DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-BNK35 to be issued by BANK 2021-BNK35:
-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-4-1 at AAA (sf)
-- Class A-4-2 at AAA (sf)
-- Class A-4-X1 at AAA (sf)
-- Class A-4-X2 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-5-1 at AAA (sf)
-- Class A-5-2 at AAA (sf)
-- Class A-5-X1 at AAA (sf)
-- Class A-5-X2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class A-S at AAA (sf)
-- Class A-S-1 at AAA (sf)
-- Class A-S-2 at AAA (sf)
-- Class A-S-X1 at AAA (sf)
-- Class A-S-X2 at AAA (sf)
-- Class B at AAA (sf)
-- Class B-1 at AAA (sf)
-- Class B-2 at AAA (sf)
-- Class B-X1 at AAA (sf)
-- Class B-X2 at AAA (sf)
-- Class C at AA (low) (sf)
-- Class C-1 at AA (low) (sf)
-- Class C-2 at AA (low) (sf)
-- Class C-X1 at AA (low) (sf)
-- Class C-X2 at AA (low) (sf)
-- Class X-D at A (low) (sf)
-- Class X-FG at BBB (low) (sf)
-- Class X-H at BB (high) (sf)
-- Class X-J at B (high) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (high) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (high) (sf)
-- Class H at BB (sf)
-- Class J at B (sf)
All trends are Stable.
Classes X-D, X-FG, X-H, X-J, X-K, D, E, F, G, H, J, and K will be privately placed. Class RR will be a non-offered certificate.
The Class A-4-1, Class A-4-2, Class A-4-X1, Class A-4-X2, Class A-5-1, Class A-5-2, Class A-5-X1, Class A-5-X2, Class A-S-1, Class A-S-2, Class A-S-X1, Class A-S-X2, Class B-1, Class B-2, Class B-X1, Class B-X2, Class C-1, Class C-2, Class C-X1, and Class C-X2 certificates are also offered certificates. Such classes of certificates, together with the Class A-4, Class A-5, Class A-S, Class B, and Class C certificates, constitute the Exchangeable Certificates. The Class A-1, Class A-2, Class A-SB, Class A-3, Class D, Class E, Class F, Class G, and Class H certificates, together with the RR Interest and the Exchangeable Certificates with a certificate balance, are referred to as the principal balance certificates.
The collateral consists of 76 fixed-rate loans secured by 109 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. Three loans, representing 10.6% of the pool, are shadow-rated investment grade by DBRS Morningstar. Additionally, 27 loans in the pool, representing 9.5% of the pool, are backed by residential co-operative loans, which typically have very low expected losses. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off balances were measured against the DBRS Morningstar Net Cash Flow and their respective actual constants, the initial DBRS Morningstar Weighted-Average (WA) Debt Service Coverage Ratio (DSCR) of the pool was 3.04 times (x). The pool additionally includes seven loans, representing 13.2% of the allocated pool balance, that exhibit a DBRS Morningstar Loan-to-Value (LTV) ratio in excess of 67.1%, a threshold generally indicative of above-average default frequency. The WA DBRS Morningstar LTV of the pool at issuance was 54.9%, and the pool is scheduled to amortize down to a DBRS Morningstar WA LTV of 52.7% at maturity. These credit metrics are based on the A note balances. Excluding the shadow-rated loans, the deal still exhibits a favorable WA DBRS Morningstar LTV of 60.0%.
Twenty-three loans, representing 17.6% of the pool, are in areas identified as DBRS Morningstar Market Ranks 7 or 8, which are generally characterized as highly dense urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. Markets with these ranks benefit from lower default frequencies than less dense suburban, tertiary, and rural markets. Urban markets represented in the deal include New York and San Francisco.
Forty-one loans, representing 45.8% of the pool balance, have collateral in Metropolitan Statistical Area (MSA) Group 3, which represents the best-performing group in terms of historical commercial mortgage-backed securities (CMBS) default rates among the top 25 MSAs. MSA Group 3 has a historical default rate of 17.2%, which is nearly 40.0% lower than the overall CMBS historical default rate of 28.0%. Additionally, only two loans, representing just 0.9% of the pool, are located in MSA Group 1, which has historically shown higher probability of default resulting in greater loan-level expected losses.
Three of the loans – Four Constitution Square, River House Coop, and Three Constitution Square – exhibit credit characteristics consistent with investment-grade shadow ratings. Combined, these loans represent 10.6% of the pool. Four Constitution Square has credit characteristics consistent with a AA shadow rating. River House Coop has credit characteristics consistent with a AAA shadow rating. Three Constitution Square has credit characteristics consistent with a AA (low) shadow rating.
Twenty-seven loans in the pool, representing 9.5% of the transaction, are backed by residential co-operative loans. Residential co-operatives tend to have minimal risk, given their low leverage and low risk to residents if the co-operative associations default on their mortgages. The WA DBRS Morningstar LTV for these loans is 17.1%.
