Fitch Downgrades 1 Distressed Class of GSMSC 2007-GG10
KEY RATING DRIVERS
The downgrade to class A-J reflects the deteriorating credit enhancement of this class and further certainty of potential losses to the pool as well as the transfer of the fourth largest loan in the pool to special servicing.
The pool contains many highly leveraged performing loans originated at the previous market peak which may not be able to refinance at maturity in a few years. While many of these loans have institutional quality borrowers, they continue to show declines in occupancy or fail to show performance improvement from stressed levels seen during the downturn. Additionally, the remaining pool contains 23 loans totaling 560.7 million which were modified at some point. Fifteen of these modified loans were split into A/B notes structures where Fitch deems the B-notes to have very slim prospects of recovery.
Fitch modeled losses of 19.5% of the remaining pool; expected losses on the original pool balance total 24.6%, including \$886.7 million (11.7% of the original pool balance) in realized losses to date. Fitch has designated 79 loans (70.5%) as Fitch Loans of Concern, which includes 15 specially serviced loans (9.1%).
As of the February 2015 distribution date, the pool's aggregate principal balance has been reduced by 33.6% to \$5 billion from \$7.56 billion at issuance. Four loans (4.6%) are defeased. Interest shortfalls are currently affecting classes A-J through C and J through S.
The largest contributor to expected losses is the Wells Fargo Tower loan (10.9% of the pool), which is collateralized by a 1,385,325 square foot (sf) class B+ office tower located in downtown Los Angeles, CA. Operating performance has been under pressure as market conditions have pressured rental rates. The net cash flow debt service coverage ratio (NCF DSCR) has consistently hovered at about 1.0x. Significant lease roll occurred in 2013 with tenants occupying approximately 100,000-sf vacating the property driving occupancy down from 92.5% to 81.2% as of September 2014. The loan was assumed by Brookfield Properties in 2013 which plans to invest additional capital to upgrade and reposition the property.
The next largest contributor to expected losses is the Shorenstein Portland Portfolio (13.9%), the largest loan in the pool is secured by a portfolio of 46 office buildings encompassing 3,882,036 sf located throughout greater Portland, OR. As of September 2014, the portfolio was 88.6% occupied, which is a slight improvement over year-end (YE) 2013 occupancy of 85.3%. While the increase in occupancy is positive, leases executed prior to 2007 are at above-market rates, and as leases roll, renewals and replacement leases have been at lower rates and have required concessions. The effects of this are becoming apparent, as September 2014 NCF DSCR held steady at 0.95x, the same as YE 2013, but up from 0.88x at YE 2012.
The third largest contributor to expected losses is the 400 Atlantic Street loan (5.3% of the pool). The loan is secured by a 527,424 sf office property in Stamford, CT. The loan transferred to the special service in October 2014 when the borrower indicated that all of the top three tenants in the building will be vacating at their respective lease expirations. The number three tenant (7% of net rentable area [NRA]) vacated in September 2014. The second largest tenant (25% of NRA) will vacate at YE 2015. The largest tenant (51% of NRA) will vacate in September 2018. The property is currently 76% occupied and the market in Stamford is very soft. The borrower has indicated that current rental rates are significantly above market and that the building will require a significant investment in leasing costs and tenant improvements to re-lease the space. The special servicer is discussing a possible modification with the borrower. The loan is 60 days delinquent.
RATING SENSITIVITIES
The Rating Outlooks on classes A-4 and A-1A to remain Negative due to the high leverage of the pool overall as well as the many large loans that struggle with performance issues. These classes could be downgraded if performance continues to deteriorate. Downgrades to distressed classes will occur as losses make their way up the capital stack, if additional loans become specially serviced or fail to pay off at maturity. Upgrades are unlikely unless there is significant paydown or defeasance.
Fitch downgrades the following class as indicated:
--\$519.9 million class A-J to 'Csf' from 'CCsf', RE 0%.
Fitch affirms the following classes as indicated:
--\$3.3 billion class A-4 at 'Asf', Outlook Negative;
--\$344.9 million class A-1A at 'Asf', Outlook Negative;
--\$756.3 million class A-M at 'CCCsf', RE 50%;
--\$75.6 million class B at 'Csf' ', RE 0%;
--\$30.3 million class C at 'Dsf' ', RE 0%.
The class A-1, A-2, A-3 and A-AB certificates have paid in full. Classes D through Q have been reduced to zero balance by realized losses and are affirmed at 'Dsf', RE 0%. Fitch does not rate the class S certificates. Fitch previously withdrew the rating on the interest-only class X certificates.
Additional information on Fitch's criteria for analyzing U.S. CMBS transactions is available in the December 2014 report, 'U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria', which is available at 'www.fitchratings.com' under the following headers:
Structured Finance >> CMBS >> Criteria Reports
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