Approximately $116.4 Million of Structured Securities Affected
New York, March 30, 2011 -- Moody's Investors Service (Moody's) affirmed the ratings of three classes
of First Union-Lehman Brothers Commercial Mortgage Trust II,
Commercial Mortgage Pass-Through Certificates, Series 1997-C2
Cl. IO, Affirmed at Aaa (sf); previously on Nov 25,
1997 Assigned Aaa (sf)
Cl. D, Affirmed at Aaa (sf); previously on Oct 23,
2006 Upgraded to Aaa (sf)
Cl. E, Affirmed at Aaa (sf); previously on Oct 23,
2006 Upgraded to Aaa (sf)
The affirmations are due to key rating parameters, including Moody's
loan to value (LTV) ratio, Moody's stressed debt service coverage
ratio (DSCR) and the Herfindahl Index (Herf), remaining within acceptable
ranges. Based on our current base expected loss, the credit
enhancement levels for the affirmed classes are sufficient to maintain
their current ratings.
Moody's rating action reflects a cumulative base expected loss of
1.9% of the current balance. At last review,
Moody's cumulative base expected loss was 3.8%.
Moody's stressed scenario loss is 7.0% of the current
balance. Moody's provides a current list of base and stress
scenario losses for conduit and fusion CMBS transactions on moodys.com
Depending on the timing of loan payoffs and the severity and timing of
losses from specially serviced loans, the credit enhancement level
for investment grade classes could decline below the current levels.
If future performance materially declines, the expected level of
credit enhancement and the priority in the cash flow waterfall may be
insufficient for the current ratings of these classes.
Moody's analysis reflects a forward-looking view of the likely
range of collateral performance over the medium term. From time
to time, Moody's may, if warranted, change these
expectations. Performance that falls outside an acceptable range
of the key parameters may indicate that the collateral's credit
quality is stronger or weaker than Moody's had anticipated during
the current review. Even so, deviation from the expected
range will not necessarily result in a rating action. There may
be mitigating or offsetting factors to an improvement or decline in collateral
performance, such as increased subordination levels due to amortization
and loan payoffs or a decline in subordination due to realized losses.
Primary sources of assumption uncertainty are the current sluggish macroeconomic
environment and varying performance in the commercial real estate property
markets. However, Moody's expects to see increasing or stabilizing
property values, higher transaction volumes, a slowing in
the pace of loan delinquencies and greater liquidity for commercial real
estate in 2011. The hotel and multifamily sectors are continuing
to show signs of recovery, while recovery in the office and retail
sectors will be tied to recovery of the broader economy. The availability
of debt capital continues to improve with terms returning toward market
norms. Moody's central global macroeconomic scenario reflects an
overall sluggish recovery through 2012, amidst ongoing individual,
corporate and governmental deleveraging, persistent unemployment,
and government budget considerations.
The principal methodologies used in this rating were: "CMBS:
Moody's Approach to Rating Fusion Transactions " published in July
2000, " CMBS: Moody's Approach to Rating Large
Loan Transactions" published in July 2000, and " CMBS:
Moody's Approach to Rating Credit Tenant Lease (CTL) Backed Transactions"
published in October 1998.
Moody's review incorporated the use of the excel-based CMBS
Conduit Model v 2.50 which is used for both conduit and fusion
transactions. Conduit model results at the Aa2 level are driven
by property type, Moody's actual and stressed DSCR,
and Moody's property quality grade (which reflects the capitalization
rate used by Moody's to estimate Moody's value). Conduit
model results at the B2 level are driven by a paydown analysis based on
the individual loan level Moody's LTV ratio. Moody's
Herfindahl score (Herf), a measure of loan level diversity,
is a primary determinant of pool level diversity and has a greater impact
on senior certificates. Other concentrations and correlations may
be considered in our analysis. Based on the model pooled credit
enhancement levels at Aa2 and B2, the remaining conduit classes
are either interpolated between these two data points or determined based
on a multiple or ratio of either of these two data points. For
fusion deals, the credit enhancement for loans with investment-grade
credit estimates is melded with the conduit model credit enhancement into
an overall model result. Fusion loan credit enhancement is based
on the credit estimate of the loan which corresponds to a range of credit
enhancement levels. Actual fusion credit enhancement levels are
selected based on loan level diversity, pool leverage and other
concentrations and correlations within the pool. Negative pooling,
or adding credit enhancement at the credit estimate level, is incorporated
for loans with similar credit estimates in the same transaction.
