Fitch Downgrades One Speculative Class of ML-CFC 2006-1
KEY RATING DRIVERS
The downgrade is due to the greater certainty of losses from the specially serviced assets. The affirmations are primarily due to the overall stable pool performance since Fitch's last rating action. Fitch modeled losses of 10.5% of the remaining pool; expected losses on the original pool balance total 9.6%, including $86.3 million (4% of the original pool balance) in realized losses to date. Fitch has designated 25 loans (26.8%) as Fitch Loans of Concern (FLOC), 13 of which are in special servicing (9.6%).
One of the FLOCs (3.3%) is secured by a 394,578 square foot (sf) office building located in Hyattsville, MD. The property is 99% occupied by the U.S. Department of Treasury with a lease expiring within the next year (April 2016). Given what is effectively a single-tenanted property, Fitch has concerns with the potential loss of property revenue should the tenant not renew at expiration. Per the first quarter 2015 (1Q15) Reis report, the submarket had a vacancy rate of 24.6% with average asking rent of $26.59 per sf.
As of the August 2015 distribution date, the pool's aggregate principal balance has been reduced by 46.7% to $1.14 billion from $2.14 billion at issuance. Nine loans (12.1% of the pool) are defeased, including one (7.5%) of the top 10 loans (by unpaid principal balance). Interest shortfalls totaling $10.7 million are currently affecting classes E through Q, with the exception of class J which is current on interest.
The largest contributor to expected losses is a loan (2.5% of the pool) secured by two office properties located in suburban Atlanta, GA totaling 323,526 sf. The portfolio has been underperforming since year-end (YE) 2009 due to the loss of several large tenants. The servicer-reported 1Q15 portfolio debt service coverage ratio (DSCR) was 0.91x with a 79.1% occupancy rate, compared to a DSCR of 1.29x and 91.5% occupancy rate at issuance. The loan remains current on debt service.
The second largest contributor to expected losses is a 170,796 sf, Class-B, retail center (2%) located in Reno, Nevada. The property became a real estate owned asset (REO) in June 2015. The property is shadow-anchored by Costco Wholesale (not part of the collateral). Currently the property is only 58% occupied, compared to 95.5% at issuance. The servicer is working to stabilize the property through leasing up activities.
The third largest contributor to expected losses is a loan (1.4%) secured by a 275,754 sf multi-tenant business park located in Tampa, Florida. The loan was transferred to special servicing in February 2013 due to imminent default. The servicer has failed to reach a loan modification agreement with the borrower. Foreclosure was scheduled for July 2015. The property occupancy has been steadily declining over the past four years and is currently 47% occupied, compared to 93.2% at issuance. The loan is currently cash managed.
RATING SENSITIVITIES
The 'AAA' rated classes are expected to remain stable due to increased loan defeasance and continued paydown. Future downgrades to the 'BBB-' rated class are possible should pool performance deteriorate, and losses on the specially serviced assets exceed expectations. In addition, the distressed classes (rated below 'B') may be subject to further rating actions as losses are realized.
Fitch has downgraded the following ratings:
--$16.1 million class E to 'Csf' from 'CCsf', RE0%.
Fitch affirms the following classes as indicated:
--$407.7 million class A-4 at 'AAAsf', Outlook Stable;
--$177.2 million class A-1A at 'AAAsf', Outlook Stable;
--$214.2 million class AM at 'AAAsf', Outlook Stable;
--$82.1 million class AJ at 'BBB-sf', Outlook Negative;
--$100 million class AN-FL at 'BBB-sf', Outlook Negative;
--$50.9 million class B at 'CCCsf', RE70%;
--$21.4 million class C at 'CCCsf', RE0%;
--$29.5 million class D at 'CCsf', RE0%;
--$24.1 million class F at 'Csf', RE0%;
--$16.1 million class G at 'Csf', RE0%;
--$2.2 million class H at 'Dsf', RE0%;
--$0 class J at 'Dsf', RE0%;
--$0 class K at 'Dsf', RE0%;
--$0 class L at 'Dsf', RE0%;
--$0 class M at 'Dsf', RE0%;
--$0 class N at 'Dsf', RE0%;
--$0 class P at 'Dsf', RE0%.
The class A-1, A-2, A-3, A-3FL, A-3B, and A-SB certificates have paid in full. Fitch does not rate the class Q certificates. Fitch previously withdrew the rating on the interest-only class X certificates.
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