Approximately $14.7 Million of Structured Securities Affected
New York, October 11, 2012 -- Moody's Investors Service (Moody's) affirmed the ratings of four classes of LB Commercial Mortgage Trust 1999-C2, Commercial Mortgage Pass-Through Certificates, Series 1999-C2 as follows:
Cl. H, Affirmed at Aaa (sf); previously on Oct 13, 2011 Upgraded to Aaa (sf)
Cl. J, Affirmed at Baa3 (sf); previously on Oct 13, 2011 Upgraded to Baa3 (sf)
Cl. K, Affirmed at C (sf); previously on Jan 13, 2011 Downgraded to C (sf)
Cl. X, Affirmed at Caa3 (sf); previously on Feb 22, 2012 Downgraded to Caa3 (sf)
The affirmations of the three principal bonds are due to key rating parameters, including WARF and base expected loss, remaining within acceptable ranges. Based on our current base expected loss, the credit enhancement levels for the affirmed classes are sufficient to maintain their current ratings.
The rating of the IO Class, Class X, is consistent with the expected credit performance of its referenced classes and thus is affirmed.
Moody's rating action reflects a cumulative base expected loss of 6.1% of the current pooled balance. At last review, Moody's cumulative base expected loss was 6.8%. Moody's provides a current list of base expected losses for conduit and fusion CMBS transactions on moodys.com at http://v3.moodys.com/viewresearchdoc.aspx?docid=PBS_SF215255. Depending on the timing of loan payoffs and the severity and timing of losses from specially serviced loans, the credit enhancement level for investment grade classes could decline below the current levels. If future performance materially declines, the expected level of credit enhancement and the priority in the cash flow waterfall may be insufficient for the current ratings of these classes.
Moody's analysis reflects a forward-looking view of the likely range of collateral performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside an acceptable range of the key parameters may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated during the current review. Even so, deviation from the expected range will not necessarily result in a rating action. There may be mitigating or offsetting factors to an improvement or decline in collateral performance, such as increased subordination levels due to amortization and loan payoffs or a decline in subordination due to realized losses.
Primary sources of assumption uncertainty are the extent of growth in the current macroeconomic environment and commercial real estate property markets. Commercial real estate property values are continuing to move in a positive direction along with a rise in investment activity and stabilization in core property type performance. Limited new construction and moderate job growth have aided this improvement. However, a consistent upward trend will not be evident until the volume of investment activity steadily increases for a significant period, non-performing properties are cleared from the pipeline, and fears of a Euro area recession are abated.
The hotel sector is performing strongly with eight straight quarters of growth and the multifamily sector continues to show increases in demand with a growing renter base and declining home ownership. Slow recovery in the office sector continues with minimal additions to supply. However, office demand is closely tied to employment, where growth remains slow and employers are considering decreases in the leased space per employee. Also, primary urban markets are outperforming secondary suburban markets. Performance in the retail sector continues to be mixed with retail rents declining for the past four years, weak demand for new space and lackluster sales driven by discounting and promotions. However, rising wages and reduced unemployment, along with increased consumer confidence, is helping to spur consumer spending resulting in increased sales. Across all property sectors, the availability of debt capital continues to improve with robust securitization activity of commercial real estate loans supported by a monetary policy of low interest rates.
Moody's central global macroeconomic scenario maintains its forecast of relatively robust growth in the US and an expectation of a mild recession in the euro area for 2012. Downside risks remain significant, and elevated downside risks and their materialization could pose a serious threat to the outlook. Major downside risks include: a deeper than expected recession in the euro area; the potential for a hard landing in major emerging markets; an oil supply shock; and material fiscal tightening in the US given recent political gridlock. Healthy but below-trend growth in GDP is expected through the rest of this year and next with risks trending to the downside.
