Approximately $1.743 Billion of Structured Securities Affected
New York, December 17, 2010 -- Moody's Investors Service (Moody's) downgraded the ratings of 15 classes
and affirmed six classes of ML-CFC 2006-2, Commercial
Mortgage Pass-Through Certificates, Series 2006-2
as follows:
Cl. A-2, Affirmed at Aaa (sf); previously on
Jul 12, 2006 Definitive Rating Assigned Aaa (sf)
Cl. A-3, Affirmed at Aaa (sf); previously on
Jul 12, 2006 Definitive Rating Assigned Aaa (sf)
Cl. A-SB, Affirmed at Aaa (sf); previously on
Jul 12, 2006 Definitive Rating Assigned Aaa (sf)
Cl. A-4, Affirmed at Aaa (sf); previously on
Jul 12, 2006 Definitive Rating Assigned Aaa (sf)
Cl. A-1A, Affirmed at Aaa (sf); previously on
Jul 12, 2006 Definitive Rating Assigned Aaa (sf)
Cl. X, Affirmed at Aaa (sf); previously on Jul 12,
2006 Definitive Rating Assigned Aaa (sf)
Cl. AM, Downgraded to Aa2 (sf); previously on Oct 20,
2010 Aaa (sf) Placed Under Review for Possible Downgrade
Cl. AJ, Downgraded to Baa2 (sf); previously on Oct 20,
2010 Aa3 (sf) Placed Under Review for Possible Downgrade
Cl. B, Downgraded to Ba1 (sf); previously on Oct 20,
2010 A2 (sf) Placed Under Review for Possible Downgrade
Cl. C, Downgraded to B1 (sf); previously on Oct 20,
2010 A3 (sf) Placed Under Review for Possible Downgrade
Cl. D, Downgraded to Caa2 (sf); previously on Oct 20,
2010 Baa2 (sf) Placed Under Review for Possible Downgrade
Cl. E, Downgraded to Caa3 (sf); previously on Oct 20,
2010 Baa3 (sf) Placed Under Review for Possible Downgrade
Cl. F, Downgraded to Ca (sf); previously on Oct 20,
2010 Ba2 (sf) Placed Under Review for Possible Downgrade
Cl. G, Downgraded to C (sf); previously on Oct 20,
2010 B2 (sf) Placed Under Review for Possible Downgrade
Cl. H, Downgraded to C (sf); previously on Oct 20,
2010 B3 (sf) Placed Under Review for Possible Downgrade
Cl. J, Downgraded to C (sf); previously on Oct 20,
2010 Caa1 (sf) Placed Under Review for Possible Downgrade
Cl. K, Downgraded to C (sf); previously on Oct 20,
2010 Caa1 (sf) Placed Under Review for Possible Downgrade
Cl. L, Downgraded to C (sf); previously on Oct 20,
2010 Caa2 (sf) Placed Under Review for Possible Downgrade
Cl. M, Downgraded to C (sf); previously on Oct 20,
2010 Caa2 (sf) Placed Under Review for Possible Downgrade
Cl. N, Downgraded to C (sf); previously on Oct 20,
2010 Caa3 (sf) Placed Under Review for Possible Downgrade
Cl. P, Downgraded to C (sf); previously on Oct 20,
2010 Caa3 (sf) Placed Under Review for Possible Downgrade
RATINGS RATIONALE
The downgrades are due to higher expected losses for the pool resulting
from realized and anticipated losses from specially serviced and troubled
loans. The affirmations are due to key 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.
On October 20, 2010, Moody's placed 15 classes on review
for possible downgrade. This action concludes our review.
Moody's rating action reflects a cumulative base expected loss of
8.5% of the current balance. At last review,
Moody's cumulative base expected loss was 4.5%.
Moody's stressed scenario loss is 15.9% 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
at http://v3.moodys.com/viewresearchdoc.aspx?docid=PBS_SF215255.
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 stressed macroeconomic
environment and continuing weakness in the commercial real estate and
lending markets. Moody's currently views the commercial real
estate market as stressed with further performance declines expected in
the industrial, office, and retail sectors. Hotel performance
has begun to rebound, albeit off a very weak base. Multifamily
has also begun to rebound reflecting an improved supply / demand relationship.
The availability of debt capital is improving with terms returning towards
market norms. Job growth and housing price stability will be necessary
precursors to commercial real estate recovery. Overall, Moody's
central global scenario remains "hook-shaped" for 2010
and 2011; we expect overall a sluggish recovery in most of the world's
largest economies, returning to trend growth rate with elevated
fiscal deficits and persistent unemployment levels.
