Fitch Upgrades Two Classes of JPMCC 2006-LDP9

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded two and affirmed 26 classes of JP Morgan Chase Commercial Mortgage Securities Corp., commercial mortgage pass-through certificates, series 2006-LDP9 (JPMCC 2006-LDP). A full list of rating actions follows at the end of this ratings action commentary.

KEY RATING DRIVERSThe upgrades reflect lower loss expectations, primarily as a result of the defeasance of the Galleria Towers loan and better than expected recoveries on the Bank of America Plaza real-estate owned (REO) asset that was disposed of in January 2016.

Fitch modeled losses of 17.4% of the remaining pool; expected losses on the original pool balance total 18.5%, including $408.7 million (8.4% of original pool balance) in realized losses to date. Fitch has designated 44 loans (40.5% of current pool balance) as Fitch Loans of Concern, which includes 23 specially serviced assets (21.9%). Eight of these specially serviced loans (2.5%) were transferred to special servicing since Fitch's last rating action. Over 6% of the pool is currently REO.

As of the April 2016 distribution date, the pool's aggregate principal balance has been reduced by 41.3% to $2.87 billion from $4.89 billion at issuance. According to servicer reporting, 27 loans (17.7%) have been defeased, including the second largest loan (Galleria Towers; 8.1%), representing an increase from 17 loans (6%) at the last rating action pool balance). Cumulative interest shortfalls totaling $54.2 million are currently affecting classes A-J/A-JS through NR.

A significant amount of the pool is scheduled to mature this year, including 17.2% which has been defeased, 0.6% in the second quarter, 0.2% in the third quarter, and 53.2% in the fourth quarter.

The largest contributor to Fitch-modeled losses, which remains the same since the last rating action, is the Americold Portfolio loan (6.8% of current pool). The interest-only loan, which matures in December 2016, is secured by a portfolio of four cold storage warehouse/distribution facilities totaling 3.3 million square feet (sf) located across four states (MO, TX, KS, and MS). The loan has reported a low occupancy and low debt service coverage ratio (DSCR) since 2010 due to the West Point, MS property ceasing physical operations in 2010 as a result of minimal occupancy and in an effort to reduce operating expenses. Despite the property being completely vacant, the borrower has continued to maintain the warehouse. However, the borrower has recently indicated that a new broker has been engaged to try to lease up the vacant space at this property. As of year-end (YE) 2015, the underlying occupancies for the three other properties were 42% (Garden City, KS), 74% (Carthage, MO), and 92% (Fort Worth, TX). YE 2015 DSCR, on a net operating income (NOI) basis, was 1.02x, an improvement from 0.89x in 2014, but still below the 1.85x reported at issuance. The 2015 NOI improved 14.5% from 2014 primarily due to increased rents and expense reimbursements, as well as slightly lower operating expenses. The sponsor has historically in the past covered debt service shortfalls out of pocket.

The next largest contributor to Fitch-modeled losses is the specially serviced Colony IV Portfolio loan (5%). The loan is secured by a cross-collateralized and cross-defaulted portfolio of 20 remaining properties comprised of 32 buildings totaling 1.8 million sf located across four states (IL, VA, MA, and NJ). As of the February 2016 rent roll, the overall portfolio occupancy was 56%, a decline from 68% in March 2015. Nine of the properties are leased to single tenants, one remains vacant (and has been since 2009 when IBM vacated), and the remaining 10 are multi-tenanted properties.

The loan was transferred to special servicing in September 2014 for imminent default when the borrower indicated to the master servicer it was not able to abide by the paydown terms through the sale of properties to qualify for the next extension option, according to terms set forth in the loan modification from 2012. At the time of the modification, the interest rate was lowered and scheduled principal paydowns and minimum reserve levels through individual property sales were established. The borrower had reportedly been coming out of pocket to cover debt service in 2014 and was remitting any excess cash flow from the properties, but stated it would no longer continue to fund the shortfalls.

The special servicer has indicated that receivership documentation has been prepared and filed for each of the jurisdictions. The special servicer expects the courts to grant receivership over the next few weeks. Once the receivers are appointed, the special servicer will evaluate each of the properties individually to determine strategies.

The third largest contributor to Fitch-modeled losses is the specially serviced 131 South Dearborn loan (8.2%). The loan is secured by a 1.5 million sf, 37-story office property located in the Central Loop submarket of Chicago, IL. As of the February 2016 rent roll, the property was 95.2% occupied, remaining relatively unchanged from 95.6% one year earlier.

