Fitch Affirms ML-CFC 2007-6; Removed from Rating Watch Positive
KEY RATING DRIVERS
Although the credit enhancement has increased due to the payoff of the transaction's pari passu portion of the Stuyvesant Town/Peter Cooper Village (ST/PCV) loan (formerly 11.2% of the pool), there remain concerns with the percentage of specially serviced loans (17.8%), of which 43% are real estate owned (REO). Five of the top 15 loans are in special servicing (12.9%) and one loan in the top 15 is considered a Fitch Loan of Concern (2.5%).
The recent sale of the ST/PCV asset and the paydown as of the January 2016 remittance resulted in a full recovery of the transaction's $202.3 million portion of the $3 billion former loan amount and additional 'gain-on sale' proceeds in excess of the total loan balance. The A-1A class balance was reduced by 64% from the principal proceeds, while the 'gain on sale' proceeds of approximately $15 million were used to reimburse interest shortfalls to classes AJ through D. Interest shortfalls are currently affecting classes D through Q.
Fitch's modeled losses are 21% of the remaining pool. Expected losses on the original pool balance total 18.4%, which is down 11.7% from Fitch's last rating action in September 2015 and includes $61.4 million (2.9% of the original pool balance) in realized losses to date. Fitch has designated 14 loans (12.6%) as Fitch Loans of Concern, which includes the 12 specially serviced assets (17.8%).
As of the January 2016 distribution date, the pool's aggregate principal balance has been reduced by 26.1% to $1.59 billion from $2.15 billion at issuance. Per the servicer reporting, seven loans (3.7%) are defeased.
The largest contributor to expected losses is the MSKP Retail Portfolio A loan (14.1% of the pool), which is secured by eight regional and neighborhood retail centers located in four distinct markets in Florida totalling 1.2 million square feet (sf). Five properties are located in the Orlando metropolitan statistical area (MSA), one in the Palm Beach MSA, one in the Ft. Lauderdale MSA, and one in Port Charlotte in southwest Florida. Overall property performance declined significantly from issuance to 2012 due to weak local retail markets, which resulted in lower rents and a drop in overall occupancy from 88% at issuance to 78% at year-end 2012.
After initially being transferred to the special servicer in March 2011, the portfolio was modified and returned to the master servicer in October 2012. Terms of the modification included the bifurcation of the loan into a senior ($130.3 million) and junior ($93.1 million 'hope note') component with maturity being extended to March 2019; both notes retained the original note rate of 5.6% and remain as interest only through maturity. Recent performance has improved, with a third quarter 2015 (3Q 2015) debt service coverage ratio (DSCR) of 1.59x (based on the A-1 Note only) and occupancy of 82%. Although losses are not expected imminently, any recovery to the B-note is contingent upon full recovery to the A-note proceeds at the loan's maturity in March 2019. Fitch modelled losses based on the stressed annualized net operating income (NOI) from September 2015. Unless collateral performance improves more significantly, recovery to the B-note component is unlikely.
The next largest contributor to expected losses is the specially-serviced Blackpoint Puerto Rico Retail loan (5.3%), which is secured by six retail properties totaling approximately 857k sf located within the greater San Juan, Puerto Rico area. The portfolio properties range from two to 20 miles from the city of San Juan, and three of the six properties are supermarket anchored. The loan was transferred for imminent default in February 2012 due to upcoming maturity and borrower expressing inability to payoff loan at maturity. The portfolio was approximately 74% occupied as of June 2015. The special servicer is dual-tracking foreclosure and a potential loan modification. Discussions with the borrower concerning a resolution are ongoing as the borrower prepares a loan modification proposal. According to the servicer, an estimate on timing of a resolution is not available at this point.
The third largest contributor to expected losses is the specially-serviced MSKP Retail Portfolio B loan (3.8%), which is secured by two retail centers located in Florida. One property is a grocery-anchored (Winn-Dixie) center located in Ft. Lauderdale, and the other is an unanchored center located in the Manalapan section of Palm Beach County. The portfolio contains a total of 207,715-sf.
Similar to the MSKP Retail Portfolio A loan, the portfolio has suffered occupancy declines since issuance due to weak local retail markets and the loan was bifurcated in October 2012 into a senior ($29.7 million) and junior ($29.7 million 'hope note') component. The loan transferred back to special servicing effective Dec. 30, 2015 due to imminent default. The special servicer is currently reviewing proposals for an additional loan modification. Portfolio occupancy has declined to 70% at year-end (YE) 2014 from 92% at issuance. Performance has improved, with a 3Q 2015 DSCR of 1.25x (based on the senior note only) and occupancy of 83%. Fitch has also deemed recovery on the B-note component unlikely unless the collateral performance improves significantly.
RATING SENSITIVITIES
The Rating Outlooks on classes A-2 through A-1A remain Stable due to the senior payment priority in the capital structure and the significant pool deleveraging from the ST/PCV payoff. With 75.7% of the pool maturing in the first quarter of 2017, additional deleveraging is expected. Class AM has been assigned a Stable Outlook to reflect the increase in credit enhancement and the overall decline in expected losses from Fitch's last review. The class may be upgraded in the future as the special servicer resolves assets and credit enhancement increases. However, there are concerns with the high percentage of assets in special servicing and continued underperformance of certain loans in the top 15. The class may be subject to downgrades if pool performance deteriorates, or losses on the specially serviced assets are greater than expected. Additional downgrades to the distressed classes (those rated below 'B') are expected 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 affirms and removes the following class from Rating Watch Positive and assigns a Rating Outlook as indicated:
--$214.6 million class AM at 'BBsf'; removed from Rating Watch Positive; assigned Outlook Stable.
Fitch affirms the following classes:
--$52.2 million class A-2 at 'AAAsf'; Outlook Stable;
--$46 million class A-2FL at 'AAAsf'; Outlook Stable;
--$60.7 million class A-3 at 'AAAsf'; Outlook Stable;
--$729 million class A-4 at 'AAAsf'; Outlook Stable;
--$115.2 million class A-1A at 'AAAsf'; Outlook Stable;
--$107.4 million class AJ at 'CCCsf'; RE 10%;
--$75 million class AJ-FL at 'CCCsf'; RE 10%;
--$42.9 million class B at 'CCsf'; RE 0%;
--$16.1 million class C at 'CCsf'; RE 0%;
--$34.9 million class D at 'CCsf', RE 0%;
--$18.8 million class E at 'Csf'; RE 0%;
--$24.1 million class F at 'Csf'; RE 0%;
--$24.1 million class G at 'Csf'; RE 0%;
--$24.5 million class H at 'Csf'; 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%.
Classes J, K, L, M, N and P have been reduced to zero due to realized losses and are affirmed at 'Dsf', RE 0%. Class A-1 has 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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