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Rating Action:

Moody's Upgrades Three, Downgrades One and Affirms Five CMBS Classes of MSDWC 2002-IQ3

12 Apr 2013

Approximately $70 Million of Structured Securities Affected

New York, April 12, 2013 -- Moody's Investors Service (Moody's) upgraded the ratings of three classes, downgraded one class and affirmed five classes of Morgan Stanley Dean Witter Capital I Trust 2002-IQ3, Commercial Mortgage Pass-Through Certificates, Series 2002-IQ3 as follows:

Cl. B, Affirmed Aaa (sf); previously on Mar 9, 2011 Confirmed at Aaa (sf)

Cl. C, Upgraded to A1 (sf); previously on Apr 11, 2012 Downgraded to A3 (sf)

Cl. D, Upgraded to A3 (sf); previously on Apr 11, 2012 Downgraded to Baa2 (sf)

Cl. E, Upgraded to Ba1 (sf); previously on Apr 11, 2012 Downgraded to Ba3 (sf)

Cl. F, Affirmed B2 (sf); previously on Apr 11, 2012 Downgraded to B2 (sf)

Cl. G, Affirmed Caa3 (sf); previously on Apr 11, 2012 Downgraded to Caa3 (sf)

Cl. H, Affirmed C (sf); previously on Apr 11, 2012 Downgraded to C (sf)

Cl. X-1, Downgraded to Caa1 (sf); previously on Feb 22, 2012 Downgraded to Ba3 (sf)

Cl. X-Y, Affirmed Aaa (sf); previously on Mar 9, 2011 Confirmed at Aaa (sf)

RATINGS RATIONALE

The upgrades of Classes C, D and E are due to an increase in subordination from loan amortization and payoffs. The deal has paid down 84% since Moody's last review.

The affirmations of Classes B and F are due to key parameters, including Moody's loan to value (LTV) ratio, Moody's stressed 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 ratings of Classes G and H reflect Moody's expected loss for those classes and thus are affirmed.

The downgrade of the interest-only (IO) class, Class X-1, is to align the rating with the expected credit performance of its referenced classes.

Class X-Y, another IO class, refers to the residential cooperative loans (co-op loans) in the pool. The rating of Class X-Y is affirmed because the rating is commensurate with the expected credit performance of the one remaining co-op loan that it references.

Moody's rating action reflects a base expected loss of 7.8% of the current pooled balance compared to 8.1% since last review. Moody's base expected plus realized losses is now 5.1% of the original pooled balance compared to 5.9% 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 the 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 Fusion U.S. CMBS Transactions" published in April 2005. The methodology used in rating Classes X-1 and X-Y was "Moody's Approach to Rating Structured Finance Interest-Only Securities" published in February 2012. 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 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 (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.

CMBS Conduit Model v 2.62 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 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 23 compared to 21 at Moody's prior 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 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 April 11, 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 March 15, 2013 distribution date, the transaction's aggregate pooled certificate balance has decreased by 92% to $70 million from $910 million at securitization. The Certificates are collateralized by 66 mortgage loans ranging in size from less than 1% to 12% of the pool, with the top ten loans representing 54% of the pool. The pool does not currently contain any defeased loans. The pool's one remaining co-op loan, which represents 1.4% of the pool, has a Aaa credit assessment.

Twenty-six loans, representing 25% 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.

Seven loans have been liquidated at a loss from the pool, resulting in an aggregate realized loss of $41 million (57% average loss severity). Two loans, representing 15% of the pool, are currently in special servicing. The largest specially serviced loan is the Magnolia Ridge Apartments Loan ($8 million -12.0% of the pool), which is secured by a 228 unit apartment complex is Metairie, Louisiana. The loan transferred to special servicing in November 2012 due to maturity default. The borrower has not remitted any payments since October 2012. The property is 96% leased as of June 2012 with average rents of approximately $680 per unit. The borrower has been unable to find a refinance that is sufficient to repay the loan in full.

The servicer has recognized an aggregate $2.4 million appraisal reduction for the two specially serviced loans. Moody's has estimated a $3.5 million loss (34% average loss severity) for the two specially serviced loans.

Moody's has assumed a high default probability for six poorly performing loans representing 10% of the pool and has estimated a $1 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 or full year 2012 operating results for 97% and 61% of the pool's loans, respectively. Moody's weighted average conduit LTV is 44% compared to 72% at Moody's prior review. Eighty-two percent of the conduit loans are fully amortizing. The average conduit loan has amortized 48% since securitization. The conduit portion of the pool excludes specially serviced and troubled loans as well as the co-op loan with a credit assessment. 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 9.9%.

Moody's actual and stressed conduit DSCRs are 1.43X and 3.14X, respectively, compared to 1.47X and 1.75X 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. Moody's stressed DSCR is greater than Moody's actual DSCR for this transaction because the actual debt constant for the pool is greater than Moody's 9.25% stressed rate.

The top three performing conduit loans represent 25% of the pool balance. The largest loan is the 16700 Aston Street and 1771 & 1791 Deere Avenue Loan ($9 million -- 12.2%), which is secured by a 212,000 square foot (SF) industrial complex located in Irvine, California. The collateral is fully leased to the Newport Corporation via a triple net lease that expires in February 2022. The lease has two five-year extension options. Annual lease payments are approximately $1.5 million or $7.20 per square foot. The loan matures in September 2013 and the debt yield is in excess of 16%. Moody's LTV and stressed DSCR are 63% and 1.62X, respectively, compared to 55% and 1.88X at last review.

The second largest loan is the Marketplace at Washington Square Loan ($5 million -- 6.9%), which is secured by a 94,000 SF grocery-anchored retail center located in North Canton, Ohio. Giant Eagle, anchors the collateral and leases 77% of the net rentable area through February 2020. The property was 98% leased as of December 2012. The fully amortizing loan matures in July 2021 and has amortized 39% since securitization. Moody's LTV and stressed DSCR are 61% and 1.77X, respectively, compared to 66% and 1.57X at last review.

The third largest loan is the Monroeville Giant Eagle Loan ($4 million -- 6.0%), which is secured by an 89,000 SF Giant Eagle grocery store located in Monroeville, Pennsylvania. Giant Eagle leases the entire space through a triple net lease that expires in February 2019. The loan is conterminous with Giant Eagle's initial lease term, but the lease has two five-year extension options. This loan is fully amortizing and has amortized 50% since securitization. Moody's LTV and stressed DSCR are 39% and 2.62X, respectively, compared to 45% and 2.31X 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.

Peter Simon
Associate 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 Upgrades Three, Downgrades One and Affirms Five CMBS Classes of MSDWC 2002-IQ3
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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