The loan, which matures in December 2016, was transferred to special servicing in May 2014 due to the borrower requesting loan modification discussions stemming from complex lease negotiations with JP Morgan Chase, which wanted to downsize by over 50% of its occupied space and extend its lease. JPMorgan Chase had already sublet nearly half of the space it leased to another tenant in the building, Citadel, at substantially below-market rates until 2017. The sublet was the result of excess office space the company had in downtown Chicago after the JP Morgan Chase merger. In addition, another large tenant, Seyfarth Shaw LLP (20% of NRA), is terminating its lease, vacating in 2017 ahead of its 2022 lease expiration.

The special servicer expects debt service payments to remain current for the foreseeable future; however, the property will face significant leasing challenges in 2017 as property occupancy is expected to drop to approximately 55%. JPMorgan Chase extended its lease on 17% of the NRA to December 2023 from December 2017, but downsized from occupying over 35% of the NRA at issuance. Holland and Knight (6.9% of NRA) signed a three-year extension to July 2019. Leasing of the Seyfarth Shaw LLP space remains on-going and discussions with Citadel on direct lease extension on its subleased space are active.

The special servicer indicated a loan modification with the borrower has been agreed upon and is currently being documented. In exchange for the modification, the borrower will be contributing $27 million of guaranteed new equity to re-tenant and stabilize the property. Terms of the modification include bifurcating the trust component into a $200 million A-note and a $36 million B-note, extending the maturity date for an additional five years to December 2020, and lowering the current pay interest rate.

RATING SENSITIVITIESThe Stable Rating Outlooks on classes A-3, A-3SFL, A-3SFX, and A-1A reflect these classes' seniority, increasing credit enhancement and expected continued paydowns. Upgrades were not considered for these classes due to concerns of future potential interest shortfalls, as well as the potential for increased losses from the specially serviced loans. Future upgrades may be possible as the specially serviced loans are resolved.

Stable Rating Outlooks were assigned to classes A-M and A-MS to reflect sufficient credit enhancement. Further upgrades to classes A-M and A-MA were limited based on significant upcoming maturities and the potential for additional loan defaults. Fitch had applied additional stresses to maturing loans when considering the upgrade to account for refinance risk. Distressed classes (those rated below 'Bsf') may be subject to further rating actions as losses are realized.

DUE DILIGENCE USAGENo third-party due diligence was reviewed or provided in relation to this rating action.

Fitch has upgraded the following classes and assigned Rating Outlooks as indicated:

--$364 million class A-M to 'Bsf' from 'CCCsf'; Outlook Stable assigned;--$121.4 million class A-MS to 'Bsf' from 'CCCsf'; Outlook Stable assigned.

Fitch has affirmed the following classes as indicated:

--$1.5 billion class A-3 at 'Asf'; Outlook Stable;--$32.7 million class A-3SFL at 'Asf'; Outlook Stable;--$15.8 million class A-3SFX at 'Asf'; Outlook Stable;--$275.8 million class A-1A at 'Asf'; Outlook Stable;--$318.5 million class A-J at 'CCsf'; RE 20%;--$106.3 million class A-JS at 'CCsf'; RE 20%;--$72.8 million class B at 'Csf'; RE 0%;--$24.3 million class B-S at 'Csf'; RE 0%;--$22.8 million class C at 'Csf'; RE 0%;--$7.6 million class C-S at 'Csf'; RE 0%;--$7.5 million class D at 'Dsf'; RE 0%;--$2.5 million class D-S at 'Dsf'; RE 0%;--$0 class E at 'Dsf'; RE 0%;--$0 class E-S at 'Dsf'; RE 0%;--$0 class F at 'Dsf'; RE 0%;--$0 class F-S at 'Dsf'; RE 0%;--$0 class G at 'Dsf'; RE 0%;--$0 class G-S at 'Dsf'; RE 0%;--$0 class H at 'Dsf'; RE 0%;--$0 class H-S at 'Dsf'; RE 0%;--$0 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 P at 'Dsf'; RE 0%.

The class A-1, A-1S, A-2, A-2S, A-2SFL and A-2SFX certificates have paid in full. Fitch does not rate the class NR certificates. Fitch previously withdrew the rating on the interest-only class X certificates.

Additional information is available at www.fitchratings.com.

Applicable CriteriaCounterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781Global Structured Finance Rating Criteria (pub. 06 Jul 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952U.S. and Canadian Fixed-Rate Multiborrower CMBS Surveillance and U.S. Re-REMIC Criteria (pub. 13 Nov 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873395

Additional DisclosuresDodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003433Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003433Endorsement Policyhttps://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Melissa Che
Director
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Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
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Mary MacNeill
Managing Director
+1-212-908-0785
or
Media Relations
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Elizabeth Fogerty, New York, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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