DBRS Confirms Ten, Downgrades 15 Classes of Morgan Stanley Capital I Trust, Series 2007-IQ16

DBRS has today confirmed Classes A-1 through AM-FL, including notional classes X-1 and X-2 at AAA with Stable trends. All six shadow ratings have also been confirmed.

In addition, DBRS downgraded 15 classes, Classes AJ through N, based on the following: the most recent annual net cash flows have declined for approximately 36% of the pool, based on balance from DBRS' NCFs at issuance, the high percent of loans in special servicing and the percentage of loans on the DBRS’ HotList. Losses from eleven delinquent and specially serviced loans are currently projected to eliminate the unrated Class S and erode a portion of the unrated Class Q. Because DBRS expects further cash flow decline in 2009, the trend remains Negative for Classes N through K.

The majority of DBRS’ anticipated losses are associated with Prospectus ID#13 (Amalfi Hotel). The loan is more than 90 days delinquent and was transferred to the special servicer on April 27, 2009, as a result of the borrower's claim that cash flow from operations has declined substantially, and it will no longer be sufficient to cover debt service. As of March 31, 2009, occupancy had decreased to 45% and DSCR was projected to be 0.5x, for the full year. The property is a 215-room boutique hotel located in the River North neighborhood of Chicago, less than one mile from Michigan Ave. While the subject is a high-quality asset in a good location, the current loan per key of $172,000 is relatively high for an unflagged hotel in this challenging environment. Given the dearth of hotel transaction activity, it is difficult to determine a liquidation value at this point in time. However, a large principal loss is considered possible given the significant impairment to net cash flow and increased cap rates in the hotel sector. The DBRS liquidation scenario assumes significant losses on this loan.

DBRS CMBS methodology assumes a mean reverting capitalization rate applied to all loans and therefore the current market's property value deterioration was already accounted for within the DBRS ratings at issuance. As a result, the downgrades are more related to the loan specific increased probability of default, caused by a deterioration of cash flow, for many loans within the transaction, as compared to property value declines.

The pool is heavily concentrated in loans secured by retail and hotel properties, each sector showing signs of stress in the current economic environment. As such, the DBRS HotList is concentrated in these property types. There are 12 loans (10.2% of the transaction’s outstanding balance) found on the DBRS HotList.

As part of its review, DBRS analyzed the six shadow-rated loans, the servicer’s watchlist, the delinquent loans, the specially serviced loans and the top ten loans. Combined, these loans represent 49.1% of the pool balance.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are CMBS Rating Methodology and CMBS Surveillance, which can be found on our website under Methodologies.

This is a Structured Finance rating.