DBRS Upgrades Three Classes; Releases Surveillance Report for MLFA 2003-Canada 10

DBRS has today upgraded Classes C, D-1 and D-2, and confirmed the remaining classes of Merrill Lynch Financial Assets Inc., Commercial Mortgage Pass-Through Certificates, Series 2003-Canada 10. All trends are Stable. Classes XP-1 and XP-2 have also been retired.

The upgrades reflect the positive outlook for the transaction, considering significant collateral reduction and an increase in defeased loans. Since issuance, the transaction has had a collateral reduction of 18.1%, exclusively from loan amortization. All 55 loans remain in the pool. In addition, seven loans (21.6% of the pool) are fully defeased. Two of the five largest loans, Sheridan Centre and Richmond Centre North (combined 12.8% of the current pool balance) are shadow-rated at BBB and BBB (high), respectively. While the majority of the underlying properties have been able to address the challenges brought on by a difficult economic environment, DBRS applied significant cash flow stresses to account for potential future declines in performance when modeling the transaction. However, given the amortization schedules and performance of the underlying loans to date, DBRS expects the transaction to maintain strong performance.

The pool is concentrated in retail properties (34.4% of the pool) and in the Province of Ontario (45.7% of the pool) while the top ten loans represents 46.2% of the pool. Concern over these concentrations is mitigated by the fact that many of the retail properties are owned by institutional investors who are experienced within the sector and by the pool’s large percentage of defeased loans, including three loans within the top ten. The majority of the loans have maintained stable performance since issuance, reporting a weighted-average debt service coverage ratio (WADSCR) of 1.67x, as of September 2009 (on a whole-loan and P&I basis).

Currently, there are no delinquent and/or specially serviced loans in the pool, but two loans (5.6% of the pool) have been HotListed by DBRS. The largest of these two loans, Lawrence Terrace (4.7% of the pool), is secured by a 410-unit multifamily property in Toronto and recently reported a T-12 2009 DSCR of 0.83x. The non-recourse loan remains current, despite reporting a DSCR above 1.0x only once (1.19x in 2006) since 2004. The low DSCRs are a result of elevated expenses, specifically, voluntary expenses (repairs & maintenance, payroll & benefits, general & administrative and professional fees), which have increased 32.9% since 2007. Meanwhile, the property's revenue has steadily increased, rising 6.2% over this time. Given these trends, and the fact the loan has amortized $1.6 million since issuance (with a current exposure of $43,496/unit), concern over the property's near term default risk is mitigated. However, after a Fair rating from an August 2009 servicer site inspection, DBRS remains troubled by the condition of the property. The majority of deferred maintenance noted in the inspection was located in the parking garage and to the property's exterior, with some signs of wear and tear to the interior, but a number of improvements within the units was also noted. DBRS will continue to monitor this loan’s performance closely through its Monthly CMBS Surveillance Report.

Note:
All figures are in Canadian 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.