Fitch Upgrades 2 Classes of ML-CFC 2006-3
KEY RATING DRIVERS
The upgrades reflect the increase in credit enhancement due to significant loan paydown since Fitch's last rating action. Since September 2015 the pool has paid down $1.47 billion (61% of the original pool balance), of which 20 loans totalling $406.5 million paid in full with the August 2016 remittance date. The affirmations on the distressed classes reflect the concentrated nature and adverse selection of the remaining pool, with only 37 of the original 213 loans remaining.
Fitch modeled losses of 31% of the remaining pool; expected losses on the original pool balance total 9.3%, including $144 million (5.9% of the original pool balance) in realized losses to date. The remaining pool contains a significant number of underperforming assets in secondary markets, with performance volatility concerns. Fitch has designated 24 loans (64% of the current pool balance) as Fitch Loans of Concern, which includes 14 specially serviced assets (34%). The pool also faces near-term maturity risks, with the most of remaining non-specially serviced loans scheduled to mature by year end 2016 (16 loans 47.5%) and 2017 (two loans 12.2%).
As of the August 2016 distribution date, the pool's aggregate principal balance has been reduced by 89% to $258.8 million from $2.43 billion at issuance. There are currently no defeased loans. Interest shortfalls are currently affecting classes E through Q.
The largest contributor to expected losses is secured by a 295,000 square foot (sf) retail center located in Woonsocket, RI (8.5%) anchored by Sears (20.5% of the net rentable area). The loan, which is currently the third largest in the pool, transferred to special servicing in June 2013 due to monetary default. The property had experienced cash flow issues due to the expiration of an anchor tenant's lease in 2013 (Shaw's Supermarket, previously 18% of the net rentable area). The special servicer had pursued foreclosure, and the property became REO as of April 2014. Occupancy was reported at 64% as of June 2016. The servicer is working to stabilize leasing at the property, but has reported significant leasing challenges due to deteriorating market conditions including large box vacancies expected at neighbouring properties. In addition, the subject properties' second largest tenant, Savers (10% NRA), has indicated they would be vacating the property prior to their November 2018 lease expiration.
The second largest contributor to Fitch-modeled losses is secured by a portfolio of three retail centers totalling 98,902 sf, and all shadow anchored by Walmart. The properties are located in three cities throughout PA (Shippensburg, Edinboro, and Bradford). The portfolio has experienced cash flow issues due to occupancy declines, in addition to amortization payments which began in August 2009. The loan transferred to special servicing in April 2010, and was eventually foreclosed on in August 2014. The servicer included the properties in a November 2015 auction. None of the offers received were accepted by the lender. The servicer continues to work on stabilizing leasing at the properties and marketing them for sale. Occupancy for the portfolio was reported at 69% as of August 2016.
The Rating Outlooks on classes AJ and B are considered Stable due to sufficient credit enhancement. Although credit enhancement on these classes is high, Fitch remains concerned with the increasing concentrations, the near term loan maturities, as well as performance volatility and adverse selection of the remaining collateral in the pool. The classes are subject to downward rating migration should realized losses exceed Fitch's expectation, or should loans not refinance at maturity as expected. Distressed classes (those rated below 'B') may be subject to further downgrades as additional losses are realized.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has upgraded the following ratings:
--$108.8 million class AJ to to 'BBBsf' from 'BBsf'; Outlook Stable;
--$48.5 million class B to to 'Bsf' from 'CCCsf'; Stable Outlook assigned.
Fitch has affirmed the following classes:
--$18.2 million class C at 'CCsf'; RE 100%;
--$48.5 million class D at 'Csf'; RE 10%;
--$21.2 million class E at 'Csf'; RE 0%;
--$13.6 million class F at 'Dsf'; RE 0%;
--$0 million class G at 'Dsf'; RE 0%;
--$0 million class H at 'Dsf'; RE 0%;
--$0 class J at 'Dsf'; RE 0%;
--$0 class K at 'Dsf'; RE 0%;
--$0 class L at 'Dsf'; RE 0%;
--$0 class M at 'Dsf'; RE 0%;
--$0 class N at 'Dsf'; RE 0%;
--$0 class P at 'Dsf'; RE 0%.
The class A-1, A-2 A-3, A-SB, A-4, A-1A, and AM certificates have paid in full. Fitch does not rate the class Q certificate or the interest only class XR certificate. Fitch previously withdrew the ratings on the interest-only class XP and XC certificates.