NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded two classes and affirmed 11 classes of Morgan Stanley Capital I Trust series 2007-XLF (MSCI 2007-XLF). The downgrades reflect an increased base case expected loss for the transaction. Fitch's performance expectations incorporate prospective views regarding the outlook of the commercial real estate market. A detailed list of rating actions follows at the end of this release.
KEY RATING DRIVERS
While credit enhancement to the more senior classes has improved significantly over the last year, the transaction faces increased concentration risk with only three hotel loans remaining, two of which are currently in special servicing.
Under Fitch's methodology, all loans are 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% and pooled expected losses are 4%. To determine a sustainable Fitch cash flow and stressed value, Fitch analyzed servicer-reported operating statements, recent valuations, STR reports, and market information. Fitch estimates that average recoveries will be strong at approximately 96% in the base case.
With respect to the pooled classes, two loans were modeled to take a loss in the base case: HRO Hotel Portfolio (45.2% of the pooled trust balance), and the former Le Meridien Cancun (7.4%). Two junior non-pooled component HRO Hotel Portfolio classes have either incurred or are expected to incur losses.
The largest component of Fitch's base case loss expectation is a defaulted A-note secured by the HRO Hotel Portfolio, which consists 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. While performance has improved over the last few years, the portfolio has not performed up to initial expectations. As of the trailing 12 months (TTM) February 2013 STR report, the portfolio had a weighted average RevPAR of $79 up from $73 as of year-end (YE) 2011 and $68 as of YE 2010. The portfolio matured without repayment at its final extended maturity of October 2012. Discussions are underway between the borrower, subordinate debt holders, and special servicer regarding a potential loan modification/extension.
The next largest component of Fitch's base case loss expectation is a specially serviced whole loan secured by the former Le Meridien Cancun, now known as the Sandos Cancun Luxury Experience Resort, an all-inclusive hotel containing 214 rooms. While to date all monthly debt service payments are current, the loan matured without full repayment in December 2012. The loan has two remaining one-year extension options available, and the exercise of the first option is currently under discussion. The property has struggled over the past few years and the servicer reported YE 2012 NOI was negative. Cash flow is expected to improve as the transition to the Sandos flag is completed and hotel operations fully ramp up.
RATING SENSITIVITIES
Upgrades to classes B and below are not expected due to the highly concentrated nature of the remaining portfolio. Further, classes B and below have been subjected to interest shortfalls; and while interest shortfalls to classes B through F have been cured, Fitch believes that there is a possibility that interest shortfalls could again affect these classes. Fitch will not assign or maintain 'AAAsf' or 'AAsf' ratings for notes that it considers to have a high level of vulnerability to interest shortfalls or deferrals. The Negative Outlook on class A2 reflects the possibility that this class could also be affected by a future interest shortfall. The ratings of classes G and H could be subject to further downgrades should additional losses be realized.
Fitch downgrades the following classes and assigns Recovery Estimates (REs) as indicated:
--$13.5 million class H to 'CCCsf' from 'BBsf'; RE 90%;
--$6 million class M-HRO to 'CCCsf' from 'BBsf'; RE 0%;
Fitch affirms the following classes and assigns or revises Outlooks and Recovery Estimates (REs) as indicated:
--$78.2 million class A-2 at 'AAAsf'; Outlook Negative;
--$41.2 million class B at 'Asf'; Outlook Stable;
--$41.2 million class C at 'Asf'; Outlook Stable;
--$25.2 million class D at 'Asf'; Outlook Stable;
--$27.4 million class E at 'Asf'; Outlook Stable;
--$26.3 million class F at 'BBBsf'; Outlook Stable;
--$26.6 million class G at 'BBsf'; Outlook to Negative from Stable;
--$10.4million class J at 'Dsf'; RE 0%;
--$0 class K at 'Dsf'; RE 0%;
--$0 class L at 'Dsf'; RE 0%;
--$8 million class N-HRO at 'Dsf'; RE 0%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'Criteria for Rating Caps in Global Structured Finance Transactions', dated Aug. 2, 2012;
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Nov. 29, 2012).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679923
Criteria for Rating Caps in Global Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684737
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=695733
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791984
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.