Fitch Downgrades 6 Distressed Classes of GSMSC 2007-GG10

CHICAGO--()--Fitch Ratings has downgraded six classes of GS Mortgage Securities Trust series 2007-GG10 (GSMSC) commercial mortgage pass-through certificates series 2007-GG10. A detailed list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The downgrades are due to realized losses to the already distressed classes C through F, and a greater certainty of losses to classes A-J and B. The rating changes follow the disposition of 25 specially serviced loans as part of a bulk loan sale by the special servicer over the last two months. Overall losses were in-line with Fitch's expectations.

Since the beginning of 2014 a total of 24 assets were disposed with losses of approximately $611 million. The largest of these assets was Two California Plaza which had an original principal balance of $470 million and incurred a 43% loss or $203.5 million. The second largest disposition was 119 West 40th Street which had an original balance of $160 million and incurred a 31% loss or roughly $49 million. The third largest asset was the $103.5 million Maguire Anaheim Portfolio which had a loss of 55% or nearly $57 million.

The remaining pool contains many highly leveraged performing loans originated at the previous market peak which may not be able to refinance at maturity in a few years. While many of these loans have institutional quality borrowers, many continue to show declines in occupancy or fail to show performance improvement from stressed levels seen during the downturn. Additionally, the remaining pool contains 13 loans totaling $656.8 million which were modified at some point. The vast majority of these loans were split into A/B notes structures where Fitch deems the B-notes to have very slim prospects of recovery.

Fitch modeled losses of 17.8% of the remaining pool; expected losses on the original pool balance total 23.5%, including $853.5 million (11.3% of the original pool balance) in realized losses to date. Fitch has designated 51 loans (52.4%) as Fitch Loans of Concern, which includes six specially serviced assets (2.6%).

As of the February 2014 distribution date, the pool's aggregate principal balance has been reduced by 31.3% to $5.2 billion from $7.56 billion at issuance. No loans are defeased. Interest shortfalls are currently affecting classes J through S.

The largest contributor to expected losses is the Wells Fargo Tower loan (10.6% of the pool), which is collateralized by a 1,385,325 square foot (sf) class B+ office tower located in downtown Los Angeles, CA. Operating performance has been under pressure as market conditions have pressured rental rates. The net cash flow debt service coverage ratio (NCF DSCR) has consistently hovered at about 1.0x. Significant lease roll occurred in 2013 with tenants occupying approximately 100,000 sf vacating the property, driving occupancy down from 92.5% to 85.8% as of September 2013. The loan was assumed by Brookfield Properties in 2013 which plans to invest additional capital to upgrade and reposition the property.

The next largest contributor to expected losses is the largest loan in the pool, Shorenstein Portland Portfolio (10.3%), which is secured by a portfolio of 46 office buildings encompassing 3,882,036 sf located throughout greater Portland, OR. As of December 2013, the portfolio was 85.4% occupied, which is a slight improvement over year-end (YE) 2012 occupancy of 81.7%. While the increase in occupancy is positive, leases executed prior to 2007 are at above-market rates, and as leases roll, renewals and replacement leases have been at lower rates and have required concessions. The effects of this are becoming apparent, as YE 2013 NCF DSCR increased to 0.95x up from 0.88x at YE 2012. The borrower expects to achieve a 1.0x DSCR by YE 2014 when some of the concessions burn off.

The third largest contributor to expected losses is the TIAA Rexcorp New Jersey loan (4%), which is secured by a portfolio of six office buildings totaling 1,042,000 sf located in suburban New Jersey. Performance declined significantly throughout 2011 and 2012 as several major tenants vacated and replacement tenants were signed at lower rents with significant free rent periods. Performance improved in 2013 as rent concessions for many tenants burned off throughout the year. Reported 2013 NCF DSCR was 0.95x compared to 0.66x at YE 2012. Occupancy was 79.7% at YE 2013 up slightly from 77% at YE 2012. Due to free rent periods and vacancies DSCR will remain below 1.0x until 2015.

RATING SENSITIVITY

The Rating Outlooks on classes A-4 and A-1A remain Negative due to the high leverage of the overall pool as well as the many large loans which struggle with performance issues. These classes could be downgraded if performance continues to deteriorate. Downgrades to distressed classes are possible should additional loans become specially serviced or fail to pay off at maturity. Upgrades are unlikely unless there is significant paydown or defeasance and significantly lower than expected realized losses.

Fitch downgrades the following classes as indicated:

--$519.9 million class A-J to 'CCsf' from 'CCCsf', RE 0%;

--$75.6 million class B to 'Csf' from 'CCCsf', RE 0%;

--$63.5 million class C to 'Dsf' from 'CCsf', RE 0%;

--$0 class D to 'Dsf' from 'CCsf', RE 0%;

--$0 class E to 'Dsf' from 'Csf', RE 0%;

--$0 class F to 'Dsf' from 'Csf', RE 0%.

Fitch affirms the following classes as indicated:

--$3.3 billion class A-4 at 'Asf', Outlook Negative;

--$446.1 million class A-1A at 'Asf', Outlook Negative;

--$756.3 million class A-M at 'CCCsf', RE 50%.

The class A-1, A-2, A-3 and A-AB certificates have paid in full. Classes G through Q have realized losses and remain at 'Dsf', RE 0%. Fitch does not rate the class S certificates. Fitch previously withdrew the rating on the interest-only class X certificates.

Additional information on Fitch's criteria for analyzing U.S. CMBS transactions is available in the December 2013 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 then CMBS then Criteria Reports

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

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (May 2013);

--'U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria' (December 2013).

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661

U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724961

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824480

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Contacts

Fitch Ratings
Primary Analyst
R. Brook Sutherland, +1 312-606-2346
Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Committee Chairperson
Mary MacNeill, +1 212-908-0785
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
R. Brook Sutherland, +1 312-606-2346
Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Committee Chairperson
Mary MacNeill, +1 212-908-0785
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com