Fitch Upgrades KeyBank N.A.'s Commercial Primary Servicer Rating

NEW YORK--()--Fitch Ratings has taken the following actions on the commercial mortgage servicer ratings of KeyBank N.A. (doing business as KeyBank Real Estate Capital [KBREC]):

--Primary servicer rating upgraded to 'CPS2+' from 'CPS2';

--Special servicer rating affirmed at 'CSS1-';

--Master servicer rating affirmed at 'CMS1'.

The upgrade of the primary servicer rating is driven by a material decline in the number of loans outsourced to a third-party servicer, from approximately 47% (by loan count) in 2013 to currently 27%. Fitch expects the use of outsourcing to continue to decline; however, there remains the potential for more loans to be outsourced based on the current shared services agreement. Fitch will continue to monitor KBREC's use of outsourcing and any material increase may result in the company's primary servicer rating being limited to the 'CPS2' category as described in Fitch's Rating Criteria for U.S. Commercial Mortgage Servicers.

In April 2012, KBREC entered into a shared services agreement with Berkadia which was expanded in 2013 during KBREC's acquisition of a large portfolio of CMBS servicing rights. Since 2013, KBREC's percentage of loans outsourced to Berkadia has continued to decrease. Starting in 2013, KBREC outsourced 47% of its primary servicing portfolio to Berkadia, declining to 40% in 2014 and 28% in 2015. As of March 31, 2016, KBREC outsourced 27% of its primary servicing portfolio to Berkadia.

KBREC maintains a robust, well-controlled primary servicing platform with highly developed technology and a deep primary servicing management team that averages 18 years of experience and 12 years with the company. As of March 31, 2016, KBREC maintained a primary and master servicing team of 327 employees, up from 261 employees during Fitch's previous review. Growth in the primary and master servicing group, which had relatively flat turnover from Fitch's prior review (12% overall), reflects efforts in growing the servicing portfolio through originations and third-party assignments including private-label servicing.

The master servicer rating reflects the company's extensive master servicing experience, commitment to technology, experienced management team and staff, and internal control environment. Fitch noted as a concern KBREC's reliance on Freddie Mac seller/servicer audits for primary servicer oversight and KBREC's limited review of primary subservicers. Fitch believes a best practice for master servicers is to perform regular risk based assessments on all subservicers.

The special servicer rating reflects the experience of KBREC's special servicing management group and asset management team (divided into large loan and small balance workout teams), strong internal controls, and the company's special servicing technology for resolving large numbers of defaulted loans.

KBREC's special servicing group continues to experience high turnover as the pace of loan resolutions reduce the active special servicing portfolio (69% by loan count since year-end 2013); in the past 12 months, KBREC experienced asset manager turnover ratio of 40%, compared to 29% asset manager turnover at Fitch's prior review. KBREC continues to retain highly experienced managers and asset managers with 24 years and 20 years of experience, respectively. Declining active special servicing portfolios and turnover among asset managers remains a common trend facing all Fitch-rated special servicers.

Each of the servicer ratings incorporates Fitch's Long-Term Issuer Default Rating for KeyCorp of 'A-' with a Negative Rating Outlook as of Nov. 2, 2015 and its commitment to commercial mortgage servicing.

KBREC, a wholly owned subsidiary of KeyCorp, is a full-service real estate finance organization with a national lending and servicing platform, providing services to both internal and third-party clients. As of March 31, 2016, KBREC's total servicing portfolio consisted of 18,350 loans totaling $197.1 billion. Master servicing is the largest component of the portfolio with 8,490 loans totaling $131.4 billion. KBREC was also the named special servicer for 5,839 loans totaling $52.4 billion, $50.1 billion of which was CMBS. KBREC does not invest in CMBS B-pieces, relying upon third-party clients for CMBS special servicing assignments.

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

Applicable Criteria

Rating Criteria for Structured Finance Servicers (pub. 01 Jul 2016)
https://www.fitchratings.com/site/re/884140

Rating Criteria for U.S. Commercial Mortgage Servicers (pub. 14 Feb 2014)
https://www.fitchratings.com/site/re/735382

Additional Disclosures

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012688

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

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Contacts

Fitch Ratings
Primary Analyst:
James Bauer, +1-212-908-0343
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Adam Fox, +1-212-908-0869
Senior Director
or
Committee Chairperson:
Tara Sweeney, +1-212-908-0347
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
James Bauer, +1-212-908-0343
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Adam Fox, +1-212-908-0869
Senior Director
or
Committee Chairperson:
Tara Sweeney, +1-212-908-0347
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com