Approximately $726.6 Million of Structured Securities Affected
New York, November 30, 2012 -- Moody's Investors Service downgraded the ratings of five classes and affirmed 20 classes of Banc of America Commercial Mortgage Inc., Commercial Mortgage Pass-Through Certificates, Series 2004-3 as follows:
Cl. A-1A, Affirmed at Aaa (sf); previously on Jul 20, 2004 Definitive Rating Assigned Aaa (sf)
Cl. A-5, Affirmed at Aaa (sf); previously on Jul 20, 2004 Definitive Rating Assigned Aaa (sf)
Cl. B, Affirmed at Aa1 (sf); previously on Mar 9, 2007 Upgraded to Aa1 (sf)
Cl. C, Affirmed at Aa2 (sf); previously on Mar 9, 2007 Upgraded to Aa2 (sf)
Cl. D, Downgraded to A3 (sf); previously on Jun 9, 2010 Confirmed at A2 (sf)
Cl. E, Downgraded to Baa1 (sf); previously on Jun 9, 2010 Confirmed at A3 (sf)
Cl. F, Downgraded to Ba1 (sf); previously on Jun 9, 2010 Downgraded to Baa2 (sf)
Cl. G, Downgraded to B3 (sf); previously on Apr 28, 2011 Downgraded to B1 (sf)
Cl. H, Downgraded to C (sf); previously on Dec 1, 2011 Downgraded to Caa3 (sf)
Cl. J, Affirmed at C (sf); previously on Dec 1, 2011 Downgraded to C (sf)
Cl. K, Affirmed at C (sf); previously on Dec 1, 2011 Downgraded to C (sf)
Cl. X, Affirmed at Ba3 (sf); previously on Feb 22, 2012 Downgraded to Ba3 (sf)
Cl. SS-A, Affirmed at Baa1 (sf); previously on Dec 1, 2011 Upgraded to Baa1 (sf)
Cl. SS-B, Affirmed at Baa2 (sf); previously on Dec 1, 2011 Upgraded to Baa2 (sf)
Cl. SS-C, Affirmed at Baa3 (sf); previously on Dec 1, 2011 Upgraded to Baa3 (sf)
Cl. SS-D, Affirmed at Ba1 (sf); previously on Dec 1, 2011 Upgraded to Ba1 (sf)
UH-A, Affirmed at Aaa (sf); previously on Jun 9, 2010 Upgraded to Aaa (sf)
UH-B, Affirmed at Aaa (sf); previously on Dec 1, 2011 Upgraded to Aaa (sf)
UH-C, Affirmed at Aaa (sf); previously on Dec 1, 2011 Upgraded to Aaa (sf)
UH-D, Affirmed at Aa1 (sf); previously on Dec 1, 2011 Upgraded to Aa1 (sf)
UH-E, Affirmed at Aa2 (sf); previously on Dec 1, 2011 Upgraded to Aa2 (sf)
UH-F, Affirmed at Aa3 (sf); previously on Dec 1, 2011 Upgraded to Aa3 (sf)
UH-G, Affirmed at A1 (sf); previously on Dec 1, 2011 Upgraded to A1 (sf)
UH-H, Affirmed at A2 (sf); previously on Dec 1, 2011 Upgraded to A2 (sf)
UH-J, Affirmed at A3 (sf); previously on Dec 1, 2011 Upgraded to A3 (sf)
The downgrades are due to an increase in realized and anticipated losses from specially serviced and troubled loans. The affirmations of the principal classes are due to key parameters, including Moody's loan to value (LTV) ratio, Moody's stressed debt service coverage ratio (DSCR) and the Herfindahl Index (Herf), 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 interest only class, Class X is consistent with the credit performance of its referenced classes and thus is confirmed.
Moody's rating action reflects a base expected loss of 3.3% of the current balance compared to 2.6% at 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. 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.
The methodologies used in this rating were "Moody's Approach to Rating Fusion U.S. CMBS Transactions" published in April 2005, "Moody's Approach to Rating CMBS Large Loan/Single Borrower Transactions" published in July 2000 and "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 these methodologies.
Moody's review incorporated the use of the excel-based CMBS Conduit Model v 2.61 which is used for both conduit and fusion transactions. Conduit model results at the Aa2 (sf) level are driven by property type, Moody's actual and stressed DSCR, and Moody's property quality grade (which reflects the capitalization rate used by Moody's to estimate Moody's value). Conduit model results at the B2 (sf) level are driven by a pay down analysis based on the individual loan level Moody's LTV ratio. Moody's Herfindahl score (Herf), a measure of loan level diversity, is a primary determinant of pool level diversity and has a greater impact on senior certificates. Other concentrations and correlations may be considered in our analysis. Based on the model pooled credit enhancement levels at Aa2 (sf) and B2 (sf), the remaining conduit classes are either interpolated between these two data points or determined based on a multiple or ratio of either of these two data points. For fusion deals, the credit enhancement for loans with investment-grade credit assessments is melded with the conduit model credit enhancement into an overall model result. Fusion loan credit enhancement is based on the underlying credit assessment of the loan which corresponds to a range of credit enhancement levels. Actual fusion credit enhancement levels are selected based on loan level diversity, pool leverage and other concentrations and correlations within the pool. Negative pooling, or adding credit enhancement at the underlying rating level, is incorporated for loans with similar credit assessments in the same transaction.
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 uses a variation of Herf to measure diversity of loan size, where a higher number represents greater diversity. Loan concentration has an important bearing on potential rating volatility, including risk of multiple notch downgrades under adverse circumstances. The credit neutral Herf score is 40. The pool has a Herf of 19 compared to 20 at last review.
