Fitch Downgrades 3 CMBS Deals on Higher Peter Cooper/Stuy Town Losses

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded, revised Loss Severity (LS) ratings and maintained a Negative Outlook on 19 classes from three U.S. CMBS transactions due to increased loss expectations for the Peter Cooper Village/Stuyvesant Town (PCV/ST) loan.

The affected transactions are as follows:

--WBCMT 2007-C30;

--ML-CFC 2007-5;

--ML-CFC 2007-6.

A detailed list of rating actions follows at the end of this release.

The downgrades are due to the recent ruling by the New York State Court of Appeals and the continued underperformance of the PCV/ST loan. The adverse ruling against the loan sponsors, Tishman Speyer Properties, LP and Blackrock Realty, is likely to stop the conversion of rent-stabilized units to market rate units and has made the owners liable for repayments of rent overcharges for unit conversions now deemed illegal.

Fitch has lowered its value estimate of the property to $1.8 billion based on second quarter 2009 (2Q'09) financials and a cap rate of 7%. In its analysis of the loan, Fitch no longer assumes income growth form the conversion of rent stabilized units to market based on the courts ruling that the owners cannot continue to convert stabilized units to markets while receiving J-51 tax benefits. The amount of historical overcharges the sponsors are now liable to repay is uncertain at this time and are also not factored into Fitch's loss estimate due the uncertainty of the amount.

Cash flow generated from the property remains significantly below what is needed to service the current outstanding debt, and the borrower continues to use debt service reserves to cover operating shortfalls. The balance of the debt service reserve as of October 2009 was $24.4 million and is likely to be sufficient to only make the November and December debt service payments. Once the reserves have been depleted, Fitch believes a default of the loan and transfer to the special servicer is likely.

Upon default, the special servicer will need an updated appraisal. If this is significantly lower than the outstanding loan amount, appraisal subordinate entitlement reductions (ASERs) based on an appraisal reduction amount (ARA) will cause interest shortfalls on multiple classes in the transactions. Rating of these classes may be downgraded further based on the recoverability of interest shortfalls. Based on Fitch's estimated value, Fitch projects the monthly ASERs to affect the following classes:

--WBCMT 2007-C30: Classes C (now rated 'BB') through S;

--ML-CFC 2007-5: Classes B (now rated 'BB') through Q;

--ML-CFC 2007-6: Classes F (now rated 'B-') through Q.

Fitch's expected losses, based on current cash flow, are 40% of the $3 billion A note balance. However, although a default is expected in the near term, a lengthy workout is also expected and full losses may not be realized until loan's maturity in 2016. Fitch is recognizing 50% of potential future losses in its rating actions today due to Fitch's expectation of a complex workout of the loan. There are many factors to be considered including a possible modification, potential legislative changes to rent stabilization laws that may alter the value of the property, and the low loan per unit ($267,213).

Fitch's recognized losses today of $600 million on the entire A Note include the potential principal losses to the individual transactions and estimated costs associated with expected special servicing fees, advances and potential legal fees. Fitch will continue to monitor this loan and adjust recognized losses as events transpire, including any potential defaults or modifications of the loan.

For the year ended 2008, the servicer reported debt service coverage ratio (DSCR) on the mortgage was 0.69 times (x), as compared to the year ended 2007 DSCR of 0.55x. For 2Q'09, the servicer reported DSCR was 0.65x. As of July 2009, approximately 60% were rent-stabilized units and 40% were market units with a vacancy rate of approximately 4%. In addition to the securitized balance, there is an additional $1.5 billion of mezzanine debt held outside the trust.

Stuyvesant Town/Peter Cooper Village is comprised of 56 multistory buildings, situated on 80 acres, and includes a total of 11,227 apartments. The loan sponsors, Tishman Speyer Properties, LP and Blackrock Realty, acquired the property with the intent of converting rent-stabilized units to market rents as tenants vacated the property.

Fitch has taken the following rating actions:

WBCMT 2007-C30

--$671.8 million class A-J to 'BB/LS4' from 'A/LS3'; Outlook Negative;

--$49.4 million class B to 'BB/LS5' from 'BBB/LS5'; Outlook Negative;

--$79 million class C to 'BB/LS5' from 'BBB-/LS5'; Outlook Negative;

--$69.2 million class D to 'B/LS5' from 'BB/LS5'; Outlook Negative;

--$59.3 million class E to 'B/LS5' from 'BB/LS5'; Outlook Negative;

--$69.2 million class F to 'B-/LS5' from 'BB/LS5'; Outlook Negative;

--$98.8 million class G to 'B-/LS5' from 'B/LS5'; Outlook Negative.

Additionally, Fitch has revised the Loss Severity (LS) Rating for the following 'AAA' rated classes to 'LS2' from 'LS1':

--$21.4 million class A-1;

--$100 million class A-2;

--$908.7 million class A-3;

--$195.5 million class A-4;

--$126.9 million class A-PB;

--$1.8764 billion class A-5;

--$2.2884 billion class A-1A.

ML-CFC 2007-5

--$211.5 million class AJ to 'BB/LS3' from 'A/LS3'; Outlook Negative;

--$175 million class AJ-FL to 'BB/LS3' from 'A/LS5'; Outlook Negative;

--$77.3 million class B to 'BB/LS5' from 'BBB-/LS5'; Outlook Negative;

--$33.1 million class C to 'BB/LS5' from 'BBB-/LS5'; Outlook Negative;

--$77.3 million class D to 'B-/LS5' from 'BB/LS5'; Outlook Negative;

--$38.6 million class E to 'B-/LS5' from 'BB/LS5'; Outlook Negative;

--$55.2 million class F to 'B-/LS5' from 'B/LS5'; Outlook Negative.

Fitch revises the Rating Outlook to Negative from Stable for the following 'AAA' rated classes:

--$341.7 million class AM;

--$100 million class AM-FL.

Additionally, Fitch revises the LS Rating for the following 'AAA' rated classes to 'LS2' from 'LS1':

--$47.2 million class A-1;

--$63.3 million class A-2;

--$60 million class A-2FL;

--$153.4 million class A-3;

--$187.1 million class A-SB;

--$1.1998 billion class A-1A;

--$1.0902 billion class A-4;

--$245 million class A-4FL.

ML-CFC 2007-6

--$107.4 million class AJ to 'BB/LS4' from 'BBB-/LS3'; Outlook Negative;

--$75 million class AJ-FL to 'BB/LS4' from 'BBB-/LS5'; Outlook Negative;

--$42.9 million class B to 'B/LS5' from 'BB/LS5'; Outlook Negative;

--$16.1 million class C to 'B/LS5' from 'BB/LS5'; Outlook Negative;

--$34.9 million class D to 'B-/LS5' from 'B/LS5'; Outlook Negative.

Additionally, Fitch revises the LS Rating for the following 'AAA' rated classes to 'LS2' from 'LS1':

--$15.3 million class A-1;

--$170.4 million class A-2;

--$150 million class A-2FL;

--$60.7 million class A-3;

--$729 million class A-4;

--$363.4 million class A-1A.

Additional information is available at www.fitchratings.com

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