Release date- 26052016 - Rating Action: Moody's Affirms Four and Downgrades Five Classes of CD 2006-CD3.
Moody's Investors Service, ('Moody's') has affirmed the ratings on four classes and downgraded the ratings on five classes in CD 2006-CD3 Commercial Mortgage Trust, Commercial Mortgage Pass Through Certificates, Series 2006-CD3 as follows:
Cl. A-1S, Affirmed Aaa (sf); previously on Jun 12, 2015 Affirmed Aaa (sf)
Cl. A-5, Affirmed Aaa (sf); previously on Jun 12, 2015 Affirmed Aaa (sf)
Cl. A-M, Affirmed A1 (sf); previously on Jun 12, 2015 Affirmed A1 (sf)
Cl. A-1A, Downgraded to Caa2 (sf); previously on Jun 12, 2015 Affirmed B3 (sf)
Cl. A-J, Downgraded to Caa2 (sf); previously on Jun 12, 2015 Affirmed B3 (sf)
Cl. B, Downgraded to Caa3 (sf); previously on Jun 12, 2015 Affirmed Caa1 (sf)
Cl. C, Downgraded to C (sf); previously on Jun 12, 2015 Downgraded to Caa3 (sf)
Cl. D, Affirmed C (sf); previously on Jun 12, 2015 Affirmed C (sf)
Cl. XS, Downgraded to Caa1 (sf); previously on Jun 12, 2015 Affirmed B1 (sf)
The ratings on three P&I classes, Class A-1S, A-5 and A-M, were affirmed because the transaction's key metrics, including Moody's loan-to-value (LTV) ratio, Moody's stressed debt service coverage ratio (DSCR) and the transaction's Herfindahl Index (Herf), are within acceptable ranges. The rating on Class D was affirmed because the ratings are consistent with Moody's expected loss.
The ratings on four P&I classes, Class A-1A, A-J, B and C, were downgraded due to anticipated losses from specially serviced and troubled loans that are higher than Moody's had previously expected.
The rating on the IO Class, Class XS, was downgraded due to the decline in the credit performance of its reference classes resulting from principal paydowns of higher quality reference classes.
Moody's rating action reflects a base expected loss of 19.6% of the current balance, compared to 8.9% at Moody's last review. Moody's base expected loss plus realized losses is now 17.0% of the original pooled balance, compared to 14.3% at the last review. Moody's provides a current list of base expected losses for conduit and fusion CMBS transactions on moodys.com at http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF215255.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:
The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range can indicate that the collateral's credit quality is stronger or weaker than Moody's had previously expected.
Factors that could lead to an upgrade of the ratings include a significant amount of loan paydowns or amortization, an increase in the pool's share of defeasance or an improvement in pool performance.
Factors that could lead to a downgrade of the ratings include a decline in the performance of the pool, loan concentration, an increase in realized and expected losses from specially serviced and troubled loans or interest shortfalls.
METHODOLOGY UNDERLYING THE RATING ACTION
The methodologies used in these ratings were 'Approach to Rating US and Canadian Conduit/Fusion CMBS' published in December 2014, and 'Moody's Approach to Rating Large Loan and Single Asset/Single Borrower CMBS' published in October 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
DESCRIPTION OF MODELS USED
Moody's review used the excel-based CMBS Conduit Model, which it uses for both conduit and fusion transactions. Credit enhancement levels for conduit loans are driven by property type, Moody's actual and stressed DSCR, and Moody's property quality grade (which reflects the capitalization rate Moody's uses to estimate Moody's value). Moody's fuses the conduit results with the results of its analysis of investment grade structured credit assessed loans and any conduit loan that represents 10% or greater of the current pool balance.
Moody's uses a variation of Herf to measure the diversity of loan sizes, where a higher number represents greater diversity. Loan concentration has an important bearing on potential rating volatility, including the risk of multiple notch downgrades under adverse circumstances. The credit neutral Herf score is 40. The pool has a Herf of 19, compared to 28 at Moody's last review.
When the Herf falls below 20, Moody's uses the excel-based Large Loan Model and then reconciles and weights the results from the conduit and large loan models in formulating a rating recommendation. The large loan model derives credit enhancement levels based on an aggregation of adjusted loan-level proceeds derived from Moody's loan-level LTV ratios. Major adjustments to determining proceeds include leverage, loan structure, property type and sponsorship. Moody's also further adjusts these aggregated proceeds for any pooling benefits associated with loan level diversity and other concentrations and correlations.