In rating this transaction, Moody's used its credit-tenant lease ("CTL") financing methodology approach ("CTL" approach) . Under Moody's CTL approach, the rating of a transaction's certificates is primarily based on the senior unsecured debt rating (or the corporate family rating) of the tenant, usually an investment grade rated company, leasing the real estate collateral supporting the bonds. This tenant's credit rating is the key factor in determining the probability of default on the underlying lease. The lease generally is "bondable", which means it is an absolute net lease, yielding fixed rent paid to the trust through a lock-box, sufficient under all circumstances to pay in full all interest and principal of the loan. The leased property should be owned by a bankruptcy-remote, special purpose borrower, which grants a first lien mortgage and assignment of rents to the securitization trust. The dark value of the collateral, which assumes the property is vacant or "dark", is then examined to determine a recovery rate upon a loan's default. Moody's also considers the overall structure and legal integrity of the transaction. For deals that include a pool of credit tenant loans, Moody's currently uses a Gaussian copula model, incorporated in its public CDO rating model CDOROMv2.8-8 to generate a portfolio loss distribution to assess the ratings.
The other methodology used in this rating was "Moody's Approach to Rating Structured Finance Interest-Only Securities" published in February 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Moody's review also incorporated the CMBS IO calculator ver1.1 which uses the following inputs to calculate the proposed IO rating based on the published methodology: original and current bond ratings and credit estimates; original and current bond balances grossed up for losses for all bonds the IO(s) reference(s) within the transaction; and IO type corresponding to an IO type as defined in the published methodology. The calculator then returns a calculated IO rating based on both a target and mid-point . For example, a target rating basis for a Baa3 (sf) rating is a 610 rating factor. The midpoint rating basis for a Baa3 (sf) rating is 775 (i.e. the simple average of a Baa3 (sf) rating factor of 610 and a Ba1 (sf) rating factor of 940). If the calculated IO rating factor is 700, the CMBS IO calculator ver1.1 would provide both a Baa3 (sf) and Ba1 (sf) IO indication for consideration by the rating committee.
Moody's ratings are determined by a committee process that considers both quantitative and qualitative factors. Therefore, the rating outcome may differ from the model output.
The rating action is a result of Moody's on-going surveillance of commercial mortgage backed securities (CMBS) transactions. Moody's monitors transactions on a monthly basis through a review utilizing MOST® (Moody's Surveillance Trends) Reports and a proprietary program that highlights significant credit changes that have occurred in the last month as well as cumulative changes since the last full transaction review. On a periodic basis, Moody's also performs a full transaction review that involves a rating committee and a press release. Moody's prior transaction review is summarized in a press release dated October 13, 2011.
As of the September 17, 2012 distribution date, the transaction's aggregate certificate balance has decreased by 98% to $14.7 million from $892.4 million at securitization. The Certificates are collateralized by 12 mortgage loans ranging in size from less than 1% to 12% of the pool, with the top ten loans representing 92% of the pool. The pool originally included two loans with credit assessments, 120 conduit loans and 12 CTL loans. Due to paydowns, the entirety of the pool now consists of CTL loans.
There are currently no loans on the master servicer's watchlist or in the special servicing.
Twenty-seven loans have been liquidated from the pool, resulting in an aggregate realized loss of $23.4 million (23% loss severity on average). Due to realized losses, classes L, M, N and P have been eliminated entirely and class K has experienced a 26% principal loss.
The CTL loans are secured by 12 properties leased to four tenants. The exposures are CVS/Caremark Corp. (Moody's senior unsecured rating Baa2 - positive outlook; 71% of the pool), Rite Aid Corporation (Moody's senior unsecured rating Caa2/Caa3 - stable outlook; 14% of the pool), Walgreen Co. (Moody's senior unsecured rating Baa1 - negative outlook; 11% of the pool), and McDonald's Corporation (Moody's senior unsecured rating A2 - stable outlook; 4% of the pool).
The bottom-dollar weighted average rating factor (WARF) for this pool is 1,210 compared to 1,213 at last review. WARF is a measure of the overall quality of a pool of diverse credits. The bottom-dollar WARF is a measure of the default probability within the pool.
The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.
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Dariusz SurmaczAsst Vice President - Analyst Structured Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael Gerdes MD - Structured Finance Structured Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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