Approximately $769.9 Million of Structured Securities Affected
New York, February 09, 2011 -- Moody's Investors Service (Moody's) downgraded the ratings of six classes
and affirmed ten classes of Morgan Stanley Dean Witter Capital I Inc.,
Commercial Mortgage Pass-Through Certificates, Series 2003-HQ2
as follows:
Cl. A-1 Certificate, Affirmed at Aaa (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Aaa (sf)
Cl. A-2 Certificate, Affirmed at Aaa (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Aaa (sf)
Cl. X-1 Certificate, Affirmed at Aaa (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Aaa (sf)
Cl. X-2 Certificate, Affirmed at Aaa (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Aaa (sf)
Cl. B Certificate, Affirmed at Aaa (sf); previously
on Apr 25, 2008 Upgraded to Aaa (sf)
Cl. C Certificate, Affirmed at A2 (sf); previously on
Mar 27, 2003 Definitive Rating Assigned A2 (sf)
Cl. D Certificate, Affirmed at A3 (sf); previously on
Mar 27, 2003 Definitive Rating Assigned A3 (sf)
Cl. E Certificate, Affirmed at Baa1 (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Baa1 (sf)
Cl. F Certificate, Affirmed at Baa2 (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Baa2 (sf)
Cl. G Certificate, Affirmed at Baa3 (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Baa3 (sf)
Cl. H Certificate, Downgraded to Ba3 (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Ba1 (sf)
Cl. J Certificate, Downgraded to B1 (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Ba2 (sf)
Cl. K Certificate, Downgraded to B2 (sf); previously
on Mar 27, 2003 Definitive Rating Assigned Ba3 (sf)
Cl. L Certificate, Downgraded to Caa1 (sf); previously
on Mar 27, 2003 Definitive Rating Assigned B1 (sf)
Cl. M Certificate, Downgraded to Caa2 (sf); previously
on Mar 27, 2003 Definitive Rating Assigned B2 (sf)
Cl. N Certificate, Downgraded to Caa3 (sf); previously
on Mar 27, 2003 Definitive Rating Assigned B3 (sf)
RATINGS RATIONALE
The downgrades are due to higher expected losses for the pool resulting
from realized and anticipated losses from troubled loans. The affirmations
are due to key parameters, including Moody's loan to value
(LTV) ratio, and Moody's stressed debt service coverage ratio
(DSCR) remaining within acceptable ranges. Based on our current
base expected loss, the credit enhancement levels for the affirmed
classes are sufficient to maintain their existing rating.
Moody's rating action reflects a cumulative base expected loss of
2.3% of the current balance. At last review,
Moody's cumulative base expected loss was 1.1%.
Moody's stressed scenario loss is 5.2% 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.
Due to the high level of credit subordination and defeasance, it
is unlikely that investment grade classes would be downgraded even if
losses are higher than Moody's expected base.
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 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 methodologies used in this rating were "CMBS: Moody's
Approach to Rating Fusion Transactions" published on April 19, 2005,
and "Moody's Approach to Rating Large Loan/Single Borrower 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 and the CMBS Large Loan Model v 8.0. 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 underlying ratings 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 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 9 compared
to 11 at Moody's prior review.
In cases where the Herf falls below 20, Moody's employs 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.
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 April 25, 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 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
six months.
DEAL PERFORMANCE
As of the January 12, 2011 distribution date, the transaction's
aggregate certificate balance has decreased by 17% to $773.8
million from $931.6 million at securitization. The
Certificates are collateralized by 52 mortgage loans ranging in size from
less than 1% to 20% of the pool, with the top ten
loans representing 62% of the pool. The pool includes three
loans, representing 40% of the pool, with investment
grade credits estimates. Fifteen loans representing 23%
of the pool have defeased and are collateralized with U.S.
Government securities.
Eight loans, representing 9% 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.
One loan has been liquidated from the pool since securitization,
resulting in a $5.2 million loss (52% loss severity).
The pool has also experienced a $1.5 million loss resulting
from a modification of the Star Village Commons Loan ($3.0
million -- 0.4%), the pool's only specially
serviced loan. The loan is secured by a 40,000 square foot
retail property located in Lake Worth, Texas. The loan transferred
into special servicing in January 2009 and is current. The loan
was modified and a new borrower has assumed the note. The loan
is pending return back to the master servicer and Moody's is not
currently estimating losses on the modified loan.
