S&P: Three Ratings Affirmed And Five Ratings Lowered From LB-UBS Commercial Mortgage Trust 2006-C3
Our rating actions on the certificates follow our analysis of the transaction, primarily using our criteria for rating U. S. and Canadian CMBS transactions, which included a review of the credit characteristics and performance of the remaining assets in the pool, the transaction's structure, and the liquidity available to the trust.
The downgrades on classes E and F reflect credit support erosion that we anticipate will occur upon the eventual resolution of the six assets ($86.2 million, 91.6%) with the special servicer (discussed below). They also reflectreduced liquidity support available to these classes because of ongoing interest shortfalls and expected future appraisal subordination entitlement reductions. In addition, we lowered our rating on class F to 'D (sf)' because we expect the accumulated interest shortfalls to remain outstanding for the foreseeable future. Class F has accumulated interest shortfalls outstanding for seven months.
We also lowered our ratings on classes NBT2, NBT3, and NBT4 to 'D (sf)' because we expect the accumulated interest shortfalls, which have been outstanding for seven consecutive months, to remain outstanding for the foreseeable future. The performance of all three classes depends upon the Northborough Tower real estate-owned (REO) asset. The REO asset is a 206,553-sq.-ft. office property located in Houston, Texas. The property is 99%economically occupied by a tenant that has vacated the property but continues to perform under a lease that expires in April 2018. The special servicer, C-III Asset Management LLC (C-III), has engaged Transwestern Co. to market theproperty for sale. We previously anticipated the asset resolution to occur by th end of September 2016 (see, "Various Rating Actions Taken On Three Classes From LB-UBS Commercial Mortgage Trust 2006-C3," published May 23, 2016).
According to the Aug. 17, 2016, trustee remittance report, the current monthlyinterest shortfalls to the pooled certificates total $60,615 and resulted primarily from:
Appraisal subordinate entitlement reduction amounts totaling $41,000; and
Special servicing fees totaling $19,608
The current interest shortfalls affected classes subordinate to and including class F.
The affirmations reflect our expectation that the available credit enhancementfor these classes will be within our estimate of the necessary credit enhancement required for the current ratings. The affirmations also reflect our views regarding the current and future performance of the transaction's collateral, the transaction structure, and liquidity support available to the classes.
While available credit enhancement levels suggest positive rating movements onclasses B and C, our analysis also considered the susceptibility to reduced liquidity support from the six specially serviced assets ($86.2 million, 91.6%).
TRANSACTION SUMMARY
As of the Aug. 17, 2016, trustee remittance report, the collateral pool balance was $94.1 million (this excludes the nonpooled balance of the Northborough Tower REO asset), which is 5.5% of the pool balance at issuance. The pool currently includes six loans and one REO asset, down from 118 loans at issuance. Six of these assets ($86.2 million, 91.6%) are with the special servicer; one ($7.9 million, 8.4%) is on the master servicer's watchlist. The master servicer, Wells Fargo Bank N. A., reported financial information for 100% of the loans in the pool, of which 90.1% was year-end 2015 data, and the remainder was partial-year 2015 data.
For the sole performing loan in the pool, we calculated a 0.44x S&P Global Ratings' weighted average debt service coverage (DSC) and 220% S&P Global Ratings' weighted average loan-to-value ratio using a 7.50% S&P Global Ratings' weighted average capitalization rate.
To date, the transaction has experienced $138.5 million in principal losses, or 8.2% of the original pool trust balance. We expect losses to reach approximately 9.9% of the original pool trust balance in the near term, based on losses incurred to date and additional losses we expect upon the eventual resolution of the six specially serviced assets.
CREDIT CONSIDERATIONS
As of the Aug. 17, 2016, trustee remittance reports, six assets in the pool were with C-III. Details of the two largest specially serviced assets are as follows:
The 1 Allen Bradley Drive loan ($52.7 million, 56.0%) is the largest loan in the pool and has a total reported exposure of $53.0 million. The loan is secured by an office property totaling 462,000 sq. ft. and is located in Mayfield Heights, Ohio. The loan was transferred to the special servicer on March 14, 2016, because of maturity default. C-III stated that it is evaluating its options. The loan is current in payment status as of August 2016. The reported DSC and occupancy as of year-end 2015 were 1.30x and 100%, respectively. There is no appraisal reduction amount (ARA) in effect against the loan. We expect a moderate loss upon this loan's eventual resolution.
The 950 Herndon Parkway loan ($17.2 million, 18.2%) has a total reported exposure of $17.7 million. The loan is secured by an office property totaling 91,920 sq. ft. and is located in Herndon, Va. The loan was transferred to special servicer on Jan. 27, 2016, because of maturity default. C-III stated that it is pursuing foreclosure. The reported DSC and occupancy as of year-end2015 were 0.76x and 81.5%, respectively. There is no ARA in effect against theloan. We expect a moderate loss upon this loan's eventual resolution.
The four remaining assets with the special servicer each have individual balances that represent less than 9.0% of the total pool trust balance. We estimated losses for the six specially serviced assets, arriving at a weighted-average loss severity of 34.6%.
With respect to the specially serviced assets noted above, a moderate loss is 26%-59%.
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