The principal methodology used in this rating was "CMBS: Moody's
Approach to Rating Fusion Transactions" published in July 2000.
In addition to methodologies and research, Moody's publishes a weekly
summary of structured finance credit, ratings and methodologies,
available to all registered users of our website, at www.moodys.com/SFQuickCheck.
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 pay down 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 underlying rating 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 underlying rating 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 59
compared to 71 at last review.
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 14, 2008. 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 received and took into account one or
more third party due diligence reports on the underlying assets or financial
instruments in this transaction and the due diligence reports had a neutral
impact on the ratings.
DEAL PERFORMANCE
As of the December 13, 2010 distribution date, the transaction's
aggregate certificate balance has decreased by 5% to $1.750
million from $1.841 billion at securitization. The
Certificates are collateralized by 187 mortgage loans ranging in size
from less than 1% to 10% of the pool, with the top
ten loans representing 33% of the pool. No loans have defeased.
The pool includes one loan, representing 10% of the pool,
with an investment grade credit estimate.
Fifty loans, representing 21% 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
performance.
Three loans have been liquidated from the pool since securitization,
resulting in a $16.0 million loss (84% loss severity
on average). The pool had not experienced any realized losses at
last review. Eighteen loans, representing 14% of the
pool, are currently in special servicing. The largest specially
serviced loan is the Penn Mutual Towers and Washington Square Garage Loan
($102.8 million -- 5.9% of the pool)
which is secured by an 854,000 square foot (SF) mixed use complex
located in Philadelphia, Pennsylvania. The loan remains current
but has been transferred between special servicing and watchlist status
since November 2009 due to occupancy concerns and the potential for imminent
default.
The remaining 17 specially serviced loans are secured by a mix of property
types. The master servicer has recognized an aggregate $35.6
million appraisal reduction for 15 specially serviced loans. Moody's
has estimated an aggregate $82.8 million loss (35%
expected loss on average) for all of the specially serviced loans.
Moody's has assumed a high default probability for 28 poorly performing
loans representing 8% of the pool and has estimated a $35
million loss (25% expected loss based on a 50% probability
default) from these troubled loans.
Moody's was provided with full year 2009 operating results for 80%
of the pool. Excluding specially serviced and troubled loans,
Moody's weighted average LTV is 103%, essentially the
same as at Moody's prior full review. Moody's net cash
flow reflects a weighted average haircut of 15.1% to the
most recently available net operating income. Moody's value
reflects a weighted average capitalization rate of 9.9%.
Excluding specially serviced and troubled loans, Moody's actual
and stressed DSCRs are 1.39X and 1.09X, respectively,
compared to 1.27X and 1.00X 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 loan with a credit estimate is the 100 Summer Street Loan ($180
million -- 10.3% of the pool), which is secured
by a 1.1 million SF Class A office building located in Boston,
Massachusetts. The property was 98% leased as of June 2010
versus 100% at last review. Moody's current credit
estimate and stressed DSCR are Baa1 and 1.47X, respectively,
compared to Baa2 and 1.96X at the last full review.
The top three performing conduit loans represent 9% of the pool
balance. The largest loan is the 200 Paul Avenue Loan ($76.2
million -- 4.4% of the pool), which is secured
by a 527,680 SF telecommunications building located in close proximity
to the main fiber optic line that serves San Francisco, California.
The loan has amortized 5% since last full review. Moody's
LTV and stressed DSCR are 71% and 1.76X, respectively,
compared to 94% and 1.27X at the last full review.
The second largest loan is the CNL-Cirrus MOB Portfolio III Loan
($47.2 million -- 2.7% of the pool),
which is secured by five medical office properties located in two states
and totaling 269,707 square feet. There properties were 81%
leased as of June 2010 versus 89% at last full review. Moody's
LTV and stressed DSCR are 121% and 0.88X, respectively,
compared to 99.7% and 1.51X at last review.
The third largest loan is the Blairstone Office Building Loan ($35.1
million -- 2.0% of the pool), which is secured
by a 263,163 SF suburban office building located in Tallahassee,
Florida. Property performance has been stable due to the long-term
lease with State of Florida's Department of Corrections through
December 2014. The loan is on the servicer's watchlist because
the borrower has indicated that the tenant may vacate the premises prior
to lease expiration in order to move into a state owned property.
Moody's analysis incorporates significant stress applied to the
cash flow to reflect the risk of potential lease rollover. Moody's
LTV and stressed DSCR are 163% and 0.84X, respectively,
compared to 119% and 1.36X at last full review.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Gregory Reed
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Sandra Ruffin
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Downgrades 15 and Affirms Six CMBS Classes of ML-CFC 2006-2
