NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed all eight rated 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 26.8% compared to 30.2% at last review. Fitch's performance expectation incorporates prospective views regarding commercial real estate market values and cash flow declines. A detailed list of rating actions follows at the end of this release.
Since last review, the senior class, A-1, has received paydown of $68.3 million. The transaction has been failing all three of its over collateralization tests since the November 2010 trustee report resulting in diverted interest to pay principal to A-1 and capitalized interest to classes C through H. Defaulted assets and Fitch Loans of Concern are at 7.1% and 21.7% compared to 6.4% and 15.7% at last review. Since last review, the disposal of three assets and re-structure of another resulted in realized losses of approximately $50.6 million to the CDO. The portfolio is concentrated with only 14 assets remaining in the CDO.
Under Fitch's methodology, approximately 48.8% of the portfolio is modeled to default in the base case stress scenario, defined as the 'B' stress. In this scenario, the modeled average cash flow decline is 7% from, generally, trailing 12-month second and third quarter 2010.
Morgan Stanley 2007-XLC1 is a static commercial real estate (CRE) CDO. As of the January 2011 trustee report and per Fitch categorizations, the CDO was substantially invested as follows: whole loans/A-notes (13.4%), B-notes (23.5%), and CRE mezzanine loans (63.1%).
The largest component of Fitch's base case loss expectation is a mezzanine loan (15.1%) secured by interests in a portfolio of five full-service hotels (1,910 keys) located in Stamford, CT; Sonoma, CA; Norfolk, VA; Atlanta, GA; and Southfield, MI. The hotels are under the Marriott, Hilton, Sheraton, and Westin flags. Due to significant renovations and poor economic conditions, the portfolio has not performed up to expectations. Current cash flow does not support debt service. Fitch modeled a term default and significant loss on this position in its base case scenario.
The next largest component of Fitch's base case loss expectation is a mezzanine loan (22.5%) secured by interests in a 770-room full service hotel located in the Times Square area of Manhattan. The property also contains approximately 240,000 square feet of office and retail space, as well as parking and signage facilities. While property performance improved significantly in 2010, Fitch modeled a maturity default and a significant loss in its base case scenario on this over-leveraged position.
The third largest component of Fitch's base case loss expectation is a mezzanine loan (15.9%) secured by interests in a portfolio of office properties located in five major metropolitan areas. While cash flow from the property has been supporting debt service, a maturity default is anticipated. Fitch modeled a significant base case loss on this over-leveraged mezzanine position in its base scenario.
This transaction was analyzed according to the 'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions', which applies stresses to property cash flows and debt service coverage ratio (DSCR) tests to project future default levels for the underlying portfolio. Recoveries are based on stressed cash flows and Fitch's long-term capitalization rates. The default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under the various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. Based on this analysis, the breakeven rates for classes A-1, A-2, and B are generally consistent with the ratings assigned below.
The 'CCC' 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 class' credit enhancement. These classes were assigned Recovery Ratings (RR) in order to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities.
The portfolio is considered concentrated with only 14 assets remaining in the transaction. The Negative Rating Outlooks reflect the possibility that while many of these assets are modeled to default, actual losses could exceed modeled losses due to potential further negative credit migration.
Fitch has affirmed and revised LS and Recovery Ratings for the following classes, as indicated:
--$196,499,188 class A-1 at 'BBB/LS3'; Outlook Negative;
--$91,677,034 class A-2 to 'BB/LS4' from 'BB/LS5; Outlook Negative;
--$58,613,508 class B at 'B/LS5'; Outlook Negative;
--$25,605,275 class C to 'CCC/RR4' from 'CCC/RR3';
--$12,052,275 class D at 'CCC/RR6';
--$9,795,339 class E at 'CCC/RR6';
--$20,359,360 class F at 'CCC/RR6';
--$14,341,699 class G at 'CCC/RR6'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 13, 2010);
--' Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Dec. 2, 2010);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 15, 2010);
--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009);
--'Criteria for Structured Finance Recovery Ratings' (Aug. 17, 2009);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 17, 2010);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Feb. 17, 2010).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=579165
Global Rating Criteria for Structured Finance CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564895
Criteria for Structured Finance Loss Severity Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=426038
Criteria for Structured Finance Recovery Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462434
Global Criteria for Cash Flow Analysis in CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=557485
Criteria for Interest Rate Stresses in Structured Finance Transactions (Global SF)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=500306
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