DBRS Confirms 17 Classes of Merrill Lynch Financial Assets Inc., Series 2005-Canada 16

DBRS has today confirmed the ratings for 17 classes of Merrill Lynch Financial Assets Inc., Series 2005-Canada 16 Commercial Mortgage Pass-Through Certificates as follows:

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

The notional classes were confirmed as follows:

Class XP-1 at AAA
Class XP-2 at AAA
Class XC at AAA

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

DBRS does not rate the $4.6 million first loss piece, Class M.

The rating confirmations reflect the continued stability of the overall pool, which has experienced a collateral reduction of 28.09% since issuance, with 38 of the original 48 loans remaining. The largest 15 loans in the pool, representing 83.12% of the pool, have a weighted-average debt service coverage ratio (WADSCR) of 1.86x and a weighed-average debt yield (WADY) of 20.51%. Those figures exclude Prospectus ID#3, RioCan Mega Centre Notre Dame (9.50% of the current pool balance), as the servicer’s reported DSCR of 3.12x for YE2010 is artificially high due to cash flow from the non-collateral portion of the property that is included in the analysis. The weighted-average loan to value (WALTV) for the pool is considered strong at 60.5%, down from 70.8% at issuance. 74.6% of the pool is reporting YE2010 financials.

There are four loans currently on the servicer’s watchlist, comprising 9.79% of the pool; however, Prospectus ID#8, Brant Street Retail (6.07% of the current pool balance), will be removed with the August 2011 remittance report as the DSCR has improved to 1.23x at YE2010 from 0.85x at YE2009. The loan is secured by a retail centre in Burlington, Ontario and had previously been on the watchlist for a low DSCR resulting from the loss of Linens ‘n Things (LNT) in Q1 2009 when the tenant filed for bankruptcy. The space was re-leased to Home Outfitters, who took occupancy in May 2009 with a lease term of 15 years.

The next largest loan on the servicer’s watchlist is Prospectus ID#15, 3883 Rutherford Road (2.21% of the current pool balance). The loan is secured by a retail property located in Vaughn, Ontario and is on the watchlist for a low DSCR, 1.04x at YE2010. This figure represents a decline from the YE2009 DSCR of 1.23x due to the loss of two small tenants in Q4 2009 and early 2010. The vacancy has since recovered, with new tenants in-place as of May 2010; as such, DBRS anticipate the DSCR should return to historical levels with the property now at 100% occupancy.

Of the two remaining watchlist loans, DBRS considers one to be of concern and has placed it on the DBRS HotList. Prospectus ID#27, 165 Ste Madeleine (0.99% of the current pool balance) is on the servicer’s watchlist for reporting a low YE2009 DSCR of 0.66x and a rating of Poor at the time of the servicer’s September 2010 site inspection. The loan is secured by a retail property in Cap-de-la-Madeleine, Québec, located just northeast of Trois Rivières. At the September 2010 site inspection, the servicer noted several items of deferred maintenance, including pavement deterioration, graffiti on the exterior doors, and missing bricks in the façade. The property is a former enclosed mall that has been repurposed; the largest tenants are Metro, Hart Stores, and Dollarama. Metro comprises 25% of the NRA on a lease through 2022. The servicer site inspection notes that the unit interiors are well-kept, but states that the declining exterior is reducing the property’s overall appeal. The low YE2009 DSCR is due to declining revenue at the property since 2008, when the property occupancy fell to 75% from 87% at issuance. The property was 77% occupied at YE2009, with no recovery noted at the time of the servicer’s inspection in Q3 2010. Furthermore, overall expenses at the property have increased by 30% from the underwritten figure; repairs and maintenance and property taxes have contributed the bulk of the overall increase. DBRS will continue to closely monitor this loan for developments.

There are six shadow-rated loans in the pool, representing 41.11% of the pool balance. All six shadow ratings were confirmed as detailed below.

