Jan 29 - Fitch Ratings has affirmed five and downgraded two classes of
Morgan Stanley 2007-XLC1, Ltd. and Morgan Stanley 2007-XLC1, LLC, (Morgan
Stanley 2007-XLC1) reflecting Fitch's base case loss expectation of 45.3%.
Fitch's performance expectation incorporates prospective views regarding
commercial real estate market value and cash flow declines. A detailed list of
rating actions follows at the end of this release.
The portfolio is very concentrated with only six assets remaining. Current CDO
collateral consists of mezzanine debt (77.6%), an A-note (15.1%), one REO asset
(6.8%), and a B-note (0.5 %). The current percentage of defaulted assets and
loans of concern is 38.2% and 23.2%, respectively, compared to 4.8% and 67.9% at
Since Fitch's last rating action, the senior class, A-2, has received additional
pay down of $71.5 million due to the full payoff of four loans, property
releases, and partial pay downs. Further, as of the January 2013 trustee report,
the CDO is failing its C/D/E and F/G/H overcollateralization test resulting in
the diversion of interest payments for classes F and below towards principal of
the senior class. The transaction has also suffered from recent interest
coverage failures, including the October through December 2012 tests.
Under Fitch's methodology, approximately 80.9% of the portfolio is modeled to
default in the base case stress scenario, defined as the 'B' stress. Modeled
recoveries average 44%.
The largest component of Fitch's base case loss expectation is a defaulted
mezzanine loan (31.4%) 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. The portfolio matured without repayment in October 2012. Fitch
modeled a 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
(15.1%) 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 (sf) of office/industrial space, and 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 (DSCR) tests to
project future default levels for the underlying portfolio. Recoveries for the
loan assets 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 default
timing and interest rate stress scenarios, as described in the report 'Global
Criteria for Cash Flow Analysis in CDOs'. Based on this analysis, the breakeven
rates for classes A-2 through C are generally consistent with the ratings
assigned below. Negative Outlooks were assigned based on the potential for
further negative credit migration of this highly concentrated portfolio.
The 'CCC' and below ratings for classes D through 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 affirms the following classes, and revises Outlooks as indicated:
--$18.4 million class A-2 at 'BBBsf'; Outlook to Negative from Positive;
--$58.6 million class B at 'BBsf'; Outlook to Negative from Stable;
--$25.5 million class C at 'Bsf'; Outlook to Negative from Stable;
--$12 million class D at 'CCCsf'; RE 100%;
--$9.8 million class E at 'CCCsf'; RE 0%.
Fitch downgrades the following classes as indicated:
--$20.3 million class F to 'CCsf' from 'CCCsf'; RE 0%;
--$14.3 million class G to 'C' from 'CCCsf'; RE 0%.
Class A-1 has paid in full.
Primary Surveillance Analyst
One State Street Plaza
New York, NY 10004
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email:
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' (June 6, 2012);
--'Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate
Transactions' (Nov. 29, 2012);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan.
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18,
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Surveillance Criteria for U.S. CREL CDOs and CMBS Large Loan Floating-Rate
Global Criteria for Cash Flow Analysis in CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Structured Finance Recovery Estimates for Distressed Securities
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FITCH TAKES VARIOUS ACTIONS ON MORGAN STANLEY 2007-XLC1