Fitch Upgrades 3 Classes of Morgan Stanley 2007-XLC1

Fitch Upgrades 3 Classes of Morgan Stanley 2007-XLC1 | Bild: © ad-hoc-news

The upgrades to class A-2 through C reflect improved credit enhancement as a result of significant paydown to the transactions senior liabilities, including the full payment of class A-1. Since the last rating action, scheduled amortization, property releases, partial paydowns related to loan modifications, and the full payoff of three loans have resulted in total paydown of over $195 million (17% of the original deal balance), as of the January 2012 trustee report. Further the CDO is failing its F/G/H overcollateralization test resulting in the diversion of interest payments for classes J and below toward principal of the senior classes.

The portfolio is very concentrated with only 10 loans remaining. Current collateralized debt obligation consists of mezzanine debt (60.4%), A-notes (15.5%), and B-notes (12.9%). After the most recent trustee report was issued, an additional mezzanine loan (6.6% was wiped out by the severely distressed sale of the mall property backing the loan. The current percentage of defaulted assets and Loans of Concern is 4.8% and 67.9%, respectively.

Under Fitch's methodology, approximately 88.8% 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 6.7% from, generally, trailing 12-month second or third quarter 2011.

The largest component of Fitch's base case loss expectation is a mezzanine loan (24.3%) 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 economic conditions, the portfolio has not performed up to expectations. Current cash flow does not support a stressed debt service. Fitch modeled a term default and substantial loss on this position in its base case scenario.

The next largest component of Fitch's base case loss expectation is an A-note secured by approximately 60 acres of land located in Las Vegas, NV. The property, which is in the process of being master planned and rezoned for development, is currently comprised of improved land with 457 apartments and 425,000 square feet of office/industrial space, with 20 acres of vacant land. Fitch modeled a term default and significant loss on this position in its base case 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 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 defaults timing and interest rate stress scenarios as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. The breakeven rates for classes A-2 through C pass the cash flow model at the ratings listed below. Further, due to the concentrated nature of the pool and significant percentage of defaulted assets and Fitch Loans of Concern, Fitch performed additional sensitivity analysis, which assumed all loans had a term default, as well as applied additional cash flow stresses. In this scenario, the credit enhancement for classes A-2 thru C is consistent with the ratings listed below.

The Positive and Stable Outlooks on classes A-2 thru C reflect the classes' senior position in the capital structure and the substantial credit enhancement to the classes.

The 'CCC' ratings for classes D thru 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 classes' credit enhancement.

Fitch upgrades the following classes and assign or revises Outlooks as indicated:

--$89,922,416 class A-2 to 'BBBsf' from 'BBsf'; Outlook to Positive from Negative;

--$58,613,508 class B to 'BBsf' from 'Bsf; Outlook to

Stable from Negative;

--$25,549,254 class C to 'Bsf' from 'CCCsf'; Outlook Stable.

In addition, Fitch affirms the following classes:

--$12,022,835 class D at 'CCCsf'; RE 100%;

--$9,768,918 class E at 'CCCsf'; RE 100%;

--$20,288,900 class Finance at 'CCCsf'; RE 0%;

--$14,277,482 class G at ' CCCsf'; RE 0%

Class A-1 has paid in full.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (Aug. 4, 2011);

--' Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate Transactions' (Dec. 1, 2011);

--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 21, 2011);

--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 16, 2011).

Applicable Criteria and Related Research:

Structured Finance Recovery Estimates for Distressed Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656557

Criteria for Interest Rate Stresses in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605426

Global Criteria for Cash Flow Analysis in CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=650717

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=657734

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