Prospectus ID#1, EPR Senior Interest (11.45% of the current pool balance) is shadow-rated AAA to reflect the strong credit metrics for the loan A-note. The whole-loan balance of $99.7 million includes a pari-passu A-note in the amount of $75.5 million and an unsecured B-note in the amount of $24.2 million. The trust holds $37.8 million of the pari-passu piece, with the remainder of that piece held in the Merrill Lynch Financial Assets Inc., Series 2005-Canada 15 transaction. The loan is secured by four retail properties located throughout Ontario; all four are anchored by an AMC theatre. The properties averaged 98% occupancy at YE2010, with a combined DSCR of 2.19x on the whole-loan balance. The leverage is considered low at $101 psf on the whole-loan balance and $76 psf on the A-note balance. The sponsor is a publicly-traded REIT with significant experience in the development and operation of this property type. As such, DBRS expects the loan to continue to perform well through the maturity in 2015.

Prospectus ID#3, RioCan Mega Center Notre Dame (9.50% of the current pool balance) is shadow-rated BBB to reflect the credit rating of the full-recourse sponsor, who was confirmed at BBB by DBRS in April 2011. The loan is secured by approximately 200,000 sf of a 421,000 sf retail property located in Laval, Québec. The largest tenant for the collateral portion of the property is Winners, with 32% of the NRA on a lease through 2015. Other centre anchors include Zellers, Pharmaprix, and Super C. The YE2010 DSCR was 3.12x, but as the figure includes cash flow from the entire centre’s operations, it is artificially inflated and not an accurate reflection of the trust loan’s performance.

Prospectus ID#5, Calloway St. Catherines (8.28% of the current pool balance) is shadow-rated ‘A’ to reflect the the strong credit metrics exhibited by the loan, which had a YE2010 DSCR of 2.11x. in addition to the credit rating of the full-recourse sponsor, who was confirmed at BBB by DBRS in April 2011, The loan is secured by a retail property located in St. Catherines, Ontario, comprised of nine buildings constructed between 1999 and 2005. The property’s largest tenant is Wal-Mart, on a lease for 46% of the NRA through 2019. The leverage is considered low at $76 psf. As the YE2010 NCF figure is an improvement of 14.31% from the underwritten figure, the debt yield is also strong, at 16.59%.

Prospectus ID#7, RONA Distribution Centre (6.50% of the current pool balance) is secured by a distribution facility for RONA stores located in Montréal, Québec. The loan is shadow-rated BBB to reflect the credit rating of the full-recourse sponsor, who was confirmed at BBB in March 2011, as well as the strength of the single tenant, RONA, who is on a lease through 2019. On May 27, 2011, DBRS changed the trend on the BBB Senior Unsecured Debt rating and Pfd-3 Preferred Shares rating of RONA inc. (RONA) to Negative from Stable to reflect concern that weak operating performance and a challenging consumer environment may lead to a deterioration of RONA’s credit risk profile.

Prospectus ID#13, International Gateway Centre (3.12% of the current pool balance) is secured by a retail property in Fort Erie, Ontario. The asset is shadow-rated BBB to reflect the strength of the property’s tenant mix, with Sobeys occupying 38% of the NRA on a lease through 2021 and Shoppers Drug Mart, occupying 13% of the NRA on a lease through October 2010. Sobeys was confirmed at BBB by DBRS on October 26, 2010 and Shoppers was confirmed at A (low) on July 30, 2010. The YE2009 DSCR was 1.60x and the occupancy for the property was 100%.

Prospectus ID#17, Uplands Common (2.26% of the current pool balance) was originally shadow-rated by DBRS at BBB to reflect the credit rating of the original full-recourse sponsor, who is rated BBB by DBRS. However, the property was sold to a publicly-traded REIT not rated by DBRS in Q3 2010 and the new sponsor has assumed the loan and the full-recourse provisions. As the new sponsor contributed over $5 million of equity to close the transaction and is experienced in the development and management of this property type, DBRS anticipates the loan will continue to perform well under the new ownership. The YE2010 DSCR was 1.68x and the property is fully occupied with Sobeys (who was confirmed at BBB by DBRS on October 26, 2010) in-place for 76% of the NRA through 2023. As such, the shadow rating on the loan was confirmed at BBB.

The DBRS analysis included an in-depth look at the top fifteen loans in the transaction, in addition to the loans on the servicer’s watchlist, DBRS Hotlist, and shadow rated loans.

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 transaction.

Notes:

All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is CMBS Rating Methodology and CMBS North American Surveillance Methodology, which can be found on our website under Methodologies.