NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded six classes of ML-CFC Commercial Mortgage Trust (MLCFC) commercial mortgage pass-through certificates series 2006-3 and removed two classes from Rating Watch Negative. A detailed list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
The downgrades of classes AM through D are due to ongoing concerns and increased loss expectations on the specially serviced loans, primarily the Atrium Hotel Portfolio loan (12.6% of the pool). Classes AM and AJ were placed on Rating Watch Negative upon notification of the loan being transferred to special servicing in May 2013. Class H has been downgraded to 'D' due to incurred losses.
Fitch modeled losses of 15.8% of the remaining pool; expected losses on the original pool balance total 15.8%, including $80.7 million (3.3% of the original pool balance) in realized losses to date. Fitch has designated 67 loans (49.2%) as Fitch Loans of Concern, which includes 18 specially serviced assets (23%).
As of the September 2013 distribution date, the pool's aggregate principal balance has been reduced by 20.9% to $1.92 billion from $2.43 billion at issuance. Per the servicer reporting, two loans (1.4% of the pool) are defeased. Interest shortfalls are currently affecting classes D through Q.
The largest contributor to expected losses is the specially-serviced Atrium Hotel Portfolio loan (12.6% of the pool), the largest loan in the pool. The loan is secured by a portfolio of six full-service hotels, including five Embassy Suites (Cary/Raleigh, NC; Portland, OR; Tampa, FL; Charleston, WV; Seaside, CA) and a Capital Plaza Hotel (Topeka, KS). The loan transferred to special servicing in May 2013 for imminent default, after the borrower notified the master servicer of significant upcoming capital improvement needs with limited available reserves. The franchise agreements on the five Embassy Suites are scheduled to expire between 2015 through 2018. The loan remains current as of the September 2013 payment date; however, only two of the six hotels report net operating income (NOI) debt service coverage ratios (DSCR) above 1.0x. The combined NOI DSCR reports at 1.10x and 1.13x for trailing twelve month (TTM) August 2013 and year end (YE) December 2012, respectively. The portfolio's combined occupancy reported approximately 74% for both TTM August 2013 and YE December 2012. The servicer has ordered third party reports and executed a pre-negotiation agreement (PNA) with the borrower.
The second largest contributor to expected losses is secured by a 156,486 square foot (SF) retail center in Gilbert, AZ (1.21%). The movie theater anchored center (28% of the net rentable area [NRA]) has experienced cash flow issues from occupancy declines due to a slow market and increased competition in the subject area. The loan transferred to special servicing in February 2011 due to payment default. A receiver was appointed in November 2011, and the lender foreclosed on the property in April 2013. The special servicer has hired a third party property manager and leasing agent to help stabilize the property and plans to market the property for sale.
The third largest contributor to Fitch-modeled losses is secured by a 132-unit multifamily property located in Tucson, AZ (1%). The loan transferred to the special servicer in December 2008 due to payment default. The Borrower subsequently filed for Chapter 11 Bankruptcy in September 2009. In October 2010 the Bankruptcy Court ruled for the lender to modify the loan at specific terms, which included a significant principal reduction. The special servicer has twice appealed the ruling, which the court had denied both times in July 2011 and June 2013. The servicer reports current occupancy at 81%.
Rating Outlooks on classes A-SB through AM are expected to remain stable due to sufficient credit enhancement. The ratings reflect additional stress scenarios applied on the Atrium Hotel Portfolio due to the large size of the loan (12.6% of the pool) and Fitch's ongoing concerns surrounding the capital improvement needs that precede the franchise agreement expirations. Additional downgrades are possible in the future if the franchise agreements are not renewed. Downgrades to the distressed classes (those rated below 'B') are expected as losses are realized on specially serviced loans.
Fitch removes from Rating Watch Negative and downgrades the following classes:
--$242.5 million class AM to 'BBBsf' from 'AAAsf'; Outlook Stable;
--$191 million class AJ to 'CCCsf' from 'BBsf', RE 55%.
Fitch downgrades the following classes and revises the Recovery Estimates (REs) as indicated:
--$48.5 million class B to 'CCsf' from 'CCCsf', RE 0%;
--$18.2 million class C to 'CCsf' from 'CCCsf', RE 0%;
--$48.5 million class D to 'Csf' from 'CCsf', RE 0%;
--$16.3 million class H to 'Dsf' from 'Csf', RE 0%.
Fitch affirms the following classes:
--$10.1 million class A-SB at 'AAAsf', Outlook Stable;
--$971.8 million class A-4 at 'AAAsf', Outlook Stable;
--$288.7 million class A-1A at 'AAAsf', Outlook Stable;
--$21.2 million class E at 'Csf', RE 0%;
--$36.4 million class F at 'Csf', RE 0%;
--$24.3 million class G 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%.
The class A-1, A-2 and A-3 certificates have paid in full. Fitch does not rate the class Q certificate or the interest only class XR certificate. Fitch previously withdrew the ratings on the interest-only class XP and XC certificates.
Additional information on Fitch's criteria for analyzing U.S. CMBS transactions is available in the Dec. 18, 2012 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
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria' (Dec. 18, 2012).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria