Fitch Downgrades 3 Classes of CSFB 2004-TFL2; Revises Outlooks

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded two classes of Credit Suisse First Boston Commercial Mortgage Securities Corp. commercial mortgage pass-through certificates, series 2004-TFL2. While Fitch does not expect losses to the remaining loan in the base case, the downgrades are the result of Fitch's prospective views regarding commercial real estate values and cash flow decline in addition to the upcoming loss of one of the collateral anchors. The Negative Rating Outlooks reflect additional sensitivity analysis related to further negative credit migration of the underlying collateral. A detailed list of rating actions follows at the end of this release.

The remaining loan in the transaction is the $67.6 million Seminole Towne Center. Under Fitch's updated analysis, the loan was modeled to default in the base case stress scenario, defined as the 'B' stress. In this scenario, the modeled cash flow decline was 10.4%, which was applied to the most recent servicer reported financial information less the income from the Belk lease, as the store has announced its closing. Fitch analyzed servicer reported operating statements, rent rolls, sales reports, in addition to other information received from the master servicer.

The loan is collateralized by 625,311 sf of a 1.1 million sf regional mall located in Sanford, FL, in Orlando's northern retail corridor. Anchor tenants that are part of the collateral are Macy's (lease expiration 2016) and Belk (lease expiration 2015). Non collateral anchors are Dillards, Sears and JC Penney.

The loan returned from special servicing after transferring to special servicing July 2009 when the borrower indicated the loan would not pay off by the maturity date of July 10, 2009. The loan was modified to include an increase in loan spread from 0.65% to 3%, loan amortization of $2.6 million per year and a loan extension to August 2010. An additional extension to August 2011 was allowed for providing a minimum debt yield of 12% and the purchase of a rate cap of 5%. In addition, the borrower paid all modification costs and special servicing fees. If the loan pays off at the new final extension date, there will be no fees to the trust.

Per the May 2010 rent roll, the in-line and total mall occupancies were 71.3% and 92.1%, respectively, compared to 84.2% and 91.6%, respectively, at issuance. There is limited near-term rollover. As a percent of the total mall space, the rollover is as follows: less than 1% in 2010; 3.1% in 2011; 6.4% (including major tenant United Artists Theatre) in 2012; 1% in 2013; 2% in 2014; and 16.3% in 2016 (including collateral anchor Macy's).

Although in-line sales have declined approximately 30% since 2007, they are relatively stable since issuance. As of March 2010, in-line sales were $269 compared to $264 at issuance. Anchor tenant Belk has stated that they will vacate the mall in October 2010, but according to the servicer, it will continue to honor the lease obligation until the lease expiration in 2015.

Fitch downgrades, removes from Rating Watch Negative and assigns Rating Outlooks to the following certificates:

--$16.5 million class J to 'AA' from 'AAA'; Outlook Negative;

--$15.5 million class K to 'A' from 'AA+'; Outlook Negative;

--$8.3 million class L to 'BB' from 'A-'; Outlook Negative.

Fitch affirms, removes from Rating Watch Negative and assigns Rating Outlooks to the following certificate:

--$17.5 million class H at 'AAA'; Outlook Stable.

Fitch affirms the following certificate:

--$9.8 million class G at 'AAA'; Outlook Stable.

Fitch withdraws the ratings of the interest-only class A-X. (For additional information, 'Fitch Revises Practice for Rating IO & Pre-Payment Related Structured Finance Securities' dated June 23, 2010).

Classes A-1 through F and class A-Y have paid in full.

This transaction was analyzed according to the 'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs'. It applies stresses to property cash flows and uses debt service coverage ratio (DSCR) tests to project future default levels for the underlying portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. This methodology was used to review this transaction as floating-rate CMBS loan pools are concentrated and similar in composition to CREL CDO pools. In many cases, the CMBS notes are senior portions of notes held in CDO transactions. The assets are generally transitional in nature, frequently underwritten with pro forma income assumptions that have not materialized as expected. Overrides to this methodology were applied on a loan-by-loan basis if the property specific performance warranted an alternative analysis.

For bonds rated 'B-' or better, the current credit enhancement levels were compared to the expected losses generated in each rating category divided by the total deal size. These classes were assigned Loss Severity (LS) ratings, which indicate each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the expected losses for the collateral in the 'B' stress. LS ratings should always be considered in conjunction with probability of default indicated by a class' long-term credit rating. Fitch does not assign Rating Outlooks or LS ratings to classes rated 'CCC' and lower.

Rating Outlooks were determined by further stressing the cash flows and fully recognizing all maturity defaults in all ratings stresses. The credit enhancements were then compared to the expected losses generated in each rating category to determine potential credit migration over the next two years. If the Rating Outlook scenario would imply a lower rating, then the class was assigned a Negative Outlook.

The ratings for bonds rated 'CCC' or lower, are based on a deterministic analysis. Bonds are rated 'C' when the expected losses on currently defaulted loans exceed a classes' respective credit enhancement level. Bonds are rated 'CC' when the combined base case expected losses on the currently defaulted loans and loans likely to default exceed a classes' respective credit enhancement level. Bonds are rated 'CCC' when the base case expected loss exceeds a classes' respective credit enhancement level.

Bonds rated 'CCC' and below were assigned Recovery Ratings (RR) in order to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities. Recovery Ratings are calculated by subtracting the base case expected losses in reverse sequential order from the pooled and non-pooled rake certificates. Any principal recoveries first pay interest shortfalls on the bonds and then sequentially through the classes. The remaining bond principal amount is divided by the current outstanding bond balance. The resulting percentage is used to assign the Recovery Ratings on the bonds.

In addition to the CREL CDO methodology, Fitch reviewed the transaction in conjunction with its 'Rating U.S. Single-Borrower Commercial Mortgage Transactions,' as there is one remaining loan. This review included reviewing insurance requirements and borrower structure. As there is no current criteria for assigning loss severity ratings to single-borrower deals, none were assigned to this transaction's classes.

The rating actions reflect the application of Fitch's current criteria which is available at 'www.fitchratings.com' and specifically include the following reports or releases:

--'Global Structured Finance Rating Criteria' (Sept 20, 2009)

--'Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs' (Nov. 9, 2009)

--'Criteria for Structured Finance Recovery Ratings' (Aug. 17, 2009)

--'Rating U.S. Single-Borrower Commercial Mortgage Transactions' (Feb. 7, 2007).

Additional information is available at 'www.fitchratings.com'.

Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=469406

Surveillance Criteria for U.S. Commercial Real Estate Loan CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=482806

Criteria for Structured Finance Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462434

Rating U.S. Single-Borrower Commercial Mortgage Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=312966

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