Approximately $1.1 Billion of Structured Securities Affected
New York, February 14, 2013 -- Moody's Investors Service (Moody's) downgraded six classes and affirmed
four classes of Credit Suisse First Boston Commercial Mortgage Pass-Through
Certificates, Series 2004-C3 as follows:
Cl. A-1-A, Affirmed Aaa (sf); previously
on Mar 9, 2011 Confirmed at Aaa (sf)
Cl. A-4, Affirmed Aaa (sf); previously on Mar
9, 2011 Confirmed at Aaa (sf)
Cl. A-5, Affirmed Aaa (sf); previously on Mar
9, 2011 Confirmed at Aaa (sf)
Cl. B, Downgraded to Baa2 (sf); previously on Mar 4,
2010 Downgraded to Aa3 (sf)
Cl. C, Downgraded to Ba3 (sf); previously on Feb 29,
2012 Downgraded to Baa1 (sf)
Cl. D, Downgraded to B3 (sf); previously on Feb 29,
2012 Downgraded to Ba1 (sf)
Cl. E, Downgraded to Caa3 (sf); previously on Feb 29,
2012 Downgraded to B3 (sf)
Cl. F, Downgraded to C (sf); previously on Feb 29,
2012 Downgraded to Caa3 (sf)
Cl. G, Downgraded to C (sf); previously on Feb 29,
2012 Downgraded to Ca (sf)
Cl. A-X, Affirmed Ba3 (sf); previously on Feb
22, 2012 Downgraded to Ba3 (sf)
RATINGS RATIONALE
The affirmations for the three principal and interest bond classes 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.
The downgrades for the six principal and interest bond classes are due
to realized losses and an increase in expected losses from specially serviced
and troubled loans.
The rating of the IO Class, Class A-X is consistent with
the expected credit performance of its referenced classes and thus is
affirmed.
Moody's rating action reflects a base expected loss of 6.3%
of the current pooled balance compared to 6.3% at last review.
Moody's based expected loss plus realized losses is now 9.4%
of the original pooled balance compared to 7.4% at last
review. Moody's provides a current list of base expected 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 extent of growth in
the current macroeconomic environment given the weak pace of recovery
and commercial real estate property markets. Commercial real estate
property values are continuing to move in a modestly positive direction
along with a rise in investment activity and stabilization in core property
type performance. Limited new construction and moderate job growth
have aided this improvement. However, a consistent upward
trend will not be evident until the volume of investment activity steadily
increases for a significant period, non-performing properties
are cleared from the pipeline, and fears of a Euro area recession
are abated.
The hotel sector is performing strongly with nine straight quarters of
growth and the multifamily sector continues to show increases in demand
with a growing renter base and declining home ownership. Recovery
in the office sector continues at a measured pace with minimal additions
to supply. However, office demand is closely tied to employment,
where growth remains slow and employers are considering decreases in the
leased space per employee. Also, primary urban markets are
outperforming secondary suburban markets. Performance in the retail
sector continues to be mixed with retail rents declining for the past
four years, weak demand for new space and lackluster sales driven
by internet sales growth. Across all property sectors, the
availability of debt capital continues to improve with robust securitization
activity of commercial real estate loans supported by a monetary policy
of low interest rates.
Moody's central global macroeconomic scenario calls for US GDP growth
for 2013 that is likely to remain close to 2% as the greater impetus
from the US private sector is likely to broadly offset the drag on activity
from more restrictive fiscal policy. Thereafter, we expect
the US economy to expand at a somewhat faster pace than is likely this
year, closer to its long-run average pace of growth.
Risks to our forecasts remain skewed to the downside despite recent positive
developments. Moody's believes that the three most immediate
risks are: i) the risk of a deeper than currently expected recession
in the euro area accompanied by deeper credit contraction, potentially
triggered by a further intensification of the sovereign debt crisis;
ii) slower-than-expected recovery in major emerging markets
following the recent slowdown; and iii) an escalation of geopolitical
tensions, resulting in adverse economic developments.
The methodologies used in this rating were "Moody's Approach to Rating
U.S. CMBS Conduit Transactions" published in September 2000,
and "Moody's Approach to Rating CMBS Large Loan/Single Borrower
Transactions" published in July 2000. The methodology used
in rating the Interest-Only Securities was "Moody's Approach
to Rating Structured Finance Interest-Only Securities" published
in February 2012. The Interest-Only Methodology was used
for the rating of Class A-X. Please see the Credit Policy
page on www.moodys.com for a copy of these methodologies.
Moody's review incorporated the use of the excel-based CMBS Conduit
Model v 2.62 which is used for both conduit and fusion transactions.
Conduit model results at the Aa2 (sf) 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 (sf) 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 (sf) and B2 (sf), 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 assessments is melded with the conduit model credit enhancement
into an overall model result. Fusion loan credit enhancement is
based on the credit assessment 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 assessment level,
is incorporated for loans with similar credit assessments in the same
transaction.