Moody's uses a variation of Herf to measure diversity of loan size,
where a higher number represents greater diversity. Loan concentration
has an important bearing on potential rating volatility, including
risk of multiple notch downgrades under adverse circumstances.
The credit neutral Herf score is 40. The pool has a Herf of 18
compared to 20 at Moody's prior review.
In cases where the Herf falls below 20, Moody's employs also
the large loan/single borrower methodology. This methodology uses
the excel-based Large Loan Model v 8.0. The large
loan model derives credit enhancement levels based on an aggregation of
adjusted loan level proceeds derived from Moody's loan level LTV
ratios. Major adjustments to determining proceeds include leverage,
loan structure, property type, and sponsorship. These
aggregated proceeds are then further adjusted for any pooling benefits
associated with loan level diversity, other concentrations and correlations.
For deals that include a pool of credit tenant loans, Moody's
currently uses a Gaussian copula model, incorporated in its public
CDO rating model CDOROMv2.8 to generate a portfolio loss distribution
to derive credit enhancement levels for CTL component. Under Moody's
CTL approach, the rating of a transaction's certificates is
primarily based on the senior unsecured debt rating (or the corporate
family rating) of the tenant, usually an investment grade rated
company, leasing the real estate collateral supporting the bonds.
This tenant's credit rating is the key factor in determining the
probability of default on the underlying lease. The lease generally
is "bondable", which means it is an absolute net lease,
yielding fixed rent paid to the trust through a lock-box,
sufficient under all circumstances to pay in full all interest and principal
of the loan. The leased property should be owned by a bankruptcy-remote,
special purpose borrower, which grants a first lien mortgage and
assignment of rents to the securitization trust. The dark value
of the collateral, which assumes the property is vacant or "dark",
is then examined to determine a recovery rate upon a loan's default.
Moody's also considers the overall structure and legal integrity
of the transaction.
Moody's ratings are determined by a committee process that considers
both quantitative and qualitative factors. Therefore, the
rating outcome may differ from the model output.
The rating action is a result of Moody's on-going surveillance
of commercial mortgage backed securities (CMBS) transactions. Moody's
monitors transactions on a monthly basis through two sets of quantitative
tools -- MOST® (Moody's Surveillance Trends) and CMM
(Commercial Mortgage Metrics) on Trepp -- and on a periodic
basis through a comprehensive review. Moody's prior full
review is summarized in a press release dated May 20, 2010.
Please see the ratings tab on the issuer / entity page on moodys.com
for the last rating action and the ratings history.
Moody's Investors Service did not receive or take into account a
third party due diligence report on the underlying assets or financial
instruments related to the monitoring of this transaction in the past
As of the March 18, 2011 distribution date, the transaction's
aggregate certificate balance has decreased by 86% to $301.0
million from $2.2 billion at securitization. The
Certificates are collateralized by 79 mortgage loans ranging in size from
less than 1% to 9% of the pool, with the top ten loans
representing 50% of the pool. The pool includes a credit
tenant lease (CTL) component, representing 20% of the pool.
Four loans, representing 18% of the pool, have defeased
and are collateralized with U.S. Government securities.
Sixteen loans, representing 19% of the pool, are on
the master servicer's watchlist. The watchlist includes loans
which meet certain portfolio review guidelines established as part of
the CRE Finance Council (CREFC) monthly reporting package. As part
of our ongoing monitoring of a transaction, Moody's reviews the
watchlist to assess which loans have material issues that could impact
Twenty-eight loans have been liquidated from the pool, resulting
in an aggregate $62.4 million realized loss (46%
loss severity on average). At Moody's last review the pool
had realized an aggregate loss of $61.0 million.