Moody's has assumed a high default probability for four poorly performing
loans representing 7% of the pool and has estimated an aggregate
$8.4 million loss (15% expected loss based on a 69%
probability default) for the troubled loans.
Moody's was provided with full year 2009 operating results for 96%
of the pool. Excluding troubled loans and loans with credit estimates,
Moody's weighted average LTV is 84% compared to 83%
at last review. Moody's net cash flow reflects a weighted
average haircut of 16% to the most recently available net operating
income. Moody's value reflects a weighted average capitalization
rate of 9.5%.
Excluding troubled loans, Moody's actual and stressed DSCRs
are 1.46X and 1.30X, respectively, compared
to 1.27X and 1.24X 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 largest loan with an underlying rating is the 1290 Avenue of Americas
Loan ($155.1 million -- 20.0%),
which represents a participation interest in the senior component of a
$361.8 million mortgage loan. The loan is secured
by a 2 million square foot office building located in New York City.
Major tenants include Equitable Life Assurance and Morrison & Foerster.
The property was 96% leased as of September 2010 compared with
99% at last review. The loan sponsors are Jamestown and
Apollo Real Estate Investors. The property is also encumbered by
a $51.2 million junior loan that is held outside the Trust.
Moody's credit estimate and stressed DSCR are A1 and 1.74X,
respectively, compared to A1 and 1.70X at last review.
The second largest loan with an underlying rating is the Oakbrook Center
Loan ($72.0 million -- 9.3%), which
represents a participation interest in a $205.8 million
mortgage loan. The loan is secured by the borrower's interest in
a mixed-use property located in Oak Brook, Illinois that
consists of an open-air regional mall, three office buildings
and a ground lease underlying a hotel and theater. Oakbrook Center
totals approximately 2.4 million square feet. The mall is
anchored by Lord & Taylor, Macy's, Neiman Marcus,
Nordstrom and Sears. Performance has slightly improved since last
review. The loan has amortized 6% since last review.
Moody's current credit estimate and stressed DSCR are Aa3 and 1.76X,
respectively, compared to A1 and 1.50X at last review.
The third largest loan with an underlying rating is the TruServe Portfolio
I Loan ($24.4 million -- 3.1%),
which is secured by three warehouse distribution facilities located in
Fogelsville, Pennsylvania, Springfield, Oregon and Kingman,
Arizona totaling a combined 1.2 million square feet. The
properties are 100% leased to TrueServ Corporation through December
2022. The loan sponsor is W.P. Carey & Company,
LLC. Moody's current credit estimate and stressed DSCR are A3 and
1.67X, respectively, compared to A3 and 1.59X
at last review.
The top three performing conduit loans represent 20% of the pool
balance. The largest loan is the Katy Mills Loan ($88.5
million -- 11.4% of the pool), which represents
a participation interest in the senior component of a $140.8
million mortgage loan. The loan is secured by the borrower's interest
in a 1.2 million square foot outlet mall located near Houston in
Katy, Texas. The mall is anchored by Bass Pro Shops,
Burlington Coat Factory, Marshall's, and AMC Theaters.
Moody's LTV and stressed DSCR are 100% and 1.00X,
respectively, compared to 88% and 1.14X at last review.
The second largest conduit loan is the D.C. Portfolio Loan
($41.4 million -- 5.3%), which
is secured by two mixed use properties located in Washington, D.C.
The properties total 215,000 square feet and consist of retail,
multifamily and a museum. The property is 80% leased as
of September 2010. The loan is currently 30 days delinquent and
is currently on the watchlist. The loan matures in March 2013.
Moody's LTV and stressed DSCR are 96% and 1.10X, respectively,
compared to 93% and 1.08X at last review.
The third largest conduit loan is the GPB-A Loan ($24.7
million -- 3.2%), which is secured by eight community
retail centers totaling 320,000 square feet located in various towns
in Massachusetts. The property was 91% leased as of September
2010 compared with 97% at last review. The property has
benefitted from increased performance and amortization. Moody's
LTV and stressed DSCR are 58% and 1.70X, respectively,
compared to 76% and 1.30X at last 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 purpose 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
Seth Anspach
Associate 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 Six and Affirms Ten CMBS Classes of MSDWC 2003-HQ2
