Fitch Ratings has downgraded; removed from Rating Watch Negative; and assigned Recovery Ratings (RRs), Rating Outlooks and Loss Severity (LS) ratings, as indicated:
Mezz Cap Commercial Mortgage Trust 2004-C1 (Mezz Cap 2004-C1):
--$23.1
million class A to 'B-/LS5' from 'AAA'; Outlook Negative;
--$2.8
million class B to 'CC/RR4' from 'AA+';
--$2.3 million class C to
'CC/RR5' from 'AA-';
--$2.8 million class D to 'C/RR6' from 'BBB';
--$1.5
million class E to 'C/RR6' from 'BBB-';
--$1.6 million class F to
'C/RR6' from 'BB';
--$1.1 million class G to 'C/RR6' from 'B';
--$3.7
million class H to 'D/RR6' from 'C/RR5'.
Class J was downgraded to 'D/RR6' from 'C/RR6' due to realized losses.
Mezz Cap Commercial Mortgage Trust 2004-C2 (Mezz Cap 2004-C2):
--$34 million class A to 'CCC/RR1' from 'AAA';
--$2.1 million class
B to 'CC/RR5' from 'AA';
--$1.6 million class C to 'CC/RR5' from
'A';
--$2.6 million class D to 'C/RR6' from 'BBB-';
--$1
million class E to 'C/RR6' from 'BB';
--$1.8 million class F to
'C/RR6' from 'BB-';
--$1.2 million class G to 'C/RR6' from 'B';
--$3.9
million class H to 'C/RR6' from 'CCC/RR1'.
Mezz Cap Commercial Mortgage Trust 2005-C3 (Mezz Cap 2005-C3):
--$40.8 million class A to 'CC/RR3' from 'A';
--$1.8 million class
B to 'C/RR5' from 'BBB+';
--$1.9 million class C to 'C/RR6' from
'BBB';
--$3.2 million class D to 'C/RR6' from 'BB-';
--$1.8
million class E to 'C/RR6' from 'B';
--$1.6 million class F to
'C/RR6' from 'B-';
--$1.7 million class G to 'C/RR6' from 'CCC/RR1';
--$4.9
million class H to 'C/RR6' from 'C/RR5'
Mezz Cap Commercial Mortgage Trust 2006-C4 (Mezz Cap 2006-C4):
--$59.8 million class A to 'C/RR2' from 'B';
--$2.2 million class B
to 'C/RR6' from 'CCC/RR1'.
Mezz Cap Commercial Mortgage Trust 2007-C5 (Mezz Cap 2007-C5):
--$39.5 million class A to 'CC/RR2' from 'A';
--$1.2 million class
B to 'CC/RR5' from 'BBB';
--$1.6 million class C to 'C/RR6' from
'BB';
--$2.3 million class D to 'C/RR6' from 'BB-';
--$1.1
million class E to 'C/RR6' from 'B+';
--$1.8 million class F to
'C/RR6' from 'B-';
--$4.4 million class G to 'C/RR6' from 'CC/RR4'.
The following classes remain at 'C/RR6':
--Mezz Cap 2004-C2, $0.5
million class J;
--Mezz Cap 2005-C3, $0.6 million class J;
--Mezz
Cap 2006-C4, $2.2 million class C, $3.6 million class D, $1.2 million
class E, $2.6 million class F, $6.9 million class G, $0.8 million class
H;
--Mezz Cap 2007-C5, $0.5 million class H.
Additionally, Fitch has withdrawn the ratings of the interest-only class X in each of the Mezz Cap 2004-C1, Mezz Cap 2004-C2, Mezz Cap 2005-C3, Mezz Cap 2006-C4, and Mezz Cap 2007-C5 transactions. (For additional information, see 'Fitch Revises Practice for Rating IO & Pre-Payment Related Structured Finance Securities', June 23, 2010).
