Fitch Ratings Affirms First Union-Lehman Bros. Series 1997-C2

Business Wire,  Sept 13, 2002  

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Business Editors

CHICAGO--(BUSINESS WIRE)--Sept. 13, 2002

First Union-Lehman Brothers Commercial Mortgage Trust II, commercial mortgage pass-through certificates, series 1997-C2 $286.2 million class A-2, $982.5 million class A-3 and interest-only class IO are affirmed at 'AAA' by Fitch Ratings. In addition, Fitch affirms the following classes: $110.2 million class B at 'AA', $110.2 million class C at 'A', $121.2 million class D at 'BBB' and $33 million class E at 'BBB-'. The remaining classes, F, G, H, J, K, L, and M, are not rated by Fitch. The affirmations follow Fitch's annual review of the transaction, which closed in November 1997.

The rating affirmations are a result of the deterioration of the mortgage pool, which is offset by the additional paydown since the last review. CRIIMI MAE (CRIIMI), as special servicer, collected 98% of the year-end (YE) 2001 financials for the transaction. When looking at comparable loans that reported financials as of YE 2001, YE 2000 and at issuance and excluding the 10.8% of CTL loans, the weighted average debt service coverage ratio (DSCR) was a 1.39 times (x), 1.41x and 1.36x, respectively. The transaction has had a 15% reduction in aggregate loan balance to $1.89 billion from $2.2 billion at issuance. The reduction is primarily due to pre-payments of loans. The number of the loans in the transaction has been reduced to 392 loans from 422 at issuance.

The decline in performance is apparent in the increase in specially serviced loans since the last review. The number of specially serviced loans has increased to 19 (4%) from four (1%) at the last review. Fitch has concerns that seven of these loans will take losses in excess of $14 million. The largest specially serviced asset (0.90%) is the Sheraton Orlando North, located in Maitland, FL. The loan transferred when the borrower could no longer keep the franchise payments current. The borrower has since filed for bankruptcy protection. The special servicer, CRIIMI, obtained an updated appraisal that valued the property at $2 million less than the loan balance.

The next largest specially serviced loan (0.68%) is a retail center located in Brandon, FL. This center has suffered from vacancy issues, as there are two empty boxes currently on the property. CRIIMI has a receiver in place at the property and is in the process of foreclosure. The updated appraised value is slightly less than the outstanding loan balance. Next, there is a vacant (former Kmart) retail property located in San Antonio, TX. The loan (0.56%) is currently 30 days delinquent. The borrower is working to secure another tenant or sell the property. A new appraisal has been ordered.

The remaining loans in special servicing are each less than $10 million. And although there are some loss expectations associated with some of them, they comprise a small portion of the pool.

The pool also has exposure to CTL loans, which comprise approximately 10.8% of the pool. Tenants at these properties include Rite Aid, Revco, Thrifty Payless, Circuit City, Office Depot, Bally Total Fitness, WalMart and Walgreen's. Fitch reviewed the credit ratings of each of these tenants and except for the Kmart loan (mentioned above) there have not been any significant declines in the credit of these tenants since the last review.

The top five largest loans (8.4%) continue to perform well. The weighted average DSCR has improved to a 1.40x as of YE 2001, from 1.36x as of YE 2000 and 1.22x at issuance. The former largest loan in the pool, Rentar, prepaid as of the August distribution date. Historically, this was an above average performing loan in the pool. Fitch also reviewed the servicer's watchlist for the pool. There was a substantial increase in the number of loans on the watchlist, however, that increase can primarily be attributed to the change in criteria for placing loans on the watchlist that was implemented by the servicer earlier this year. Low occupancy is the main reason for most watchlist loans.

Fitch will continue to monitor this portfolio for any change in performance.

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