; RE 0%;
--$0 class H at 'Dsf'; RE 0%;
--$0 class J at 'Dsf'; RE 0%;
--$0 class K at 'Dsf'; RE 0%;
--$0 class L at 'Dsf'; RE 0%;
--$0 class M at 'Dsf'; RE 0%;
--$0 class N at 'Dsf'; RE 0%;
--$0 class P at 'Dsf'; RE 0%.
The class A-1, A-2 and A-2FL certificates have paid in full. Fitch does not rate the class Q and AJ-FX certificates. Fitch previously withdrew the rating on the interest-only class X certificates.
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