DBRS Comments on Provisional Ratings for MSBAM 2013-C7

On January 7, 2013, DBRS was made aware of a lawsuit filed on January 2, 2013, by the franchisor, Starwood Hotels & Resorts Worldwide, Inc. (Starwood), against affiliates of the borrower of the Le Meridien Parker Palm Springs loan in the Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7 (MSBAM 2013-C7) transaction. DBRS assigned provisional ratings to MSBAM 2013-C7 on January 3, 2013. According to the lawsuit, Starwood is seeking to terminate the license agreements for the operation of Le Meridien Parker New York (not collateral for the loan) and Le Meridien Parker Palm Springs, and is also seeking to recover over $1 million in unearned reimbursements from the Starwood Preferred Guest customer loyalty program (SPG Program). The lawsuit alleges that affiliates of the sponsor, The Jack Parker Corporation, fraudulently manipulated bookings at both properties in order to obtain higher reimbursement payments from Starwood under the SPG Program. It is not clear how much of the $1 million in damages is related to the subject property as opposed to the property in New York City.

Based on the information available to date, DBRS has changed our modeling assumption of the sponsor, which has resulted in an increase to the probability of default for the subject loan. DBRS has also considered the effect of the possibility of an early special servicer transfer event. In addition, DBRS reduced room revenues in the DBRS underwritten net cash flow (UW NCF) by $250,000, which conservatively assumes that all $1 million of allegedly improper reimbursements are allocated to the subject property and are averaged over the four years in which the actions were alleged to occur. With respect to the possibility of termination of the license agreement, which would prohibit the subject from operating under the Le Meridien flag, DBRS does not consider termination to have a materially adverse effect on the credit quality of the loan. As the license agreement expires in 2014 and the sponsor has the ability under the loan documents to operate the property without franchise affiliation thereafter, this scenario had already been contemplated by DBRS. The subject already markets itself as the Parker Palm Springs, without mention of the Le Meridien brand, and it is reported that only a small minority of room nights are generated through the Starwood website without first going to the Parker Palm Springs website. Also, there will be a full cash flow sweep any time the debt service coverage ratio (DSCR) is less than 1.50 times (x) while the property is operating without franchise affiliation.

Upon making these changes to our analysis, DBRS has confirmed the provisional ratings assigned to the below listed classes in the MSBAM 2013-C7 transaction.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (sf)
-- Class PST at A (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

Classes X-B, D, E, F, G and H have been privately placed pursuant to Rule 144a.

The Class X-A and Class X-B balances are notional. DBRS ratings on interest-only certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the interest-only certificate’s position within the transaction payment waterfall when determining the appropriate rating. The Class PST certificates are exchangeable for the Class A-S, B and C certificates (and vice versa).

The ratings assigned to the certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

Notes:
All figures are in U.S. dollars unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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