DBRS Upgrades Two and Confirms 11 Classes of Merrill Lynch Financial Assets Inc., Series 2006-Canada 19

DBRS has today upgraded the ratings for two classes of Merrill Lynch Financial Assets Inc., Series 2006-Canada 19 as follows:

-- Class B to AAA (sf) from AA (high) (sf)
-- Class C to AA (high) (sf) from AA (low) (sf)

In addition, DBRS has confirmed the ratings for the remaining classes as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (sf)
-- Class H at BB (low) (sf)
-- Class J at B (high) (sf)
-- Class K at B (sf)
-- Class L at B (low) (sf)
-- Class XC at AAA (sf)

All classes have Stable trends.

These rating actions reflect the strength of the pool overall, which had a weighted-average debt service coverage ratio (DSCR) of 1.52 times (x) and a weighted-average debt yield of 10.95%, with collateral reduction of 38.3% since issuance, as of the March 2014 remittance. The transaction closed in 2006 with 75 loans, and since that time, 23 loans have been repaid in full. Since the last surveillance review, one of the original top ten loans repaid from the trust. Marriott Pooled Senior Loan (Prospectus ID#4) was previously in special servicing following the borrower’s request for a modification of the loan while PIP work was completed. The loan was repaid with the July 2013 remittance.

There are 13 loans on the servicer’s watchlist as of the March 2014 remittance, representing 31.74% of the pool. For the nine loans on the watchlist reporting current net cash flow (NCF) figures, the weighted-average DSCR was 1.25x and the weighted-average NCF change from issuance was -7.43%. The largest loan on the watchlist is also the largest loan in the pool. 400 University (Prospectus ID#1, 13.8% of the current pool balance) is secured by a high-profile office tower in downtown Toronto. The building was originally owned by the Zurich Insurance Company (Zurich), which previously occupied 33.5% of the NRA on a lease that expired January 2014. The tenant did not renew its lease at expiration and according to Altus InSite, approximately 27.9% of the NRA was available for lease as of April 2, 2014. A leasing reserve was established in 2010 specifically for re-leasing the space previously occupied by Zurich. As of the March 2014 remittance, this leasing reserve had a balance of $900,000, equating to approximately $7.78 per square foot. Given the budget for leasing expenses and the property’s location and excellent visibility, DBRS expects the property’s occupancy to improve to market levels in the near term.

The second-largest loan on the watchlist is Castel Royale (Prospectus ID#3, 7.4% of the current pool balance), which is secured by a 250-unit independent living property located in an affluent area of Montréal. The property was flagged for a decline in occupancy, which dropped to 74% in YE2011; however, occupancy has bounced back to 86.3% as of the December 2013 rent roll. The property’s cash flow is likely to remain low until a full year’s operation at the improved occupancy. The YE2012 DSCR was reported to be 1.05x, down from 1.28x at YE2011. This loan benefits from full-recourse to the sponsor, which is one of the largest operators of senior housing in Canada.

Overall, there have been no losses to the trust since issuance. The largest 15 loans in the pool represent 70.6% of the outstanding balance as of the March 2014 remittance. The weighted-average DSCR at YE2012 for the largest 15 loans was 1.52x along with a weighted-average NCF growth of 14.0% since issuance. The pool is diverse, with a good mix of collateral by property type and geographic location. In addition, there are three fully defeased loans, representing 2.07% of the pool balance as of the March 2014 remittance.

There are two loans shadow-rated investment grade by DBRS in the pool, representing a 4.65% of the pool combined. The shadow ratings were confirmed as part of the above-noted rating actions.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction including details on the largest loans in the pool, the loans in special servicing and the loans on the servicer’s watchlist. The March 2014 monthly surveillance report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com

Notes:
All figures are in Canadian dollars unless otherwise noted.

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

The applicable methodologies are CMBS Rating Methodology (January 2012) and CMBS North American Surveillance Methodology (November 2012), which can be found on our website under Methodologies.