DBRS Confirms 16 Classes of Merrill Lynch Financial Assets Inc., Series 2006-Canada 20

DBRS has today confirmed the ratings of all 16 classes of Merrill Lynch Financial Assets Inc., Series 2006-Canada 20 as follows:

• Class A-1 at AAA
• Class A-2 at AAA
• Class A-3 at AAA
• Class B at AA
• Class C at A
• Class D at BBB
• Class E at BBB (low)
• Class F at BB (high)
• Class G at BB
• Class H at BB (low)
• Class J at B (high)
• Class K at B
• Class L at B (low)
• Class XP-1 at AAA
• Class XP-2 at AAA
• Class XC at AAA

All classes were confirmed with a Stable trend.

The ratings reflect the increased credit enhancement to the bonds from a collateral reduction of approximately 10.44% since issuance, the healthy weighted-average debt service coverage ratio (DSCR) of 1.54x for the pool and the strong loan-to-value (LTV) weighted average of 67.2% for the pool, based on the original values determined at issuance.

There are nine loans on the servicer’s watchlist, representing a combined 11.42% of the pool. Two of those loans are in the Top Ten: Prospectus ID#6, Holiday Inn-Midtown Montrèal (4.93% of the pool balance) and Prospectus ID#10, Le Carrefour Office (3.14% of the pool balance).

Holiday Inn-Midtown Montrèal is a full-service hotel located in Midtown Montrèal at 420 Sherbrooke West. This loan is on the servicer’s watchlist for a decline in the DSCR from the underwritten coverage of 2.20x. There are 488 units, with a current loan per key of $53.9 thousand. At the time of the loan’s closing, the asset was underperforming its competitive set, but it was believed that the borrower’s investment of approximately $4 million in a property improvement plan (PIP) would boost the property’s market share and improve revenues at the property. However, the market deteriorated significantly over the next few years, limiting the opportunities for improvement in occupancy and room rates. The property performance has improved in 2010, with the trailing-twelve-month (TTM) DSCR, as of June 30, 2010, of 1.24x and an occupancy of 64% at the time of the October 2010 servicer’s site inspection. These numbers compare favourably to the YE2009 DSCR of 1.09x and the occupancy of 60%.

Le Carrefour Office is a Class A office property located in Laval, Quèbec near the interchange of Highways 440 and 15. This loan is on the servicer’s watchlist for a low DSCR at YE2009 of 1.05x and an occupancy of 86%. At closing, the property was fully occupied and the DSCR was 1.25x. Although the property has experienced significant occupancy declines since 2006, there has been some recent success in maintaining the larger tenants at the property upon their expiry. In 2010, a tenant occupying 8.4% of the NRA was signed to a renewal term of five years. Between Q3 2010 and YE2011, 10.14% of the properties NRA is set to expire; DBRS will closely monitor those expiries for developments. The loan is full recourse to the borrower.

There are two loans in special servicing in this transaction as of the January 2011 remittance, representing a combined 6.26% of the pool: Prospectus ID#8, Marriott Pooled Senior Loan (4.77% of the pool) and Prospectus ID#23, Summit Properties (1.49% of the pool).

The Marriott Pooled Senior Loan is collateralized by five limited-service Marriott hotel properties located in the Greater Toronto Area (GTA). Three of the properties are flagged by the Courtyard division of Marriott; the other two are flagged as Residence Inns. The combined unit count for the portfolio is 632 rooms. The whole-loan balance of $73.5 million is comprised of two pari-passu A-notes each in the original principal amount of $25.4 million and an unsecuritized B-note in the original principal amount of $22.6 million. The loan transferred to the special servicer in August 2009 when the borrower advised the servicer that it could no longer fund the full debt service for the loan and fund the scheduled property improvement plans (PIPs) scheduled for the three Courtyard properties. Since that time, the servicer has negotiated forbearance agreement, directing all cash flows from the property to fund the debt service on the A-notes (which have been current since the loan’s transfer to the special servicer) and to fully fund the PIPs, prior to any payment of the B-note. The forbearance period has two one-year extension options. The servicer is currently processing the borrower’s request to exercise the first one-year extension option. The YE2010 performance for the portfolio is quite strong, with the DSCR at 2.00x for the A-notes and 1.20x for the whole-loan balance. Additionally, the updated appraised value of $69.4 million, as of April 2010, is a 23% decline from the issuance value, though it is still favourable on an A-note basis, with the current A-note balance at approximately $51 million. Occupancy for the properties during that period ranged from 69% to 82%; these figures are representative of a year-over-year improvement for each property on an individual basis from 2009. The first phase of the PIPs for the Courtyard properties is scheduled for completion in the summer of 2011, with renovations to the lobbies and common areas. The second phase, which will include renovations to the guest rooms, is scheduled to commence in the second half of 2011. The loan will remain with the special servicer through full repayment of the A-notes. DBRS will continue to monitor these loans closely.

