Fitch Takes Various Actions on MSC 2003-IQ4
KEY RATING DRIVERS
The upgrade reflects an increase in credit enhancement due to five loan pay offs since Fitch's previous rating action, as well as continued amortization and paydown. Of the original 119 loans, 20 remain. Fitch has applied additional stresses in its base case scenario to reflect the adverse selection as the pool becomes more concentrated. Fitch identified 2 Fitch Loans of Concern (33.2%). Additionally, four loans (12.1%) are backed by single-tenant properties. These concerns increase the pool's exposure to single event risk, which can cause a significant loss and/or interest shortfalls in the future. The downgrade to classes L through M reflects the higher likelihood of losses associated with the transaction's specially serviced asset, North Mayfair (25.3% of the pool), which is the transaction's largest asset and currently real estate owned (REO).
Fitch modeled losses of 18.5% of the remaining pool; expected losses on the original pool balance total 1.6%, including $8.4 million (1.2% of the original pool balance) in realized losses to date. As of the August 2016 distribution date, the pool's aggregate principal balance has been reduced by 97.3% to $19.4 million from $727.8 million at issuance. One loan is defeased (1.5%). Interest shortfalls are currently affecting classes M through O.
The North Mayfair asset (25.3%), is a 101,286 square foot (sf) office building located in Wauwatosa, WI. The loan transferred to special servicing upon maturity default in December 2012 and became REO in December 2014. The special servicer plans to list and market the property for sale fourth quarter 2016. Occupancy increased to 66% as of August 2016 from 61% at year-end (YE) 2014.
The second largest loan is secured by Timber Sound II Apartments, a 160-unit apartment complex built in 1998 located in Orlando, FL. Debt service coverage ratio (DSCR) fell below the threshold in 2014 due to low occupancy combined with increased expenses. However, the property has since recovered. Occupancy increased by 6% to 98% as of June 2016 from 92% at YE 2014. DSCR for YE 2015 increased to 2.05x from 1.09x at YE 2014. The loan has been current since issuance.
The third largest loan is secured by Plainview Commons, a 33,517 sf unanchored retail center located in Plainview, NY. The property is occupied by 14 tenants, none of which occupy more than 12% of net rentable area (NRA). Occupancy declined by 17% to 83% as of YE 2015 from 100% at YE 2014. DSCR was reported at 1.83x as of YE 2015, which is below 1.99x reported at YE 2014. The loan has been current since issuance.
RATING SENSITIVITIES
The Rating Outlooks on classes H through K are expected to remain Stable as near-term upgrades may not be warranted due to the deal's increasing concentrations. Fitch's loss assumptions included a stressed value on the specially serviced loan as occupancy remains low and ultimate recovery or timing of recovery is unknown. Downgrades to classes L and M would occur as losses are realized.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
Fitch upgrades the following class as indicated:
--$5.9 million class H to 'AAAsf' from 'Asf'; Outlook Stable.
Fitch downgrades the following classes as indicated:
--$5.5 million class L to 'Csf' from 'CCCsf'; RE 90%;
--$1.8 million class M to 'Csf' from 'CCsf'; RE 0%;
--$752,852 thousand class N to 'Dsf' from 'Csf'; RE 0%.
Fitch affirms the following classes as indicated:
--$3.6 million class J at 'BBBsf'; Outlook Stable;
--$1.8 million class K at 'BBsf'; Outlook Stable.
The class A-1, A-2, B, C, D, E F and G certificates have paid in full. Fitch does not rate class O certificates. Fitch previously withdrew the ratings on the interest-only class X-1 and X-2 certificates.
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