As of the May 17, 2016 distribution date, the transaction's aggregate certificate balance has decreased by 61.4% to $1.4 billion from $3.6 billion at securitization. The certificates are collateralized by 95 mortgage loans ranging in size from less than 1% to 12.7% of the pool, with the top ten loans constituting 51.9% of the pool. Nineteen loans, constituting 8.8% of the pool, have defeased and are secured by US government securities.
Forty loans, constituting 35.3% of the pool, are on the master servicer's watchlist. The watchlist includes loans that meet certain portfolio review guidelines established as part of the CRE Finance Council (CREFC) monthly reporting package. As part of Moody's ongoing monitoring of a transaction, the agency reviews the watchlist to assess which loans have material issues that could affect performance.
Forty-five loans have been liquidated from the pool, resulting in an aggregate realized loss of $336.7 million (for an average loss severity of 41%). Twelve loans, constituting 29% of the pool, are currently in special servicing. The largest specially serviced loan is the Fair Lakes Office Portfolio Loan (for $142.5 million -- 10.3% of the pool), which represents a 55% pari-passu interest in a $259.0 million first mortgage loan secured by a 1.25 million square foot (SF) office park located in Fairfax, Virginia. The complex is located 15 miles west of Washington D.C., and consists of nine class A buildings ranging in size from 75,000 SF to 275,000 SF. The loan transferred to special servicing in June 2015 for imminent default; due to the anticipated loss of the largest tenant, SRA International (21% of the property NRA; lease expiration of December 2015). SRA International has since vacated and the remaining three largest tenants all have lease expiration dates within the next three years. As per the April 2016 rent roll the property was 56% leased, compared to 82% as of March 2015 and 99% at securitization. The Special Servicer will pursue a title transfer through a deed in lieu of foreclosure.
The remaining 11 specially serviced loans are secured by a mix of property types. Moody's estimates an aggregate $210 million loss for the specially serviced loans (53% expected loss on average).
Moody's has assumed a high default probability for 8 poorly performing loans, constituting 4.4% of the pool, and has estimated an aggregate loss of $6.6 million (a 10.9% expected loss on average) from these troubled loans.
Moody's received full year 2014 operating results for 88% of the pool and full or partial year 2015 operating results for 89% of the pool. Moody's weighted average conduit LTV is 105.5%, compared to 111.1% at Moody's last review. Moody's conduit component excludes loans with structured credit assessments, defeased and CTL loans, and specially serviced and troubled loans. Moody's net cash flow (NCF) reflects a weighted average haircut of 13.8% to the most recently available net operating income (NOI). Moody's value reflects a weighted average capitalization rate of 9.5%.
Moody's actual and stressed conduit DSCRs are 1.21X and 1.02X, respectively, compared to 1.23X and 1.02X at the last review. Moody's actual DSCR is based on Moody's NCF and the loan's actual debt service. Moody's stressed DSCR is based on Moody's NCF and a 9.25% stress rate the agency applied to the loan balance.
The top three conduit loans represent 20.6% of the pool balance. The largest loan is the InterContinental Boston Hotel Loan ($175 million -- 12.7% of the pool), which is secured by a 424-room, luxury hotel located in Boston's Financial District. The building is 20-stories, of which the first 12 floors are collateral for the loan and the top eight floors of the building contain 130 luxury residential condominium apartments. The hotel was constructed in 2006 and benefits from a strong brand affiliation with the Intercontinental Hotel Group (IHG), which signed a 99-year triple net lease and guaranteed rental payments for the first 25 years. The loan is interest-only throughout its 15-year term. Additionally, there is mezzanine debt with a current balance of $23 million. The sponsor is the Extell Development Company. Moody's LTV and stressed DSCR are 147% and 0.75X, respectively, the same as at the last review.
The second largest loan is The Hay-Adams Loan ($70.4 million -- 5.1% of the pool), which is secured by an 145 key, full service, luxury hotel located in Washington, D.C.; directly across the street from the White House. The December 2015 trailing twelve month occupancy was 70.8%, with an average daily rate of $470.56 and revenue per available room of $333.33, compared to the December 2014 trailing twelve month occupancy of 70.8%, with an average daily rate of $476.87 and revenue per available room of $337.52. Moody's LTV and stressed DSCR are 116% and 0.93X, respectively, compared to 114% and 0.95X at the last review.
The third largest loan is the Lightstone MI Tranche I Loan ($38.2 million -- 2.8% of the pool), which is secured by four multifamily properties with a total of 1,017 units located in Michigan. As per the March 2016 rent roll the portfolio was 98.6% occupied. Moody's LTV and stressed DSCR are 79% and 1.19X, respectively, compared to 82% and 1.16X at the last review.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.
The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.
Moody's did not use any stress scenario simulations in its analysis.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Structured Finance Group
Moody's Investors Service, Inc.
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Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007