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

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

-- 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)

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

The rating confirmations reflect the overall performance of the transaction. Since issuance in November 2002, 47 loans out of the original 70 loans, have been fully repaid, resulting in a collateral reduction of approximately 95.0%. The transaction also benefits from defeasance collateral as four loans, representing 11.5% of the current pool balance, are fully defeased as of the December 2015 remittance. The transaction is reporting a weighted-average (WA) debt service coverage ratio (DSCR) of 1.80 times (x) and a WA debt yield of 56.6% based on YE2014 financials for the 23 loans remaining in the pool. Five loans, representing 12.2% of the pool, are expected to mature within the next 12 months. The WA debt yield for these loans is 32.8%. The largest concentration of loan maturities occur in 2019 and 2020 when a total of 17 loans, representing 72.4% of the current transaction balance, is scheduled to mature.

As of the December 2015 remittance, there are no loans in special servicing and four loans on the servicer’s watchlist, representing 20.2% of the current pool balance. One of these loans is on the watchlist for an upcoming maturity date in March 2016. This loan represents 5.4% of the current pool balance and has a DSCR and exit debt yield of 1.36x and 32.5%, respectively. It is 100% occupied by a single tenant with a lease expiration in March 2021. The remaining three loans on the servicer’s watchlist are discussed below.

The largest loan on the servicer’s watchlist, Privacy Protected loan (Prospectus ID#35), representing 7.2% of the current pool balance, is secured by an enclosed shopping mall in Smith Falls, Ontario. As a result of unaccounted general and administrative expenses at issuance, this loan has consistently struggled financially and has been on the servicer’s watchlist since January 2007. At YE2014 the DSCR was 0.81x, a slight improvement compared with the YE2013 DSCR of 0.52x. Recent occupancy has been negatively impacted by the departure of the largest tenant, which had assumed the lease of the previous anchor tenant, expiring in March 2023. The new tenant, which occupied 57.3% of the net rentable area (NRA) filed for bankruptcy protection and vacated the Canadian market. Additionally, the former third largest tenant (occupying 9.3% of the NRA) and various smaller tenants have vacated the property as well. According to the sponsor’s site plan of the property, the physical occupancy is approximately 26.3% with the two current largest tenants occupying 16.2% of NRA and 5.6% of NRA, respectively. DBRS has contacted the servicer for a leasing update and the borrower’s plans for the vacant units. Despite the recent financial difficulties and vacancies, this loan benefits from low leverage at $10.00 per square foot and by having an experienced institutional sponsor, which owns and manages the property and provides full recourse to the loan.

Privacy Protected loan (Prospectus ID#56), representing 4.8% of the current pool balance, is secured by an independent living facility in Cobourg, Ontario. This loan has been on the watchlist for several years due to decreased occupancy resulting in a prolonged decline in cash flow. At YE2014, the DSCR was negative 0.15x, which represents an even further decrease from the YE2013 DSCR of 0.18x when occupancy was reported at 56.8%. An updated rent roll had not been received by DBRS since April 2012 until a May 2015 rent roll was recently provided. According to this rent roll, occupancy has significantly improved to 94.7% with an average rental rate of $2,034 per bed. Based on this information, DBRS expects the cash flow to improve; however, based on the historical occupancy at the property, DBRS modeled this loan with an increased vacancy factor to remain conservative until performance stabilizes. According to the May 2014 site inspection, the property was determined to be in average condition with no outstanding capital improvements or deferred maintenance items. It was noted that the subject does not offer as many amenities compared with newer facilities with which it competes. This loan is sponsored by an institutional operator of independent living properties across Canada, which also provides full recourse for the loan.

Privacy Protected loan (Prospectus ID#59), representing 2.9% of the current pool balance, is secured by a flex-industrial property in Calgary, Alberta. This loan is on the watchlist as the former single tenant at the property vacated at the end of its lease term in February 2015. DBRS has contacted the servicer regarding a leasing update for this property. At YE2014, the DSCR was 1.49x which had remained the same for the past four years. As the property is now unoccupied, it is expected that the financial performance will deteriorate as there is no cash flow. As a result, DBRS has modeled this loan with an increased probability of default and an increased severity of loss. The borrower has kept the loan current and provides full recourse to the loan.

While there is volatility in performance of the watchlisted loans, the combined unpaid principal balance of the three loans is $3.5 million, which is well below the $8.2 million balance of the unrated Class L, the first loss piece of the transaction. In addition, all three loans have full recourse to their respective sponsors.

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 December 2015 Monthly CMBS 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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.