Fitch Downgrades 3 Classes of Salomon Brothers VII 2000-C2; Assigns Outlooks

NEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades, removes from Rating Watch Negative and assigns Recovery Ratings on the following Salomon Brothers Mortgage Securities (SBMS) VII, Inc., series 2000-C2 commercial mortgage pass-through certificates:

--$21.5 million class H to 'CCCsf/RR6' from 'BBB-sf';

--$13.7 million class J to 'Csf/RR6' from 'Bsf';

Fitch also downgrades and revises recovery ratings on the following class:

--$6.4 million class K to 'Csf/RR6' from 'CCCsf/RR2'.

In addition, Fitch removes from Rating Watch Negative, affirms, assigns Rating Outlooks and LS ratings to the following classes as indicated:

--$11.7 million class E at 'AAAsf/LS5'; Outlook Negative;

--$13.7 million class F 'AAsf/LS5'; Outlook Negative;

--$9.8 million class G 'A-sf/LS5'; Outlook Negative.

Fitch also affirms the following classes and assigns Rating Outlooks and LS ratings as indicated:

--$8.7 million class C at 'AAAsf/LS3'; Outlook Stable;

--$7.8 million class D 'AAAsf/LS3'; Outlook Stable.

Class L remains at 'D/RR6' with $5.6 million outstanding and classes M and N remain at 'D/RR6' and have been reduced to zero due to realized losses. Classes A-1, A-2, and B have paid in full. Fitch does not rate class P.

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

The downgrades are the result of an increase in Fitch expected losses following Fitch's prospective review of potential stresses and expected losses associated with specially serviced assets. In addition, classes H through K continue to incur interest shortfalls due to special servicing fees, expenses and appraisal reductions. Although classes E through G have recovered interest shortfalls, additional shortfalls are possible due to potentially higher fees and expenses in the future. The Negative Outlooks reflect the potential for future downgrades if interest shortfalls are incurred. Fitch expects potential losses of 31.6% of the remaining pool balance from loans in special servicing and loans that are not expected to refinance at maturity based on Fitch's refinance test. The majority of Fitch expected losses are from loans currently in special servicing with the three largest specially serviced loans representing approximately 85% of Fitch's expected losses. Rating Outlooks reflect the likely direction of any rating changes over the next one or two years.

As of the July 2010 distribution, the pool has paid down 87.4% to $98.4 million from $782 million at issuance. Of the original 192 loans, 31 remain in the transaction. Two loans (5.5%) are currently defeased. Fitch has identified 14 Loans of Concern (82.2%), all of which are in special servicing.

The largest specially serviced loan (26.7%) is an office property located in New Orleans, LA. The loan transferred to special servicing in April 2010 when the loan reached the anticipated repayment date. The loan is current and is pending return to the master servicer however, occupancy recently dropped with the loss of one tenant. Additionally, future declines in occupancy may occur as another large tenant expires in 2011.

The second largest specially serviced asset (14.4%) is a retail property located in Baltimore, MD. It has been real estate owned (REO) since February 2006. Litigation is ongoing with regards to the collection of a judgment in the trust's favor. Fitch will continue to model losses based on the recent appraised value until more information is known regarding the outcome of the litigation.

Fitch stressed the cash flow of the remaining non-defeased loans by applying a 5% reduction to 2009 fiscal year end net operating income and applying an adjusted, property specific market cap rate between 7.25% and 10.5% to determine value.

Similar to Fitch's prospective analysis of recent vintage CMBS, each loan also underwent a refinance test by applying an 8% interest rate and 30-year amortization schedule based on the stressed cash flow. Loans that had a resulting debt service coverage ratio (DSCR) of 1.25 times (x) or higher were considered to pay off at maturity. Loans with a resulting DSCR of less than 1.25x were assumed to default at maturity. Under this scenario, 18 loans did not pass the refinance test.

Additional information on Fitch's amended criteria for analyzing recent vintage U.S. CMBS is available in the July 7, 2009 report, 'Surveillance Methodology for Recent Vintage U.S. CMBS,' which is available at 'www.fitchratings.com'.

Additional information is available at www.fitchratings.com.

Related Research:

--'Global Structured Finance Rating Criteria' (Aug. 13, 2010);

--'Special-Purpose Vehicles in Structured Finance Transactions' (Sept. 17, 2009);

--'Surveillance Methodology for Recent Vintage U.S. CMBS' (July 7, 2009);

--'U.S. CMBS Surveillance Criteria' (Oct. 7, 2008);

--'Rating Criteria for Fitch's U.S. CMBS Multiborrower Rating Model' (Jan. 4, 2008);

Related Research:

Rating Criteria for Fitch's U.S. CMBS Multiborrower Rating Model

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=367170

Special-Purpose Vehicles in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=466618

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326

Surveillance Methodology for Recent Vintage U.S. CMBS

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=457782

U.S. CMBS Surveillance Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=408326

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.