The Summit Properties loan is collateralized by a 122-unit multifamily property located in the small community of Leduc, Alberta approximately 35 km south of Edmonton. The loan transferred to the special servicer in August 2010 for imminent default and is due for the December 1, 2010 payment. The borrower advised the special servicer that the property cash flows were not sufficient to support the debt service payments in the face of increasing property taxes and the need for significant capital improvements to the property’s mechanical systems. The property has historically performed in-line with the underwritten DSCR of 1.16x; at Q1 2010, the DSCR was 1.18x and the property was 98% occupied. Since the loan’s transfer to special servicing, a second lien in the amount of $2.25 million was found in a title search by the servicer. In late 2010, the borrower requested permission to sell the property and pay off the loan with a partial waiver of the yield maintenance, as required by the loan documents. The servicer reported in February 2011 that the request was approved, with a full payment of the outstanding principal and interest received along with 44% of the yield maintenance requirement. The borrower also reimbursed the special servicer for all outstanding fees associated with the workout on this loan. As such, DBRS anticipates any shortfall associated with this loan to be contained to the interest-only classes. That loan will pay out of the pool at the February 2011 remittance.

There are two shadow-rated loans in the transaction: Prospectus ID#4, Westview Village MHC (5.17% of the pool) and Prospectus ID#21, CLSC Sherbrooke (1.65% of the pool). The Westview Village MHC loan is collateralized by a 1,060-pad mobile home community in Edmonton. The loan was shadow-rated BBB at issuance because of the strong historical performance of the asset and the strong LTV of 62%. The loan continues to perform well, with a Q2 2010 DSCR of 2.47x and an occupancy of 99.8%. The current LTV is 58%, based on the original appraised value of $47.25 million. As such, the BBB shadow rating for that loan has been confirmed.

The CLSC Sherbrooke loan is secured by a 51,000 sf office property located in Montrèal. The property’s single tenant is the Province of Quèbec, on a lease that runs nine years past the loan’s maturity to August 2025. The loan was shadow-rated at A (high) at issuance to give credit to the strength of the single tenant, who is rated A (high) by DBRS (as confirmed in August 2010). The loan’s shadow-rating of A (high) was confirmed as part of this review.

There is significant exposure to the Calgary office market in the Top Ten: Prospectus ID#2, Heritage Square (6.95% of the pool) and Prospectus ID#9, MacFarlane Tower (4.36% of the pool). Heritage Square is a 320,000 sf suburban office property located in south central Calgary near the interchange of Highways 8 and Highway 2. At YE2009, the property was 97% occupied with a DSCR of 2.72x. The increase in DSCR since issuance can be attributed to the expansion of the property’s largest tenant into an additional 10% of the NRA (for a total of approximately 60% of the NRA) at a rate per square foot that would represent a 25% increase since issuance. That tenant’s lease expires in August 2013. The property’s second largest tenant, with 28% of the NRA, recently signed a ten-year extension on their lease that was scheduled for expiry in December 2011.

MacFarlane Tower is a Class B office property located in downtown Calgary’s west core submarket; the whole loan is a pari-passu structure, split equally across two A-notes with a current balance of $23.2 million. The total loan per square foot is $203. At issuance, the property was 99% occupied. Since that time, occupancy has fallen slightly (as of June 30, 2010, the property was 92% occupied), but the DSCR remains quite healthy at 1.61x for YE2009. There are 13 tenants, comprising a combined 21.5% of the NRA, scheduled to expire between Q3 2010 and YE2011; DBRS has requested a leasing update for the property and has modeled this loan to reflect the risk associated with the upcoming rollover coupled with market difficulties in this submarket.

In the next two years, Calgary office supply is projected to increase while the demand is projected to remain unstable. DBRS will monitor these two loans closely as market conditions fluctuate.

Excluding the Marriott Pooled Senior Loan, there are eight loans, comprising 11.45% of the pool balance, scheduled for maturity in 2011. The average DSCR, for the seven loans in that group for which we have reported financials, is 1.67x, with an average exit debt yield of 13.9%. These numbers compare favourably with loans that successfully paid out of similarly seasoned transactions in Q4 2010 and thus far in 2011; as such, DBRS anticipates the majority of these loans will successfully refinance.

DBRS continues to monitor this transaction on a monthly basis in the CMBS Monthly Surveillance report, which can provide more detailed information on the individual loans in the pool.

Notes:
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.