The downgrades are due to significant deterioration in loan performance across the pools, as evidenced by principal write-downs to the junior classes, large increases in the number of specially serviced loans, and additional interest shortfalls within the transactions since Fitch's last rating action. Severe market value declines have resulted in an elevated number of specially serviced loans and very high loss severities - typically 100% - on loans liquidated within the last year.
In most cases principal losses have not yet been realized; and only the unrated and junior-most classes of certificates have taken principal write-downs to date. However, the higher leverage on the loans, coupled with continuing term defaults and projected defaults upon maturity, make substantial future losses to the trusts likely. Of the 27 specially serviced loans that have been liquidated to date, 24 realized losses of 100%. Five additional loans have already been disposed of within their respective A note transactions at 100% losses to the B notes, but have not yet been reported in the Mezz Cap transaction remittance reports. The pace of liquidations has also begun to increase, with 18 of the aforementioned dispositions occurring in 2010 and all but four of the remaining liquidations occurring in 2009.
The current ratings are based on application of Fitch's recent-vintage U.S. commercial mortgage backed security (CMBS) methodology. The ratings are prospective in nature and reflect anticipated losses associated with the loans currently in special servicing as well as the potential for losses to occur on the performing loans having to refinance in the future. This updated criteria replaces the previous approach that did not address refinancing in an illiquid capital market environment.
The transactions are securitized by B notes, which are subordinate to the first mortgage loans securitized in various CMBS transactions. The loans are secured by traditional commercial real estate property types and are subject to standard intercreditor agreements that limit the rights and remedies of the B note holder in the event of default and upon refinancing. Due to their subordinate positions, B notes that default and incur a loss are typically 100% non-recoverable. Advancing typically ceases once a loan becomes 30 days past due.
The transactions' defaults generally far exceed the average delinquencies of typical CMBS deals. The total proportion of loans currently in special servicing for each transaction is as follows: Mezz Cap 2004-C1, 25.6%; Mezz Cap 2004-C2, 11.8%; Mezz Cap 2005-C3, 31.7%; Mezz Cap 2006-C4, 33.3%; and Mezz Cap 2007-C5, 22.6%. Fitch Loans of Concern make up between 42.3% and 58.4% of each transaction.
The Mezz Cap 2004-C1, Mezz Cap 2005-C3, Mezz Cap 2006-C4, and Mezz Cap 2007-C5 transactions are experiencing current interest shortfalls on all Fitch-rated classes. Classes F through K of the Mezz Cap 2004-C2 transaction have been affected by current interest shortfalls. Fitch expects that a majority of classes in the five Mezz Cap B note CMBS transactions will continue to incur interest shortfalls resulting from loan modifications, advances, appraisal reductions, special servicing fees, and legal fees. Fitch expects that most of the current and future shortfalls will not be recovered.
Fitch examined updated rent rolls, operating statements, and reports obtained from both the B note and the corresponding A note servicers. In determining which specially serviced loans are expected to incur losses, Fitch reviewed evaluations provided by each A note's respective special servicer and evaluated expected workout strategies. Similar to Fitch's prospective analysis of recent vintage CMBS, each loan also underwent a refinance test incorporating an 8% interest rate and a 30-year amortization schedule based on the stressed cash flow. Loans that could refinance to a debt service coverage ratio of 1.25 times or higher were considered to be able to pay off at maturity. Of the loans not expected to pay off at maturity, several incurred modeled losses when compared to Fitch's stressed value. After applying expected losses, new credit enhancement levels were calculated.
Additional information on Fitch's amended criteria for analyzing recent vintage U.S. CMBS is available in the July 7, 2009 report, 'Surveillance Methodology for Recent Vintage U.S. CMBS,' which is available at 'www.fitchratings.com' under the following headers:
Structured Finance >> CMBS >> Criteria Reports
Additional information is available at 'www.fitchratings.com'.
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Media Relations
Sandro Scenga,
+1-212-908-0278
sandro.scenga@fitchratings.com
or
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Weichert, +1-212-908-0398
Adam Fox, +1-212-908-0869