DBRS Upgrades Fives Classes and Confirms 10 Other Classes of Merrill Lynch Financial Assets Inc., Series 2003-Canada 10

DBRS has today confirmed the ratings of Merrill Lynch Financial Assets Inc., Commercial Mortgage Pass-Through Certificates, Series 2003-Canada 10 as follows:

Class A-1 at AAA (sf)
Class A-2 at AAA (sf)
Class B at AAA (sf)
Class C at AAA (sf)
Class XC-1 at AAA (sf)
Class XC-2 at AAA (sf)
Class G at BB (high) (sf)
Class H at BB (sf)
Class J at B (sf)
Class K at B (low) (sf)

In addition, DBRS has upgraded five classes as follows:

Class D-1 to AA (sf) from A (high) (sf)
Class D-2 to AA (sf) from at A (high) (sf)
Class E-1 to A (sf) from BBB (high) (sf)
Class E-2 to A (sf) from BBB (high) (sf)
Class F to BBB (sf) from BBB (low) (sf)

All trends for the rated classes of the transaction are Stable.

DBRS does not rate the $5,985,200 first loss piece, Class L.

The pool collateral has been reduced by 29.0% since issuance, with the current pool balance at approximately $326 million.

The rating actions reflect the increased credit enhancement and the defeasance of nine loans (25.8% of the current pool balance). Overall, financial performance for the remaining collateral is strong with a weighted-average debt service coverage ratio (WADSCR) of 1.74x and a weighted-average loan-to-value (WALTV) of 50%. This is an improvement over the last review in October 2010, when the pool’s WADSCR and WALTV were reported to be 1.65x and 64.3%, respectively. All 46 remaining loans in the transaction are current.

There are six loans, representing 10.3% of the current pool balance on the servicer’s watchlist. Of these loans, five are on the watchlist due to performance issues. Two watchlisted loans, which are also on the DBRS HotList, have remained points of concern since October 2010 and are discussed below.

Lawrence Terrace (Prospectus ID#8, 5.27% of the current pool balance) is a two-building (14 storey) multifamily property in Toronto located south of Highway 401. The property was built in 1964 and reportedly underwent $1.4 million in capital improvements in the few years prior to the loan’s issuance. The borrower has owned the building since 1981 and has remained current on payments, despite a decline in performance. The loan was originally placed on the servicer’s watchlist for a Poor property inspection rating and has remained on the servicer’s watchlist for a decrease in the DSCR which can be attributed to a significant increase in the repairs and maintenance (R&M) expenses. Financial reports obtained from the servicer have indicated performance at the property has improved slightly year-over-year since YE2007. DBRS will continue to monitor this loan.

Ramada Belleville (Prospectus ID#38, 0.87% of the current pool balance) is a 124-key, full-service Ramada Inn and Conference Centre in Belleville, Ontario in the Bay of Quinte District. The loan has been on the servicer’s watchlist for decline in cash flow. The cash flow at the property has declined significantly since issuance, with a YE2010 DSCR reported to be -0.55x, down from 0.39x at YE2009, and 0.69x at YE2008. According to servicer commentary, the borrower had reported a $300,000 decline in total revenue for the YE2009, of which, $140,000 was attributable to a decrease in food and beverage revenue. Despite the performance issues at the property, the loan remains current, with a reasonable leverage point, on a per-unit basis, of $22,930. Additionally, the loan has full recourse to the sponsor, Royal Host REIT.

When considering the upgrades, DBRS recognized the performance challenges of the two Hotlist loans and in addition applied a 20% net cash flow stress to the remaining loans in the transaction.

DBRS maintains two shadow ratings in this transaction. The shadow-rated loans are Sheridan Centre (Prospectus ID#1, 8.74% of the current pool balance) at BBB and Richmond Centre North (Prospectus ID#3, 5.46% of the current pool balance) at BBB (high). The loans have continued to exhibit stable performance and, as such, DBRS has confirmed the shadow ratings.

DBRS continues to monitor this transaction on a monthly basis in the Monthly CMBS 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 North American Surveillance Methodology, which can be found on our website under Methodologies.