Fitch Downgrades Senior Classes of Morgan Stanley 2007-XLC1
Fitch Ratings downgraded two and affirmed four classes of Morgan Stanley 2007-XLC1, Ltd. and Morgan Stanley 2007-XLC1, LLC, (Morgan Stanley 2007-XLC1) reflecting Fitch’s base case loss expectation of 58%. Fitch’s performance expectation incorporates prospective views regarding commercial real estate market value and cash-flow declines.
KEY RATING DRIVERS:
The portfolio is very concentrated with only three assets remaining. Current collateral consists of mezzanine debt on the Crowne Plaza Times Square (63.4% of the pool), an A-note secured by land in Las Vegas (25.4%) and REO land in Hawaii (11.3%). The downgrades to the senior classes reflect the extreme concentration of the pool and the declining performance of the assets.
Since Fitch’s last rating action, class A-2 paid in full and class B received additional pay down of approximately $7 million primarily from the disposal of three assets, including two loans paid in full and interest diversion. Over the same period, the CDO realized losses of approximately $66 million. The current percentage of defaulted assets and Loans of Concern is 11.3% and 88.7%, respectively, compared to 38.2% and 23.2% at last review.
As of the January 2014 trustee report, the CDO is failing its C/D/E and F/G/H overcollateralization tests resulting in the diversion of interest payments for classes F and below towards principal of the senior class. The transaction is also failing its F/G/H interest coverage test.
Because the collateral pool is concentrated, Fitch assumed that 100% of the portfolio will default in the base case stress scenario, defined as the ‘B’ stress. Modeled recoveries were average at 42%.
The largest component of Fitch’s base case loss expectation is related to a mezzanine loan (63.4% of the pool) backed by interests in the Crowne Plaza Times Square in Manhattan. The hotel contains 795 rooms, and approximately 226,000 square feet of office and retail space. The loan was recently extended through December 2014. Year end (YE) 2010 and 2011 performance significantly improved from YE 2009, which had offline rooms. However, cash-flow has declined over the last two years primarily due to an increased ground lease payment, the loss of some commercial revenue and new franchise fee obligations. Fitch modeled a substantial loss on this subordinate position in its base case scenario.
The next largest component of Fitch’s base case loss expectation is related to an A-note (25.4%) secured by approximately 60 acres of land located in Las Vegas. The property, which is in the process of being master planned and rezoned for development, is currently comprised of improved land with 457 apartments and 615,000 square feet of office/industrial space, and 20 acres of vacant land. Fitch modeled a term default and significant loss on this position in its base case scenario.
This transaction was analyzed according to the +IBw-Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions,+IB0- which applies stresses to property cash-flows and debt service coverage ratio (DSCR) tests to project future default levels for the underlying portfolio. Recoveries for the loan assets are based on stressed cash-flows and Fitch’s long-term capitalization rates. Fitch compared the credit enhancement of the classes to the expected losses generated by the model. The credit enhancement of class B is consistent with the rating listed below. This CDO is highly concentrated. Cash-flow modeling was not performed as part of this analysis as the impact of structural features was expected to be minimal.
The ‘CCC’ and below ratings for classes C through G are based on a deterministic analysis that considers Fitch’s base case loss expectation for the pool and the current percentage of defaulted assets and Fitch Loans of Concern factoring in anticipated recoveries relative to each classes credit enhancement.
The Negative Outlook on class B was assigned based on the potential for further negative credit migration of this highly concentrated portfolio. All classes are subject to further downgrades should additional losses be realized.
Morgan Stanley 2007-XLC1 is a static CRE CDO originated in 2007. Principal proceeds were applied pro-rata to the liabilities until sequential pay was triggered in November 2008. The portfolio is specially serviced by CT Investment Management Co., LLC, an affiliate of The Blackstone Group.