Fitch Downgrades 5 Classes of MSC 2006-HQ9; Upgrades Rake Classes

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded five, upgraded three and affirmed 16 classes of Morgan Stanley Capital I Trust (MSC 2006-HQ9) commercial mortgage pass-through certificates series 2006-HQ9. A detailed list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The downgrades reflect an increase in expected losses due to deterioration in performance of several large loans within the pool. Fitch modeled losses of 7.0% of the remaining pool; expected losses on the original pool balance total 8.9%, including $120.2 million (4.6% of the original pool balance) in realized losses to date. Fitch has designated 42 loans (16.7%) as Fitch Loans of Concern, which includes eight specially serviced assets (6.8%).

As of the September 2015 distribution date, the pool's aggregate principal balance has been reduced by 40.5% to $1.55 billion from $2.6 billion at issuance. Per the servicer reporting, 19 loans (26.3% of the pool) are defeased. Interest shortfalls are currently affecting classes H through S.

Approximately $1.5 billion of loans (96% of the pool) have scheduled maturities in 2016. Almost two thirds of the loans in the pool (64%) mature through the 2nd quarter followed by 32% in the 3rd quarter of 2016.

The largest contributor to expected losses is a loan (2.5% of the pool) secured by 256,753 sf office property in Cincinnati, OH. The loan transferred to special servicing in July 2015 due to imminent default. As of July 2015, occupancy for the property declined to 74% with the largest tenant, LA Fitness (17% of NRA), vacating at lease expiration and relocating to a new development less than half a mile away. Another tenant, Mercy Medical (4%) also vacated in early 2015. The property faces increasing leasing challenges with 38% of leases scheduled to expire by 2016 coupled with the completion of a new mixed-use office and retail development across the freeway. Additionally, according to Reis, the West Hamilton submarket is confronting persistent softness in the office market with a vacancy rate of 30% for the past year.

The second largest contributor to expected losses is a portfolio of two office buildings (1.7% of the pool) totaling 608,054 sf in downtown Indianapolis. The asset is REO as of August 2015.The asset transferred to special servicing in April 2014 when the sponsor notified the servicer that it would no longer contribute capital to fund property shortfalls. As of August 2015, occupancy for the portfolio declined to 60% from 65% in 2014. The occupancy has the potential to decline further with 23% of leases scheduled to expire through 2016. The servicer is proceeding with foreclosure. According to Reis, the central business district submarket of Indianapolis reported a vacancy rate of 17% with average asking rents of $19.25 per square foot (psf) compared to $16.48 psf for the subject property.

The third largest contributor to expected losses is a 236,019 sf office property (0.9% of the pool) located in Pittsburgh, PA. The collateral includes eight floors of a 21-story building and does not include The Marriott City Center hotel, which operates in the remainder of the property. The asset transferred to special servicing in March 2014 and is REO as of July 2015. As of September 2015, occupancy for the property declined to 15% primarily due to the largest tenant, University of Pittsburgh Medical Center Health Plan, vacating 73% of the space. According to Reis, the CBD office submarket of Pittsburgh has a vacancy rate of 14.8%.

The ST classes are related to a non-pooled B-Note secured by 633 17th Street. The underlying collateral is an office building in the central business district of Denver, CO. As of June 2015, the trailing twelve month NOI improved 17% from YE 2014 and is in-line with historical NOI levels since issuance. The class ST-B certificates are receiving paydown from incoming principal payments. The loan matures in January 2016.

RATING SENSITIVITIES

Rating Outlooks on classes A-1A through A-J, remain Stable due to increasing credit enhancement and continued paydown of the classes. The Negative Outlook on Class B reflects maturity concentration concerns with approximately 96% of the pool scheduled to mature by year-end 2016. The class is subject to downward rating migration should realized losses exceed Fitch's expectation, or should loans not refinance at maturity as expected. Outlooks for classes C and D while stable are subject to ongoing collateral performance and resolution outcomes of assets in special servicing. Distressed classes (those rated below 'B') may be subject to further downgrades as additional losses are realized.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

Fitch downgrades the following classes and assigns Recovery Estimates (REs) as indicated:

--$35.3 million class C to 'BBsf' from 'BBBsf'; Outlook Stable;

--$28.9 million class D to 'Bsf' from 'BBsf'; Outlook Stable;

--$22.4 million class E to 'CCCsf' from 'Bsf'; RE 95%;

--$25.7 million class F to 'CCsf' from 'CCCsf'; RE 0%;

--$25.7 million class G to 'Csf' from 'CCsf'; RE 0%.

Fitch affirms the following classes and revises an Outlook as indicated:

--$138.4 million class A-1A at 'AAAsf'; Outlook Stable;

--$513.7 million class A-4 at 'AAAsf'; Outlook Stable;

--$229.3 million class A-4FL at 'AAAsf'; Outlook Stable;

--$256.5 million class A-M at 'AAAsf'; Outlook Stable;

--$202 million class A-J at 'Asf'; Outlook Stable;

--$19.2 million class B at 'Asf'; Outlook to Negative from Stable;

--$28.9 million class H at 'Csf'; RE 0%;

--$4.9 million class J at 'Dsf'; RE 0%;

--$0 class K at 'Dsf'; RE 0%;

--$0 class L at 'Dsf'; RE 0%;

--$0 class M at 'Dsf'; RE 0%;

--$0 class N at 'Dsf'; RE 0%;

--$0 class O at 'Dsf'; RE 0%;

--$0 class P at 'Dsf'; RE 0%;

--$0 class Q at 'Dsf'; RE 0%.

Fitch upgrades the following rake classes as indicated:

--$1.1 million class ST-C to 'BBsf' from 'Bsf'; Outlook Stable;

--$2.3 million class ST-D to 'Bsf' from 'CCCsf'; Outlook Stable Assigned;

--$1.3 million class ST-E to 'Bsf' from 'CCCsf'; Outlook Stable Assigned.

Fitch affirms the following rake class:

--$1.9 million class ST-B at 'BBsf'; Outlook Stable.

Classes A-1, A-2, A-3, A-AB, X-RC, and ST-A have paid in full. Fitch does not rate the class S, ST-F and DP certificates. Fitch previously withdrew the ratings on the interest-only class X and X-MP certificates.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Criteria for Analyzing Large Loans in U.S. Commercial Mortgage Transactions (pub. 27 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870009

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria (pub. 10 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=812608

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992273

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992273

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151014006369/en/

Fitch Ratings
Primary Analyst
David Ro
Director
+1-312-368-3132
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Committee Chairperson
Mary MacNeill
Managing Director
+1-212-908-0785
or
Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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