DBRS Morningstar Places Ratings for 577 Classes Within 158 U.S. CMBS Transactions Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) placed its ratings for 577 classes within 158 U.S. commercial mortgage-backed securities (CMBS) transactions Under Review with Negative Implications. DBRS Morningstar ratings that are placed Under Review with Negative Implications are typically confirmed or downgraded by a subsequent rating committee. The appendix to this press release provides a listing of all 577 classes included in these rating actions, including any interest-only (IO) classes that reference the principal and interest bonds placed Under Review.

These rating actions are the result of DBRS Morningstar’s stress analysis as outlined in its June 29, 2020, commentary entitled “CMBS Conduit Exposure to Coronavirus Disease (COVID-19) Implications.” As further described in that commentary, DBRS Morningstar developed a ratings baseline scenario and sensitivity analyses for its rated conduit and agency multiborrower transactions to account for the impact of the coronavirus pandemic on projected losses for those transactions.

In the analysis for these rating actions, DBRS Morningstar applied the baseline scenario net cash flow (NCF) haircuts to the prior year-end figure, or, if not available, the issuer’s NCF figure with the DBRS Morningstar NCF haircut, for the underlying loans (excluding loans that were in special servicing prior to March 1, 2020). Loans that had a scenario-adjusted debt service coverage ratio (DSCR) at 0.95 times (x) or lower were subject to a scenario liquidation, with the liquidation frequency determined by the corresponding property type’s minimum default probability level as estimated by the CMBS Insight model. Loans in special servicing prior to March 1, 2020, were scenario liquidated in the analysis as further described in the commentary.

In cases where DBRS Morningstar assigned a higher probability of default (POD) to loans in the most recent surveillance review than the baseline scenario analysis produced, DBRS Morningstar generally accepted the higher POD in the stress analysis for these rating actions.

This stress analysis suggests hotel, retail, and student housing property types represent the largest proportion of scenario losses, with significantly smaller concentrations in office and multifamily property types. When broken down by vintage, the analysis tagged a higher proportion of bonds from the 2014 to 2016 vintages for review, with those transactions collectively representing 40.2% of the classes placed Under Review with Negative Implications. The bonds with 2017 to 2018 vintages exhibited the next highest concentration, with 80 classes representing 13.9% of those affected by these rating actions.

DBRS Morningstar expects the deepest and most prolonged impact of the pandemic to be observed within the hotel and retail property types, as reflected in the higher baseline scenario NCF haircuts for those property types of -40% for full-service hotels, -30% for limited-service hotels, and -26% for retail property types, as compared with respective NCF haircuts of -10% and -5% for office and multifamily. Student housing property types were subject to a -15% haircut. As the country continues to grapple with hot spots and the virus’s resurgence in areas previously deemed on the path to stabilization, both business and leisure travel will continue to be significantly affected and stricter social distancing requirements will continue to limit foot traffic for brick-and-mortar retail.

DBRS Morningstar’s North American CMBS analytical team will continue to review the transactions affected by these rating actions to evaluate the increased risk factors that have emerged amid the effects of the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics) becomes available, DBRS Morningstar will address the Under Review with Negative Implication rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions such as the unknown length of the pandemic-related downturn may result in a prolonged resolution period.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The appendix includes bonds that are IO certificates that reference a single rated tranche or multiple rated tranches. The IO ratings mirror the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), which can be found at dbrsmorningstar.com/about/methodologies. A link to the methodology referenced in this transaction is listed at the end of this press release. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group released on April 16, 2020, a set of macroeconomic scenarios for the 2020–22 period in select economies. These scenarios were last updated on July 22, 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The ratings of two securities are endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union:

-- Commercial Mortgage Pass-Through Certificates, Series 2014-C17, Class D (Class D) of Morgan Stanley Bank of America Merrill Lynch Trust 2014-C17 (MSBAM 2014-C17)

-- Commercial Mortgage Pass-Through Certificates, Series 2014-C21, Class D (Class D) of WFRBS Commercial Mortgage Trust 2014-C21 (WFRBS 2014-C21)

The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on the MSBAM 2014-C17 transaction took place on March 13, 2020, when all classes, including the endorsed Class D, were confirmed.

The last rating action on the WFRBS 2014-C21 transaction took place on March 13, 2020, when all classes, including the endorsed Class D, were confirmed.

These ratings are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. DBRS Morningstar reviews and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Stephen Koehler, Assistant Vice President, North American CMBS
Rating Committee Chair: Rich Carlson, Senior Vice President, North American CMBS
Initial Rating Date: Initial Rating Date: MSBAM 2014-C17 – July 23, 2014 / WFRBS 2014-C21 – July 14, 2014

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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North American CMBS Surveillance Methodology (March 6, 2020), https://www.dbrsmorningstar.com/research/357710/north-american-cmbs-surveillance-methodology