Fitch Downgrades One Class and Affirms 14 of MSCI 2006-HQ10

CHICAGO--()--Fitch Ratings has downgraded one and affirmed 14 classes in Morgan Stanley Capital I Trust series 2006-HQ10 commercial mortgage pass-through certificates. A detailed list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The affirmations reflect the largely unchanged loss expectations for the pool since Fitch's last rating action. Fitch modelled losses of 33.9% for the remaining pool; expected losses on the original pool balance total 5.8%, including $84.9 million in realized losses to date. At the last review, Fitch modelled losses of 7.3% for the then-remaining pool (5.0% of the original balance).

Since the last rating action, 69 loans repaid from the trust in full, contributing $792.7 million in principal paydown. This has left the deal highly concentrated with only 12 loans or loan groups remaining. Four loans, representing 53.4% of the pool, are currently in special servicing. Adverse selection is also a concern as the deal continues to wind down: there are five performing loans representing 37.6% of the pool balance which are scheduled to mature by YE2016. After these loans repay, the pool will be almost exclusively composed of defaulted assets.

The largest loan in the pool is also the largest loan in special servicing. Representing 36.6% of the pool, the collateral is a portfolio of seven medical office properties located in Colorado (four), Indiana (two) and Arizona (one). The properties were all developed between 1997 and 2002 and total 435,438 square feet (sf). The loan transferred to special servicing in May 2016 due to imminent default after the borrower indicated it would be unable to pay off the loan at maturity, which is scheduled for Oct. 1, 2016. While the borrower continues to pay debt service, a substantial amount of tenant roll is scheduled to occur by the end of the year. As of March 2016, the portfolio occupancy was 84.3% and the YE2015 debt service coverage ratio (DSCR) was reported to be 1.21x.

The second largest loan in the pool is also a multi-property portfolio. The AZ Office/Retail Portfolio represents 27.1% of the pool and comprises two retail properties and one office building located in Scottsdale, Arizona. The individual crossed loans were previously in special servicing for imminent default and were returned to the master servicer in February 2014 without any modification. They are scheduled to mature in October 2016. Based on the March and June 2016 rent rolls, the portfolio occupancy was 90.1% and the YE2015 DSCR was reported to be 1.16x.

Fort Roc Portfolio is the third largest loan in the pool, representing 10.8% of the pool balance, and is in special servicing. The collateral includes seven retail properties totalling 343,769 sf. They are located in Pennsylvania (three), New York (two), Tennessee (one) and Delaware (one). Five of the seven properties are considered single-tenant. Rite-Aid is the sole tenant for four properties, and a fifth property was previously leased exclusively to Staples. The Rite-Aid leases expire in 2018, 2020 and 2026. One of the New York properties was previously leased to Staples through September 2015 and is now completely vacant. This asset accounts for 6.9% of the portfolio net rentable area (NRA) and the Staples departure brings the portfolio occupancy down to 91.3%. The two remaining properties are multi-tenant properties and are anchored by Kmart, which has individual lease expiration dates in February and September 2017. At least one of the two stores has been earmarked by Sears Holding Corp. for closure, which would bring the portfolio occupancy down further to 59.7%.

RATING SENSITIVITIES

Classes A-M and A-J maintain Stable Outlooks. Class A-M is expected to be fully repaid by maturing loans in the next remittance. Class A-J will become the most senior bond in the transaction; however, the concentrated nature of the pool and the potential for additional loans to transfer to special servicing limit the possibility for upgrade. While it is viewed as unlikely, classes could be upgraded should the loans in special servicing liquidate at recoveries much higher than Fitch currently anticipates. Distressed classes may be subject to downgrades as losses are realized.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10

No third-party due diligence was provided or reviewed in relation to this rating action.

Fitch has downgraded one class as follows:

--$16.8 million class C to 'CCsf' from 'CCCsf', RE 10%.

Fitch has affirmed the following classes as indicated:

--$52.4 million class A-M at 'AAAsf', Outlook Stable;

--$119.3 million class A-J at 'Bsf', Outlook Stable;

--$31.7 million class B at 'CCCsf', RE 100%;

--$22.4 million class D at 'Csf', RE 0%;

--$16.8 million class E at 'Csf', RE 0%;

--$6.4 million class F at 'Dsf', RE 0%;

--$0 class G at 'Dsf', RE0%;

--$0 class H at 'Dsf', RE0%;

--$0 class J at 'Dsf', RE0%;

--$0 class K at 'Dsf', RE0%;

--$0 class L at 'Dsf', RE0%;

--$0 class M at 'Dsf', RE0%;

--$0 class N at 'Dsf', RE0%;

--$0 class O at 'Dsf', RE0%.

The class A-1, A-2, A-3, A-4, A-1A, A-4FL and A-4FX certificates have paid in full. Fitch does not rate the class P certificate. Fitch previously withdrew the ratings on the interest-only class X-1 and X-2 certificates.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
https://www.fitchratings.com/site/re/886006

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
https://www.fitchratings.com/site/re/883130

U.S. and Canadian Fixed-Rate Multiborrower CMBS Surveillance and U.S. Re-REMIC Criteria (pub. 13 Nov 2015)
https://www.fitchratings.com/site/re/873395

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012388

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012388

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst:
Roxanna Tangen, +1-312-368-3116
Associate Director
Fitch Ratings, Inc.
70 W. Madison
Chicago, IL 60602
or
Committee Chairperson:
Mary MacNeill, +1-212-908-0785
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Roxanna Tangen, +1-312-368-3116
Associate Director
Fitch Ratings, Inc.
70 W. Madison
Chicago, IL 60602
or
Committee Chairperson:
Mary MacNeill, +1-212-908-0785
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com