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Rating Action:

Moody's Upgrades Two, Downgrades One and Affirms 13 CMBS Classes of MLMT 2004-MKB1

23 May 2013

Approximately $375.5 Million of Structured Securities Affected

New York, May 23, 2013 -- Moody's Investors Service (Moody's) upgraded the ratings of two classes, downgraded one class and affirmed 13 classes of Merrill Lynch Mortgage Trust 2004-MKB1, Commercial Mortgage Pass-Through Certificates, Series 2004-MKB1 as follows:

Cl. A-1A, 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. B, Affirmed Aaa (sf); previously on Mar 9, 2011 Confirmed at Aaa (sf)

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

Cl. D, Upgraded to Aaa (sf); previously on Jun 21, 2012 Upgraded to Aa1 (sf)

Cl. E, Upgraded to Aa1 (sf); previously on Jun 21, 2012 Upgraded to Aa2 (sf)

Cl. F, Affirmed A1 (sf); previously on Jun 21, 2012 Upgraded to A1 (sf)

Cl. G, Affirmed Baa1 (sf); previously on Jun 23, 2011 Upgraded to Baa1 (sf)

Cl. H, Affirmed Baa3 (sf); previously on May 14, 2004 Definitive Rating Assigned Baa3 (sf)

Cl. J, Affirmed Ba2 (sf); previously on Nov 4, 2010 Downgraded to Ba2 (sf)

Cl. K, Affirmed B1 (sf); previously on Nov 4, 2010 Downgraded to B1 (sf)

Cl. L, Affirmed B3 (sf); previously on Nov 4, 2010 Downgraded to B3 (sf)

Cl. M, Affirmed Caa2 (sf); previously on Jun 21, 2012 Downgraded to Caa2 (sf)

Cl. N, Affirmed Caa3 (sf); previously on Jun 21, 2012 Downgraded to Caa3 (sf)

Cl. P, Downgraded to C (sf); previously on Jun 21, 2012 Downgraded to Ca (sf)

Cl. XC, Affirmed Ba3 (sf); previously on Feb 22, 2012 Downgraded to Ba3 (sf)

RATINGS RATIONALE

The upgrades are due to actual and anticipated increased credit support from loan payoffs and amortization as well as overall stable pool performance. The pool has paid down by 7% since Moody's prior review and a majority of the pool matures within the next 12 months. Many of these loans appear to be well positioned for refinance. The downgrade of Class P is due to actual and Moody's anticipated losses from specially serviced and troubled loans.

The affirmations of the principal and interest 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 rating of the IO Class, Class XC, is consistent with the credit performance of its referenced classes and thus is affirmed.

Moody's rating action reflects a base expected loss of 3.5% of the current pooled balance compared to 4.4% at last review. Moody's base expected loss plus realized losses is now 2.4% of the original pooled balance compared to 2.5% 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 in the 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 continues to exhibit growth albeit at a slightly slower pace. The multifamily sector should remain stable with moderate growth. Gradual recovery in the office sector continues and will be assisted in the next quarter when absorption is likely to outpace completions. However, since office demand is closely tied to employment, we expect regional employment growth to provide market differentiation. CBD markets continue to outperform secondary suburban markets. The retail sector exhibited a slight reduction in vacancies in the first quarter; the largest drop since 2005. However, consumers continue to be cautious as evidenced by sales growth continuing below historical trends. 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 outlook indicates the global economy has lost momentum over the past quarter as it tries to recover. US GDP growth for 2013 is likely to remain close to 2%, however US sequestration cuts that came into effect in March may create a drag on the positive growth in the US private sector. While the broad economic impact in unclear, the direct effect is likely to shave 0.4% off US GDP growth in 2013. Continuing from the previous quarter, Moody's believes that the three most immediate risks are: i) the risk of an even 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 principal methodology used in this rating was "Moody's Approach to Rating U.S. CMBS Conduit Transactions" published in September 2000. The methodology used in rating Class XC 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.

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 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 27 compared to 29 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 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 June 21, 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 May 13, 2013 distribution date, the transaction's aggregate certificate balance has decreased by 61% to $378.6 million from $979.9 million at securitization. The Certificates are collateralized by 47 mortgage loans ranging in size from less than 1% to 8% of the pool, with the top ten loans representing 36% of the pool. Seven loans, representing 28% of the pool, have defeased and are secured by U.S. Government securities.

Four loans, representing 5% 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.

Six loans have been liquidated since securitization, of which five have incurred cumulative losses totaling $10.4 million. Four loans incurred losses at the time of liquidation with a average 37% severity. Currently, there is one loan in special servicing, representing 2% of the pool. The specially serviced loan is the Port Columbus IV Loan ($8.2 million -- 2.2% of the pool), which is secured by a 104,000 square foot (SF) office property located in Columbus, Ohio. The loan was transferred in February of 2012 for imminent default. The lender filed a foreclosure complaint and in May of 2012 a receiver was appointed. As of April 2013 the property was 59% leased.

Moody's has assumed a high default probability for three poorly performing loans representing 4.6% of the pool. Moody's has estimated an aggregate $8.2 million loss (32% expected loss) from the specially serviced and troubled loans.

Moody's was provided with full year 2011 and partial and full year 2012 operating results for 100% and 86% of the pool's loans, respectively. Excluding specially serviced and troubled loans, Moody's weighted average LTV is 80% compared to 83% at prior review. Moody's net cash flow (NCF) reflects a weighted average haircut of 11.5% to the most recently available net operating income. Moody's value reflects a weighted average capitalization rate of 9.5%.

Excluding specially serviced and troubled loans, Moody's actual and stressed DSCRs are 1.47X and 1.44X, respectively, compared to 1.46X and 1.39X at last review. Moody's actual DSCR is based on Moody's net cash flow 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 loans represent 15% of the pool. The largest conduit loan is the WestPoint Crossing Shopping Center Loan ($24.0 million -- 6.3% of the pool), which is secured by a leasehold interest in a 241,000 SF retail center consisting of 11 one-story buildings located in Tucson, Arizona. The center is shadow-anchored by Home Depot and Target. The largest in-line tenants are Food City (23% of net rentable area (NRA); lease expiration in February 2022), Ross (13% of the NRA; lease expiration in January 2018) and Marshall's (12% of the NRA; lease expiration in October 2017). As of February 2013, the property was 95% leased compared to 99% at last review. Moody's LTV and stressed DSCR are 84% and 1.19X, respectively, compared to 85% and 1.18X at last review.

The second largest loan is the GFS Marketplace Portfolio Loan ($17.2 million -- 4.5% of the pool), which is secured by 17 single-tenant retail properties with a total of 272,000 SF located in Ohio (6), Michigan (5) Indiana (4), and Illinois (2). All the properties are leased to GFS Holdings, Inc., a foodservice distributor, under leases expiring in September 2028. Moody's LTV and stressed DSCR are 46% and 2.22X, respectively, compared to 48% and 2.14X at last review.

The third largest loan is the MHC Portfolio - Mariner's Cove Loan ($15.1 million -- 4.0 % of the pool), which is secured by a 374-pad manufactured housing community located in Millsboro, Delaware. As of December 2012, the property was 97% leased compared to 98% at last review. Moody's LTV and stressed DSCR are 62% and 1.49X, respectively, compared to 65% and 1.41X 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.

Benjamin Abrams
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 Two, Downgrades One and Affirms 13 CMBS Classes of MLMT 2004-MKB1
No Related Data.
© 2021 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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