Approximately $126.4 Million of Structured Securities Affected
New York, January 13, 2011 -- Moody's Investors Service (Moody's) downgraded the ratings of two classes,
confirmed one class and affirmed five classes of Merrill Lynch Financial
Assets Inc., Commercial Mortgage Pass-Through Certificates,
2001-Canada 5 as follows:
Cl. A-2, Affirmed at Aaa (sf); previously on
May 18, 2001 Definitive Rating Assigned Aaa (sf)
Cl. X, Affirmed at Aaa (sf); previously on May 18,
2001 Definitive Rating Assigned Aaa (sf)
Cl. B, Affirmed at Aaa (sf); previously on Sep 2,
2010 Confirmed at Aaa (sf)
Cl. C, Confirmed at A1 (sf); previously on Oct 28,
2010 A1 (sf) Placed Under Review for Possible Downgrade
Cl. D, Downgraded to B2 (sf); previously on Oct 28,
2010 Ba2 (sf) Placed Under Review for Possible Downgrade
Cl. E, Downgraded to Caa1 (sf); previously on Oct 28,
2010 B2 (sf) Placed Under Review for Possible Downgrade
Cl. F, Affirmed at C (sf); previously on Sep 2,
2010 Downgraded to C (sf)
Cl. G, Affirmed at C (sf); previously on Jul 8,
2010 Downgraded to C (sf)
The downgrades are due to higher expected losses for the pool resulting
from anticipated losses from a specially serviced loan and interest shortfalls.
The confirmation and 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 confirmed and affirmed classes are
sufficient to maintain the existing ratings.
On October 28, 2010, Moody's placed three classes on
review for possible downgrade. This action concludes our review.
Moody's rating action reflects a cumulative base expected loss of
4.6% of the current balance. At last review,
Moody's cumulative base expected loss was 3.4%.
Moody's stressed scenario loss is 7.6% 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 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 methodologies used these ratings were were "Moody's Approach
to Rating Canadian CMBS" rating methodology published in May 2000 and
"Moody's Approach to Rating Large Loan/Single Borrower Transactions" rating
methodology published in July 2000. Both methodologies are available
In addition, 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 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
underlying ratings 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 underlying ratings in the same
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
the risk of multiple notch downgrades under adverse circumstances.
The credit neutral Herf score is 40. The pool has a Herf of 13
compared to 14 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 8.0 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.
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 September 2, 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 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.
As of the December 13, 2010 distribution date, the transaction's
aggregate certificate balance has decreased by 49% to $126.4
million from $248.7 million at securitization. The
Certificates are collateralized by 25 mortgage loans ranging in size from
less than 1% to 14% of the pool, with the top ten
loans representing 63% of the pool. Nine loans, representing
16% of the pool, have defeased and are collateralized with
Canadian Government securities. Defeasance at last review represented
21% of the pool.
Fifteen loans, representing 50% 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
Two loans have been liquidated from the pool, resulting in an aggregate
realized loss of $8.7 million. The disposition of
these loans, which were secured by hotel properties located in Niagara
Falls, Canada, resulted in a 100% loss severity.
One loan, representing 4% of the pool, is currently
in special servicing. This loan is the Skeena Mall Loan ($6.5
million -- 4% of the pool), which is secured by a retail
center located in Terrace, British Columbia. The loan was
transferred to special servicing in February 2009 due to delinquency and
is currently 90+ days delinquent. The property was 51%
leased as of June 2010, the same as at last review. The servicer
has recognized an appraisal reduction of $2.9 million for
this loan. Moody's has estimated an aggregate $4.0
million loss (63% expected loss on average) for this specially
Based on the most recent remittance statement, Classes F through
NR have experienced cumulative interest shortfalls totaling $600,800.
Moody's anticipates that the pool will continue to experience interest
shortfalls caused by the specially serviced loan. In addition,
Midland Loan Services, Inc. (Midland), the transaction's
master servicer, has indicated that it still has outstanding advances
against the loans that were liquidated in May 2010. Midland expects
to recover these advances over the next several months, resulting
in an increase in interest shortfalls. Interest shortfalls are
caused by special servicing fees, including workout and liquidation
fees, appraisal subordinate entitlement reductions (ASERs) and extraordinary
Moody's was provided with full year 2009 operating results for 64%
of the pool. Excluding the specially serviced loan and defeased
loans, Moody's weighted average LTV is 50% compared
to 52% at Moody's prior review. Moody's net
cash flow reflects a weighted average haircut of 13.9% to
the most recently available net operating income. Moody's
value reflects a weighted average capitalization rate of 9.75%.
Excluding the specially serviced loan and defeased loans, Moody's
actual and stressed DSCRs are 1.81X and 2.28X, respectively,
compared to 1.77X and 2.22X 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 29% of the pool
balance. The largest loan is the York Mills Gardens Loan ($17.6
million -- 11.5% of the pool), which is secured
by a 89,000 square foot retail center located in Toronto,
Ontario. The largest tenants are Longo's, Shopper's
Drug Mart and Roger's Video. The property was 97%
leased as of August 2010, the same as the last review. The
loan has amortized 19% since securitization. Moody's
LTV and stressed DSCR are 60% and 1.6X, respectively,
the same as last review.
The second largest loan is the Delta Bow Valley Loan ($15.3
million -- 10.0% of the pool), which is secured
by a 398 room full service hotel located in Calgary, Alberta.
The property had an overall average occupancy of 63% for 2009.
The loan has amortized 24% since securitization. Moody's
LTV and stressed DSCR are 42% and 2.82X, respectively,
compared to 43% and 2.78X at the last review.
The third largest loan is the Robson Promenade Loan ($9.5
million -- 7.5% of the pool), which is secured
by a 30,488 square foot anchored shopping center located in the
West End submarket of Vancouver, BC. The property was 100%
leased as of December 2009. The loan has amortized 32% since
securitization. Moody's LTV and stressed DSCR are 31%
and 2.76X, respectively, compared to 32% and
2.7X at the last review.
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
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.
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Michael M. Gerdes
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Downgrades Two, Confirms One and Affirms Five CMBS Classes of MLFA 2001-Canada 5
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