CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded five classes and affirmed seven classes of Morgan Stanley Capital I Trust (MSC 2006-IQ11) commercial mortgage pass-through certificates series 2006-IQ11. A detailed list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
The downgrades reflect increased credit risk in the pool specifically related to the largest loan in the transaction, the Merritt Square Mall, which is in special servicing. The mall, which represents 13.7% of the pool balance, is expected to be returned to the lender as the borrower was unable to refinance at maturity. Additionally, the pool has become increasingly concentrated with a high percentage of REO assets in special servicing with limited progress toward resolution.
As of the March 2016 distribution date, the pool's aggregate principal balance has been reduced by 76.3% to $382.8 million from $1.62 billion at issuance. Fitch has designated 28 Fitch Loans of Concern (49.8%), which includes 12 assets in special servicing (36.2%). Of the assets in special servicing, eight assets are REO representing 20.3% of the pool balance. Two loans are defeased (6.1%) and 19 loans are cooperative properties (14.3%). Approximately 79.5% of the pool is scheduled to mature in 2016 primarily in the first half of the year.
The largest contributor to expected losses is a 416,443 sf office complex (9.8%) located in Jacksonville, FL. The asset transferred to special servicing in November 2012 for imminent default and subsequently became REO in March 2014. Occupancy has declined substantially as the largest tenant vacated 36% of the property at lease expiration in 2015 bringing total occupancy down to 59.6% as of March 2016. The servicer continues to renew expiring tenants and has indicated that there is interest from the market on the vacant space.
The second largest contributor to expected losses is the Merritt Square Mall, a 811,410 sq ft. regional enclosed mall (13.7% of the pool) located on Merritt Island, FL. Collateral includes 478,040 square feet (sf), of which 241,868 sf is in-line space and 236,172 sf as anchor space. The loan transferred to special servicing in August 2015 for imminent default as the borrower was unable to pay off the loan at maturity. The sponsor recently announced their intentions to return the mall to the lender. As of September 2015, occupancy for the mall was 98% with NOI DSCR of 1.49x compared with occupancy of 97% and NOI DSCR of 1.29x at YE 2014. Despite the high occupancy, challenges remain as the mall generates relatively weak sales with multiple tenants on percentage rent lease structures and declining population trends in the immediate trade area.
The third largest contributor to expected losses is an asset in special servicing (3.6%), secured by a 212,000 sf office building in downtown Lancaster, PA. The asset transferred to the special servicer in April 2008 due to the single tenant, L3 Communications, vacating the space and discontinuing payment of rent. Foreclosure of the property was hindered by litigation surrounding the mortgage and sponsor. Litigation has since been resolved and the asset is REO as of September 2015. The city of Lancaster, which previously had evaluated taking the asset via eminent domain, is no longer pursuing this action. The asset is under contract for sale and is expected to close by the end of May. Fitch anticipates significant losses upon disposition of the asset.
RATING SENSITIVITIES
Rating Outlook on class A-M remains Stable due to increasing credit enhancement and continued paydown of the class. The Negative Outlook reflects the potential for downgrade should performance of the Merritt Square Mall deteriorate further and expected losses of assets in special servicing increase. Upgrades are unlikely due to the uncertainty surrounding the resolution of REO assets, including Merritt Square Mall, and susceptibility to adverse selection as the pool pays down. The distressed classes (those rated below 'B-sf') are subject to further downgrades as losses are realized.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch downgrades the following classes and revises the Rating Outlook as indicated:
--$147.5 million class A-J to 'BBsf' from 'BBBsf'; Outlook to Negative from Stable;
--$30.3 million class B to 'CCCsf' from 'BBsf'; RE 85%;
--$12.1 million class C to 'Csf' from 'Bsf'; RE 0%;
--$22.2 million class D to 'Csf' from 'CCCsf'; RE 0%;
--$16.2 million class E to 'Csf' from 'CCsf'; RE 0%.
Fitch affirms the following classes:
--$104.2 million class A-M at 'AAAsf'; Outlook Stable;
--$14.1 million class F at 'Csf'; RE 0%;
--$18.2 million class G at 'Csf'; RE 0%;
--$14.1 million class H at 'Csf'; RE 0%;
--$3.8 million class J at 'Dsf'; RE 0%;
--$0 class K at 'Dsf'; RE 0%;
--$0 class L at 'Dsf'; RE 0%.
The class A-1, A-2, A-3, A-4, and A-1A certificates have paid in full. Fitch does not rate the class M, N, O, P and EI certificates. Fitch previously withdrew the ratings on the interest-only class X and X-Y certificates.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
U.S. and Canadian Fixed-Rate Multiborrower CMBS Surveillance and U.S. Re-REMIC Criteria (pub. 13 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873395
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001400
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001400
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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