(NEW YORK, NY) -- Things look bleak over at  Tishman Speyer's  56-building, twin apartment Stuyvesant Town and Peter Cooper Village in Manhattan.

Peter Cooper Village and Stuyvesant Town

Fitch Ratings reports debt service reserves for six loans totaling $4.5 billion are likely to run out by the end  of  this  year. A default on the loan is likely if an equity infusion or recapitalization does not take place
 
Please see Real Estate Channel posting, Jan. 26, 2009,  "Clock Ticking on Tishman Speyer's $4.5B Loan Payments."),  .

Pieces of a $3 billion pari passu (without preference or priority) Stuy Town loan are securitized in the following transactions:

 -- WBCMT 2007-C30; -- COBALT 2007-C2;  --ML-CFC 2007-5; -- ML-CFC 2007-6.

Fitch  has downgraded  these  four U.S. CMBS transactions due to the continued  underperformance of the Stuy Town loan and other loans in the transactions.

The  outcome of the ongoing Stuy Town litigation may have future rating implications for the four transactions, notes Fitch analyst and senior director  Adam Fox.

"Based  on  current  performance and the uncertainty surrounding ongoing litigation,   we   do not expect  property  performance  to  improve sufficiently to service the securitized portion of the $4.5 billion debt before reserves are depleted', says Fox.

In  addition  to  the  securitized  balance, there is an additional $1.5 billion  of mezzanine  debt  held outside the trust.

For the year ended 2008,  the  servicer  reported debt service coverage ratio (DSCR) on the mortgage  was 0.69 times (x), as compared to the year ended 2007 DSCR of 0.55x. 

For  first  quarter-2009 (1Q'09), the servicer reported DSCR was 0.71x. As of July 2009, approximately 60% were rent-stabilized units and 40% were market units with a vacancy rate of approximately 4.1%.

Based on first quarter financials reviewed by Fitch, cash  flow  generated  from the property remains  "significantly  below  what  is needed to service the current outstanding debt,  and  the borrower continues to use debt service reserves to cover operating shortfalls," the agency says.

Capital  expenditures  for  converting  stabilized units to market rents have  ceased  because of a moratorium on conversion imposed by the Court of Appeals as a result of the litigation.

While this has reduced capital expenditures, the use of debt service reserves has increased because the Court  also  requires  the  borrower to separately escrow the difference between   stabilized  and  market  rents  on  former  stabilized  units, Fox says.

Previously,  this  difference  was available for debt service. Once debt service  reserves  have  been  depleted,  the borrower has the option to replenish them or cover the operating shortfalls out of pocket.

Fitch's  analysis  is  based  on  updated  expectations  of limited unit turnover  and  stabilized expenses. Based on this estimate of cash flow, losses  could  be  as  high  as  20%  of  the $3 billion A note balance.

However,  although  a  default  is  expected in the near term, a lengthy workout  is  also  expected.

While final resolution for this lawsuit may not occur for several months or years, Fitch believes the ultimate value of  the  properties  will be, in large part, determined by the lawsuit's  resolution.

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