DBRS Confirms Ten Classes and Downgrades 15 other Classes of ML-CFC Commercial Mortgage Trust, Series 2006-1

DBRS has today confirmed Classes A-1 through A-M, including notional class X, at AAA with Stable trends. Five shadow ratings have also been confirmed.

In addition, DBRS has downgraded 15 classes, based on the following: 15 loans, representing 7.0% of the current pool balance, are delinquent; an additional two loans, representing 1.3% of the pool, are current but specially serviced; and the DBRS HotList, representing an additional 6.2% of the pool. DBRS estimates that losses on the 17 delinquent and specially serviced loans will eliminate seven classes, Classes J through Q, and erode a portion of Class H. The trend has been changed to Negative for Classes F through P as DBRS is projecting either a loss to each class or very minimal credit enhancement remaining after the projected losses are taken.

The following three specially serviced loans represent nearly half of all the losses estimated by DBRS.

Inglewood Park is the largest specially serviced or delinquent loan, representing 1.8% of the pool. Collateral for the loan consists of seven office/flex buildings located in Largo, Maryland, approximately 10 miles east of Washington, D.C. The properties’ performance has been weak since issuance and occupancy is currently less than 50%. The loan was structured with a $5.2 million holdback that was to be released upon achievement of certain performance hurdles. These hurdles were never met, and the loan balance was paid down by the amount of the hold back in early 2010. While this pay down will reduce the loan’s loss severity, DBRS is still estimating significant principal losses.

Colonial Mall Glynn Place is the second largest specially serviced or delinquent loan, representing 1.0% of the pool. The subject property is a regional mall located in coastal Georgia in the city of Brunswick. The property featured a Steve & Barry’s store at issuance that served as collateral for the loan and contributed more than 10% of the total property income. Steve & Barry’s liquidated in late 2008 and closed the store at the subject property. In addition, in-line shop space vacancy has increased from 26% at issuance to 33%, as of March 2010. The borrower has offered to return the property to the special servicer via deed in lieu of foreclosure, but modification negotiations are still ongoing. To date, the borrower has kept the loan current. Given the very minimal amount of cash flow generated at the property, significant principal losses are expected for this loan.

U Stor It Self Storage Portfolio is the third largest specially serviced or delinquent loan, representing 1.0% of the pool. The loan is collateralized by four self-storage properties located in the Chicago area. This loan was transferred to the special servicer after the borrower indicated that the properties were incurring negative cash flows (before application of debt service) and without immediate relief it would potentially hand the assets over to the special servicer. At issuance, an up-front reserve was held because of the low occupancy of two of the properties. It appears that $1.6 million of this reserve is still held by the lender and could ultimately be used to pay down the balance of the loan. According to the borrower, the properties have suffered from a general decline in the local economies, along with the vacancy of an industrial tenant at one property that occupied approximately 23% of the total NRA. The borrower had requested a modification, but foreclosure is now being pursued. While the $1.6 million reserve will reduce the loan’s loss severity, DBRS is still estimating significant principal losses.

While estimated losses from delinquent and specially serviced loans are significant, the ratings confirmations at the top of the capital structure reflect the strong performance of most of the current loans. The top ten loans, which represent 45% of the pool, have a very strong weighted-average debt yield of 13.2%. In addition, the weighted-average DSCR for these loans is quite high at 2.11x. While this figure is skewed somewhat by two AAA shadow-rated loans with very high DSCRs, there is only one loan in the top ten with a DSCR less than 1.10x. This loan, Prince Georges Center II, is also the only top ten loan that has been placed on the servicer’s watchlist because of performance issues, and DBRS does not consider the loan to be at risk for immediate default.

The pool is also unlikely to experience significant ratings stress related to the exposure of hotel loans. While 12.8% of the pool is collateralized by hotel properties, 80% of this concentration is represented by two cross-collateralized loans: Ashford Hotel Portfolio 2 and Ashford Hotel Portfolio 3. These loans have a combined YE2009 DSCR of 1.40x, which is considered very strong given the hospitality industry recording its worst year in several decades in 2009. DBRS sees limited term default risk for this loan, given its ability to withstand this part of the down cycle in the industry. The other hotel exposure is represented by five loans that all have DSCRs in excess of 1.50x.

As part of its review, DBRS analyzed the servicer’s watchlist, the delinquent loans, the specially serviced loans, the top ten loans and the three shadow rated loans outside of the top ten. Combined, these loans represent approximately 63% 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 CMBS rating.