In cases where the Herf falls below 20, Moody's also employs the large loan/single borrower methodology. This methodology uses the excel-based Large Loan Model v 8.5 and then reconciles and weights the results from the two 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. These aggregated proceeds are then further adjusted for any pooling benefits associated with loan level diversity, other concentrations and correlations.
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 December 1, 2011. Please see the ratings tab on the issuer / entity page on moodys.com for the last rating action and the ratings history.
As of the November 13, 2012 distribution date, the transaction's aggregate pooled certificate balance has decreased by 43% to $726.6 million from $1.3 billion at securitization. The Certificates are collateralized by 66 mortgage loans ranging in size from less than 1% to 14% of the pool, with the top ten non-defeased loans representing 52% of the pool. Nine loans, representing 8% of the pool, have defeased and are secured by U.S. Government Securities. The pool contains two loans with credit assessments, representing 24% of the pool.
Seventeen loans, representing 17% of the pool, are on the master servicer's watchlist. The watchlist includes loans which meet certain portfolio review guidelines established as part of the CRE Finance Council (CREFC) monthly reporting package. As part of our ongoing monitoring of a transaction, Moody's reviews the watchlist to assess which loans have material issues that could impact performance.
Five loans have been liquidated from the pool, resulting in an aggregate realized loss of $38.9 million (69% loss severity on average). Currently two loans, representing 2% of the pool, are in special servicing. The loans are secured by a multifamily property and an office property. Moody's estimates an aggregate $6.9 million loss for the specially serviced loans (60% expected loss on average).
Moody's has assumed a high default probability for three poorly performing loans representing 3% of the pool and has estimated an aggregate $4.1 million loss (20% expected loss based on a 50% probability default) from these troubled loans.
Moody's was provided with full year 2011 operating results and partial year 2012 for 100% and 85% of the pool respectively. Excluding specially serviced and troubled loans, Moody's weighted average LTV is 87% compared to 84% at Moody's prior review. Moody's net cash flow reflects a weighted average haircut of 11% to the most recently available net operating income. Moody's value reflects a weighted average capitalization rate of 9.1%.
Excluding special serviced and troubled loans, Moody's actual and stressed DSCRs are 1.39X and 1.21X, respectively, compared to 1.47X and 1.25X at last review. Moody's actual DSCR is based on Moody's net cash flow (NCF) and the loan's actual debt service. Moody's stressed DSCR is based on Moody's NCF and a 9.25% stressed rate applied to the loan balance.
The largest loan with a credit assessment is the U-Haul Portfolio Loan ($90.9 million --13.9% of the pool), which is secured by 78 properties operated as U-Haul storage or rental centers. The portfolio is also encumbered by a $60.6 million B-note which is the collateral for non-pooled Classes UH-A, UH-B, UH-C, UH-D, UH-E, UH-F, UH-G, UH-H and UH-J. The properties total 4.0 million square feet (SF) and are located in 24 states with concentrations in Texas (21%), Florida (16%) and Arizona (10.4%). Property performance continues to be stable. Moody's current credit assessment and stressed DSCR are Aaa and 3.90X, respectively, compared to Aaa and 3.37X at last full review.
The second loan with a credit assessment is the 17 State Street Loan ($67.8 million -- 10.4% of the pool), which is secured by a 44-story, Class A, 532,000 SF office building located within the South Ferry/Financial District sub-market of New York City. The property is encumbered by a $32.3 million B-note which is the collateral for non-pooled Classes SS-A, SS-B, SS-C, SS-D and a non-rated class. The loan was transferred into special servicing in July 2010 due to the servicer's determination of imminent default. The special servicer granted approval for the borrower to receive a capital infusion from a new source in the form of preferred equity to fund capital improvements. Subsequently, the loan was returned to the master servicer on April 1, 2011. As of September 2012, the property was 83% leased compared to 88% at last full review. Moody's analysis reflects a downward adjustment to current NOI due to upcoming lease maturities and above market rents. Moody's current credit assessment and stressed DSCR are A3 and 1.75X, respectively, compared to A3 and 1.72X at last full review.
The top three performing conduit loans represent 15% of the pool balance. The largest loan is the SUN Communities -- Scio Farm Loan ($37.4 million -- 5.7% of the pool), which is secured by a 913-pad manufactured housing community located in Ann Arbor, Michigan. As of June 2012, the property was 96% leased compared to 95% at last full review. The loan is stable and benefiting from amortization. Moody's LTV and stressed DSCR are 88% and 1.05X, respectively, compared to 89% and 1.04X at last full review.
The second largest loan is the SUN Communities Portfolio 9 Loan ($34.1 million -- 5.2% of the pool), which is secured by four manufactured housing communities totaling 1,235 pads located in Michigan (3) and Florida (1). As of June 2012, the portfolio was 94% leased, the same as last full review. The loan is stable and benefiting from amortization. Moody's LTV and stressed DSCR are 82% and 1.18X, respectively, compared to 84% and 1.15X, at last full review.
The third largest loan is the SUN Communities Portfolio 8 Loan ($25.5 million -- 3.9% of the pool), which is secured by three manufactured housing communities totaling 1,174 pads located in Indiana (2) and Florida (1). As of June 2012, the portfolio was 82% leased compared to 73% at last full review. Moody's LTV and stressed DSCR are 99% and 0.98X, respectively, compared to 98% and 0.99X at last full review.
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.
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Lacey M Morgan Associate Analyst Structured Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Sandra Ruffin VP - Senior Credit Officer 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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