Currently there is one loan, representing 1% of the pool,
in special servicing. The Texas Melody Loan ($3.0
million -- 1.0%) is secured by a 262-unit multifamily
property located in Dallas, Texas. The property was 66%
leased as of March 2010 compared to 56% at last review.
The property was transferred to special servicing October 2010 due to
imminent default and a $358,000 appraisal reduction has been
recognized. The special servicer is pursuing a foreclosure action.
Moody's estimates a loss of $1.2 million for this specially
serviced loan (41% expected loss).
Moody's has assumed a high default probability for four poorly performing
loans representing 2% of the pool and has estimated an aggregate
$474,000 loss (10% expected loss based on a 50%
probability default) from these troubled loans.
Moody's was provided with full year 2009 and partial year 2010 operating
results for 88% and 71% of the pool, respectively,
excluding the CTL and defeased loans. Excluding specially serviced
and troubled loans, Moody's weighted average LTV is 73%
compared to 79% at Moody's prior review. Moody's
net cash flow reflects a weighted average haircut of 15% to the
most recently available net operating income. Moody's value
reflects a weighted average capitalization rate of 10.3%.
Excluding specially serviced and troubled loans, Moody's actual
and stressed DSCRs are 1.18X and 1.67X, respectively,
compared to 1.21X and 1.62X at last review. Moody's
actual DSCR is based on Moody's net cash flow (NCF) and the loan's
actual debt service. Moody's stressed DSCR is based on Moody's
NCF and a 9.25% stressed rate applied to the loan balance.
The top three performing conduit loans represent 24% of the pool
balance. The largest loan is the Soho Court Loan ($26.6
million -- 8.8%), which is secured by a 195-unit
multifamily apartment complex in New York City. The property was
97% leased as of January 2011 compared to 98% at last review.
Moody's LTV and stressed DSCR are 66% and 1.48X, respectively,
compared to 69% and 1.34X at last review.
The second largest loan is the Town Square Wheaton Loan ($23.3
million -- 7.7%), which is secured by a 175,536
square foot (SF) retail property located in Wheaton, Illinois.
Performance has declined slightly due to lower occupancy. The center
was 79% leased as of September 2010 versus 96% at last review.
Moody's LTV and stressed DSCR are 79% and 1.37X, respectively,
compared to 89% and 1.14X at last review.
The third largest loan is the Drury Hotel Portfolio Number One Loan ($21.1
million -- 7.0% of the pool), which is secured
by a 676-room portfolio of five hotel properties located in Indiana
and Missouri and operating as a Hampton Inn and four Drury Inns.
Property performance has declined due to lower occupancy. As of
June 2010, hotel occupancy was 67% compared to 69%
at last review. The decline in performance has been offset by amortization.
The Drury Inn in Indianapolis, Indiana recently completed a $1.6
million renovation. Moody's LTV and stressed DSCR are 102%
and 1.24X, respectively, compared to 104% and
0.92X at last review.
The CTL component includes forty-one loans ($59.5
million -- 19.8%) secured by properties leased to nine
tenants under bondable leases. The largest exposures are Blue Cross
Blue Shield (34% of the CTL component), Rite-Aid Corp.
(34%, Moody's senior unsecured rating Caa2/Ca -- stable
outlook) and CVS Caremark Corp. (12%, Moody's
senior unsecured rating Baa2 -- stable outlook). Moody's has
issued a public debt rating for tenants leasing properties representing
66% of the CTL pool and completed updated credit estimates for
the non-Moody's rated reference obligations.
The bottom-dollar weighted average rating factor (WARF) for the
CTL pool is 3,300. WARF is a measure of the overall quality
of a pool of diverse credits. The bottom-dollar WARF is
a measure of the default probability within the pool.
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Affirms Three CMBS Classes of FULB 1997-C2
250 Greenwich Street
New York, NY 10007