S&P: Merrill Lynch Mortgage Trust 2006-C2 Rating Raised On One Class; One Rating Affirmed
The rating actions follow our analysis of the transaction, primarily using ourcriteria for rating U. S. and Canadian CMBS transactions, which included a review of the credit characteristics and performance of the remaining loans inthe pool, the transaction’s structure, and the liquidity available to the trust.
We raised our rating on class A-J to 'BB - (sf)' from 'B (sf)' to reflect our expectation of the available credit enhancement for this class, which we believe is greater than our most recent estimate of necessary credit enhancement for the rating level. The upgrade also reflects our views regarding the current and future performance of the transaction's collateral, the available liquidity support, and the significant reduction in the trust balance.
While available credit enhancement suggests further positive rating movement on class A-J, our analysis also considered the certificates' susceptibility toreduced liquidity support from the eight specially serviced loans ($32.8 million, 50.8%).
The affirmation of the 'CCC (sf)' rating on class B, which has carried accumulated interest shortfalls for the past five consecutive months, reflectsour belief that the class is susceptible to ongoing interest shortfalls due tothe eight specially serviced loans. As of the Aug. 30, 2016, revised trustee remittance report, the trust experienced net interest shortfalls of $99,364, primarily reflecting: $51,616 in workout fees, $48,807 in interest deferred onmodified loans, and $4,461 in net special servicing fees.
As of the Aug. 30, 2016, revised trustee remittance report, the collateral pool balance was $64.5 million, which is 4.2% of the pool balance at issuance. The pool currently includes 12 loans (reflecting crossed loans), down from 121loans at issuance. Eight of these loans are with the special servicer (including one loan that was transferred after the release of the August 2016 trustee remittance report), and one loan ($9.1 million, 14.1%) is on the master servicers' combined watchlist. The master servicers, Wells Fargo Bank N. A. and Prudential Asset Resources, reported financial information for 84.4% of the loans in the pool, all of which was either partial-year or year-end 2015 data.
Excluding the eight specially serviced assets and two subordinate B hope notes($8.8 million, 13.6%), we calculated a 1.18x S&P Global Ratings' weighted average debt service coverage (DSC) and 56.7% S&P Global Ratings' weighted average loan-to-value (LTV) ratio using a 7.63% S&P Global Ratings' weighted average capitalization rate for the performing loans in the transaction.
To date, the transaction has experienced $147.3 million in principal losses, or 9.6% of the original pool trust balance. We expect losses to reach approximately 10.0% of the original pool trust balance in the near term, basedon losses incurred to date and additional losses we expect upon the eventual resolution of the specially serviced loans.
As of the Aug. 30, 2016, revised trustee remittance report, eight loans in thepool were with the special servicer, C-III Asset Management LLC (C-III). Details of the two largest specially serviced loans are as follows:
Windmill Lakes ($7.8 million, 12.1%) is the third-largest loan in the pooland has a reported total exposure of $7.9 million. The loan is secured by a 70,949-sq.-ft retail property in Batavia, Ill. The loan was transferred to C-III in July 2016 due to maturity default. The reported DSC and occupancy as of year-end 2015 were 1.04x and 94.8%, respectively. We expect a minimal loss upon this loan's eventual resolution.
The SSA - Roseville, CA loan ($5.5 million, 8.6%) has a reported total exposure of $5.6 million. The loan is secured by a 24,500-sq.-ft. suburbanoffice in Roseville, Calif. The loan was transferred to C-III in July 2016due to maturity default. The reported DSC and occupancy as of year-end 2015 were 2.12x and 100.0%, respectively. We expect a minimal loss upon this loan's eventual resolution.
The six remaining assets with the special servicer each have individual balances that represent less than 8.5% of the total pool trust balance. We estimated losses for the eight specially serviced assets, arriving at a weighted-average loss severity of 21.3%.
With respect to the specially serviced assets noted above, a minimal loss is less than 25%.