DBRS Confirms All Classes of Merrill Lynch Financial Assets Inc., Series 2002-Canada 8

DBRS, Inc. (DBRS) has today confirmed the ratings of eight classes of Merrill Lynch Financial Assets Inc., Series 2002-Canada 8 as follows:

-- Class E at AAA (sf)
-- Class F at AAA (sf)
-- Class G at AAA (sf)
-- Class H at AAA (sf)
-- Class J at AA (low) (sf)
-- Class K at A (low) (sf)
-- Class X-1 at AAA (sf)
-- Class X-2 at AAA (sf)

DBRS does not rate the $8.2 million first loss piece, Class L. All trends are Stable.

Classes A-1, A-2, B, C and D were previously discontinued following the repayment of their outstanding balances.

The rating confirmations reflect the overall stability of the pool as well as the increased credit enhancement to the transaction overall. Since issuance in November 2002, 47 of the original 70 loans have been repaid in full, resulting in a collateral reduction of approximately 94.1% since issuance. The transaction also benefits from defeasance collateral as four loans, representing 12.2% of the current pool balance, are fully defeased and 19 loans, representing 83.0% of the current pool balance, are structured as fully amortizing loans. Based on current balances and the most recent year-end reporting available, the largest 15 loans, excluding defeasance, have a weighted-average (WA) debt service coverage ratio (DSCR) of 1.80 times (x) and a WA debt yield of 41.3%. There are no loans in special servicing and three loans on the servicer’s watchlist, representing 14.3% of the current pool balance. Two of the most pivotal loans on the watchlist are highlighted below.

The largest loan on the servicer’s watchlist, Privacy Protected loan (Prospectus ID#35), representing 7.0% of the current pool balance, is secured by an enclosed shopping mall in Smith Falls, Ontario, and has consistently suffered from cash flow shortfalls as a result of unaccounted for janitorial as well as general and administrative expenses. The loan has been on the servicer’s watchlist for several years and reported a YE2013 DSCR of 0.52x. Performance has remained relatively flat in comparison with YE2012 as the DSCR was reported at 0.53x. According to the January 2014 rent roll, the property was 93.4% occupied with major tenants including Target Canada Co. (Target; 57.4% of net rentable area (NRA), lease expiring in March 2023), Food Basics (16.2% of NRA, lease expiring on September 30, 2015) and Staples (9.3% of NRA, lease expiring in August 2023). With the recent announcement that Target has filed for creditor protection and plans to discontinue all operations in Canada, DBRS considered the current performance of this loan and the potential negative impact that Target’s departure from the mall will have on future operating cash flow in its analysis. Despite recent financial difficulties, the loan benefits from experienced institutional borrower, RioCan Real Estate Investment Trust (REIT), which owns and manages the property and provides full recourse for the loan.

Privacy Protected loan (Prospectus ID#56), representing 4.5% of the current pool balance, is secured by an independent living facility in Cobourg, Ontario, and has experienced a cash flow decline in the past three years because of a declining occupancy rate and increasing operating expenses. This loan has been on the servicer’s watchlist for several years and reported a DSCR of 0.18x at YE2013, further declining from 0.39x at YE2012. In addition, according to the servicer, occupancy declined to 57% at YE2013 from 70% at YE2012. The January 2014 site inspection shows the property to be in average condition and plain in appearance, but well maintained with no deferred maintenance items noted. Unlike newer independent living facilities, the subject does not have many property amenities which are limited to a small library, hair salon and movie room. The loan is sponsored by Chartwell Retirement Residences REIT, which provides full recourse for the loan.

While both loans on the watchlist have not reported a DSCR above 1.0x for at least two years and their respective debt yields are well below the pool average, the combined unpaid principal balance of both loans is $3.2 million, well below the $8.2 million balance of the unrated Class L, the first loss piece of the transaction. As part of its review, DBRS analyzed the top 15 loans and the loans on the servicer’s watchlist, which comprise approximately 88.9% of the current pool balance.

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 and loans on the servicer’s watchlist. The January 2015 Monthly Surveillance Report for this transaction will be published shortly.

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 (January 2015), which can be found on our website under Methodologies.