The conduit model includes an IO calculator, which uses the following
inputs to calculate the proposed IO rating based on the published methodology:
original and current bond ratings and credit assessments; original
and current bond balances grossed up for losses for all bonds the IO(s)
reference(s) within the transaction; and IO type as defined in the
published methodology. The calculator then returns a calculated
IO rating based on both a target and mid-point. For example,
a target rating basis for a Baa3 (sf) rating is a 610 rating factor.
The midpoint rating basis for a Baa3 (sf) rating is 775 (i.e.
the simple average of a Baa3 (sf) rating factor of 610 and a Ba1 (sf)
rating factor of 940). If the calculated IO rating factor is 700,
the CMBS IO calculator would provide both a Baa3 (sf) and Ba1 (sf) IO
indication for consideration by the rating committee.
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.
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 17
compared to 22 at Moody's prior review.
In cases where the Herf falls below 20, Moody's also employs
the Large Loan / Single borrower methodology. This methodology
uses the excel-based Large Loan Model v. 8.5 and
then reconciles and weights the results from the two models in formulating
a rating recommendation. 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.
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 a review utilizing MOST®
(Moody's Surveillance Trends) Reports and a proprietary program that highlights
significant credit changes that have occurred in the last month as well
as cumulative changes since the last full transaction review. On
a periodic basis, Moody's also performs a full transaction review
that involves a rating committee and a press release. Moody's prior
transaction review is summarized in a press release dated February 29,
2012. Please see the ratings tab on the issuer / entity page on
moodys.com for the last rating action and the ratings history.
DEAL PERFORMANCE
As of the January 17, 2013 distribution date, the transaction's
aggregate pooled certificate balance has decreased by 35% to $1.07
billion from $1.6 billion at securitization. The
Certificates are collateralized by 136 mortgage loans ranging in size
from less than 1% to 13% of the pool, with the top
ten loans representing 32% of the pool. Twenty-nine
loans, representing 38% of the pool, have defeased
and are collateralized with U.S. Government Securities.
Twenty-one loans, representing 6% 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.
Nineteen loans have been liquidated from the pool, resulting in
an aggregate realized loss of $86.3 million (55%
average loss severity). There are thirteen loans, representing
7% of the pool, that are currently in special servicing.
The servicer has recognized an aggregate $36.5 million in
appraisal reductions for nine of the specially serviced loans and Moody's
has estimated an aggregate $41.7 million loss (56%
average expected loss) for all specially serviced loans.
Moody's has assumed a high default probability for six poorly performing
loans representing 5% of the pool and has estimated a $8.2
million aggregate loss (15% expected loss based on a 50%
probability default) from these troubled loans.
Moody's was provided with full year 2011 and partial year 2012 operating
results for 100% and 26% of the pool's non-defeased
and non-specially serviced loans, respectively. Moody's
weighted average conduit LTV is 89% compared to 88% at Moody's
prior review. The conduit portion of the pool excludes specially
serviced, troubled and defeased loans. Moody's net cash flow
reflects a weighted average haircut of 11% to the most recently
available net operating income. Moody's value reflects a weighted
average capitalization rate of 9.6%.
Moody's actual and stressed conduit DSCRs are 1.36X and 1.23X,
respectively, compared to 1.38X and 1.21X 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 conduit loans represent 20% of the pool. The
largest performing loan is the Pacific Design Center Loan ($138.1
million -- 12.9% of the pool), which is secured
by a 916,000 square foot (SF) office and design showroom building
located in West Hollywood, California. In addition to the
showroom and office space, the property also houses a 384-seat
theater and screening room, conference facilities, a two-story
gallery leased to the Museum of Contemporary Art, a fitness facility
and two restaurants. The property is 68% leased compared
to 70% at last review. Financial performance has declined
since last review. Moody's LTV and stressed DSCR are 100%
and 1.08X, respectively, compared to 95% and
1.14X at last review.
The second largest performing loan is the BC Wood Portfolio Loan ($39.5
million -- 3.7% of the pool), which is secured
by four shopping centers located in Louisville, Lexington and Paris,
Kentucky, all built between 1951 and 1989. The weighted average
occupancy for all properties was 92% compared to 90% at
last review. The loan sponsor is Brian C. Wood. Financial
performance has declined slightly since last review which is offset by
the benefits of amortization. Moody's LTV and stressed DSCR
are 95% and 1.12X, respectively, compared to
96% and 1.1X at last review.
The third largest performing loan is the Private Mini Storage Portfolio
Loan ($36.4 million -- 3.4% of the pool),
which is secured by nine self storage properties located in seven different
markets within the state of Texas. Financial performance has improved
since last review and the loan benefits from amortization. Moody's
LTV and stressed DSCR are 83% and 1.21X, respectively,
compared to 91% and 1.1X at last review.
REGULATORY DISCLOSURES
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of this transaction
in the past six months.
In conducting surveillance of this credit, Moody's considered performance
data contained in servicer and remittance reports. Moody's obtains
servicer reports on this transaction on a periodic basis, at least
annually.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Gregory Reed
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Michael Gerdes
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Downgrades Six and Affirms Four CMBS Classes of CSFB 2004-C3
