DBRS Upgrades Eight Classes, Confirms One Class and Discontinues Three Classes of Merrill Lynch Financial Assets Inc., Series 2006-Canada 18

DBRS Limited (DBRS) has today upgraded the following classes of Merrill Lynch Financial Assets Inc., Series 2006-Canada 18:

-- Class D to AAA (sf) from BBB (sf)
-- Class E to AAA (sf) from BBB (low) (sf)
-- Class F to AAA (sf) from BB (high) (sf)
-- Class G to AAA (sf) from BB (sf)
-- Class H to AAA (sf) from BB (low) (sf)
-- Class J to AA (sf) from B (high) (sf)
-- Class K to A (sf) from B (sf)
-- Class L to BBB (low) (sf) from B (low) (sf)

Additionally, DBRS has confirmed the rating on the following class:

-- Class XC at AAA (sf)

All trends are Stable.

DBRS has discontinued the ratings on Classes A-3, B and C, as these classes were fully repaid with the March 2016 remittance.

The ratings upgrades reflect the performance of the transaction as well as the overall collateral reduction since issuance. The transaction has experienced a collateral reduction of 88.0% since issuance as a result of scheduled amortization and the successful repayment of loans. There are nine loans remaining in the pool out of the original 83 loans as of the March 2016 remittance. All remaining loans are scheduled to mature by November 2017, with all except one scheduled to mature within the next three months. This transaction benefits from defeasance collateral, as the largest loan remaining in the pool, representing 25.7% of the pool balance, is fully defeased. Excluding the defeased loan, the transaction is reporting a weighted-average (WA) refinance debt service coverage ratio (DSCR) of 1.60 times (x) and a WA exit debt yield of 14.0%, based on most recent available financials.

The second-largest loan, Calfrac Centre, representing 21.7% of the current pool balance, is secured by a 44,959-square foot (sf) office building located in Calgary, Alberta. The property is located in the downtown core and north of the Beltline office area. This property is 100.0% occupied by a single tenant, which renewed its lease at expiration in August 2015 to August 2020. The tenant was paying a rental rate of $18.57 per square foot (psf) net, according to the May 2015 rent roll; however, an updated rental rate has not been provided. According to the Q4 2015 CBRE report, Class B office properties in downtown Calgary exhibited a vacancy rate of 17.1% with average net asking rental rates of approximately $18.00 psf. In comparison, the downtown Calgary office market as a whole reported a vacancy rate of 17.6% with an average net asking rent of $19.44 psf. According to the most recent financials available, the loan reported a fiscal year-end January 2013 DSCR of 1.29x. Given that the subject is fully occupied on a lease through August 2020 and rental rates for similar properties in the submarket have not dramatically decreased when compared with the tenant’s old rental rate, DBRS expects the current performance of the loan to be similar. Additionally, in its upgrade scenario, DBRS modeled the loan with a stressed cash flow to determine that the performance of the loan will sustain a decreased cash flow. This loan is scheduled to mature in June 2016 and, based on the dated cash flow, the loan has a debt yield of 11.6%.

There are six loans, representing 36.3% of the current pool balance, on the servicer’s watchlist. However, three loans are on the watchlist because of upcoming or past maturity dates.

The 22 King Street South & 17 Regina Street loan, representing 4.1% of the current pool balance, is secured by a 20,136-sf five-storey boutique office building and an accompanying parking garage in downtown Waterloo, Ontario. This loan was added to the watchlist originally in 2012, as its performance declined, and it has continued to struggle. At YE2014, the loan reported a DSCR of 0.79x, which has improved since YE2013 when the DSCR was 0.57x and from the lowest point at YE2012 when the DSCR was 0.07x. The property has struggled with low occupancy, which was reported at 58.6% at YE2012; however, according to the June 2015 rent roll, occupancy has increased to 81.4%. The largest tenant, IBS Waterloo, representing 24.5% of the net rentable area (NRA), signed a ten-year lease in 2014. The tenant received a period of free rent until August 2014. DBRS expects that the YE2015 net cash flow will better reflect the current performance of the loan, as rent is now being paid by the new tenant. There is upcoming rollover concern, as tenants occupying 35.2% of the NRA have lease expirations in 2016. According to CBRE, the overall vacancy for the Waterloo Region at Q4 2015 was 12.0%, increasing from 11.7% at Q3 2015. Most of the vacancy is from the suburban market, with the core Waterloo region reporting a vacancy rate of 2.1% at Q4 2015. This loan was scheduled to mature in January 2016 but has received an extension with a revised maturity date of April 2016. Based on the YE2014 net cash flow, the exit debt yield is 7.8%; however, DBRS expects that the YE2015 net cash flow will have improved, which will improve the refinance metrics of the loan.

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 (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.