Fifty loans, representing a combined 48.9% of the pool by allocated loan balance, exhibit issuance LTVs of less than 59.3%, a threshold historically indicative of relatively low-leverage financing and generally associated with below-average default frequency. Even with the exclusion of the shadow-rated loans and the loans secured by co-operative properties, collectively representing 16.2% of the pool, the deal exhibits a favorable DBRS Morningstar Issuance LTV of 60.0%.
Term default risk is low, as indicated by a strong DBRS Morningstar DSCR of 3.04x. Even with the exclusion of the shadow-rated loans and the loans secured by co-operative properties, the deal exhibits a very favorable DBRS Morningstar DSCR of 2.53x.
Nine loans, representing 28.3% of the pool balance, received a property quality of Average + or better, including three loans, representing 8.4%, deemed to have Above Average quality and one loan, representing 3.9%, deemed to have the highest property quality of Excellent.
Five loans, representing 18.1% of the pool, were classified by DBRS Morningstar as having Strong sponsorship strength. Furthermore, DBRS Morningstar identified only one loan, representing 3.2% of the pool, with Weak sponsorship strength.
While the pool demonstrates favorable loan metrics with WA DBRS Morningstar Issuance and Balloon LTVs of 54.9% and 52.7%, respectively, it also exhibits heavy leverage barbelling. There are three loans, accounting for 10.6% of the pool, with investment-grade shadow ratings and a WA LTV of 36.9% and 27 loans, representing 9.5% of the transaction, secured by co-operatives with a WA DBRS Morningstar LTV of 17.1%. The pool also has 50 loans, representing a combined 48.9% of the pool by allocated loan balance, with an issuance LTV lower than 59.3%, a threshold historically indicative of relatively low-leverage financing. There are seven loans, comprising a combined 13.2% of the pool balance, with an issuance LTV higher than 67.1%, a threshold historically indicative of relatively high-leverage financing and generally associated with above-average default frequency. The WA expected loss of the pool’s investment-grade and co-operative component was approximately 0.2%, while the WA expected loss of the pool’s conduit component was substantially higher at approximately 2.1%, further illustrating the barbelled nature of the transaction.
The WA DBRS Morningstar expected loss exhibited by the loans that were identified as representing relatively high-leverage financing was 4.3%. This is significantly higher, more than double, than the conduit component’s WA expected loss of 2.1%, and the pool’s credit enhancement reflects the higher leverage of this component of seven loans with an issuance LTV in excess of 67.1%. While there is some leverage barbelling occurring, it is mostly caused by extremely low leverage and low expected loss loans on one end of the spectrum, as opposed to extremely high leverage and high expected losses. Even the higher leverage component of this pool is fairly benign, and there is not a large component of the pool that represents a substantial outlier expected loss concentration.
The pool has a relatively high concentration of loans secured by office and retail properties with 23 loans, representing 51.3% of the pool balance. The ongoing Coronavirus Disease (COVID-19) pandemic continues to pose challenges globally, and the future demand for office and retail space is uncertain, with many store closures, companies filing for bankruptcy or downsizing, and more companies extending their remote-working strategy. Two of the 14 office loans, Four Constitution Square and Three Constitution Square, representing 25.2% of the office concentration, are shadow-rated investment grade by DBRS Morningstar. Furthermore, 70.6% of the office loans are located in MSA Group 3, which represents the lowest historical CMBS default rates. The office and retail properties exhibit favorable WA DBRS Morningstar DSCRs of 3.52x and 3.31x, respectively. Additionally, both property types exhibit favorable WA Morningstar LTVs at 52.0% and 57.5%, respectively. Three of the loans secured by office properties, representing 40.0% of the concentration, have sponsors that were deemed to be Strong. Additionally, two of the loans secured by retail properties, representing 30.6% of the concentration, have sponsors deemed to be Strong.
Forty-eight loans, representing 74.8% of the pool balance, are structured with full-term interest-only (IO) periods. An additional six loans, representing 9.2% of the pool balance, are structured with partial-IO terms ranging from 24 months to 60 months. Of the 48 loans structured with full-term IO periods, 27 loans, representing 42.5% of the pool by allocated loan balance, are located in areas with a DBRS Morningstar MSA Group 2 or 3. These markets benefit from increased liquidity even during times of economic stress. Three of the loans, representing 10.6% of the total pool balance, are shadow-rated investment grade by DBRS Morningstar: Four Constitution Square, River House Coop, and Three Constitution Square. The full-term IO loans are effectively pre-amortized, as evidenced by the very low WA DBRS Morningstar Issuance LTV of only 50.3% for these loans.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
Class X-A, Class X-B, Class X-D, Class X-FG, Class X-H, Class X-J, and Class X-K are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors 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.
For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.
All figures are in U.S. dollars unless otherwise noted.
With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.
The principal methodology is North American CMBS Multi-Borrower Rating Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. 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.
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.
Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.
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