DBRS Assigns Provisional Ratings to Wells Fargo Commercial Mortgage Trust 2015-NXS2

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2015-NXS2 (the Certificates) to be issued by Wells Fargo Commercial Mortgage Trust 2015-NXS2. The trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-E at AAA (sf)
-- Class X-F at AAA (sf)
-- Class X-G at AAA (sf)
-- Class A-5FL at AAA (sf)
-- Class A-5FX at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

Classes E, F, G, X-E, X-F, X-G, A-5FL and A-5FX will be privately placed.

The X-A, X-B, X-E, X-F and X-G balances are notional. DBRS ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the IO certificates’ position within the transaction payment waterfall when determining the appropriate rating.

Up to the full certificate balance of the Class A-S, Class B and Class C certificates may be exchanged for the Class PEX certificates. Class PEX certificates may be exchanged for the full certificate balance of the Class A-S, Class B and Class C certificates.

The aggregate principal balance of the A-5FL and A-5FX certificates will at all times equal the principal balance of the Class A-5FX regular interest.

The collateral consists of 63 fixed-rate loans secured by 77 commercial and multifamily properties, comprising a total transaction balance of $914,361,541. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the loan term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized Net Cash Flow and their respective actual constants, four loans, representing 3.7% of the pool, had a DBRS Term Debt Service Coverage Ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts, resulting in 30 loans, representing 52.1% of the pool, having DBRS refinance DSCRs below 1.00x. However, the DBRS Refi DSCR for the loans are based on a weighted-average (WA) stressed refinance constant of 9.78%, which implies an interest rate of 9.20%, amortizing on a 30-year schedule. This represents a significant stress of 5.0% over the WA interest rate of the loans in the pool. Additionally, 96.6% of these loans with DBRS Refi DSCRs below 1.00x are located in urban or suburban markets.

Fourteen loans, representing 21.5% of the pool, are secured by single-tenant properties, including two of the top 15 loans. Additionally, DBRS modeled one loan, representing 4.4% of the pool, as a single-tenant property given the significant concentration by one tenant. Loans secured by properties occupied by single tenants have been found to suffer from higher loss severities in the event of default. As such, DBRS modeled single-tenant properties with a higher POD and cash flow volatility compared with multi-tenant properties. Additionally, 14 loans, representing 28.1% of the pool, are located in urban markets, which benefit from consistent demand even in times of stress. The largest loan in the pool, Patriots Park, representing 9.8% of the pool, has credit characteristics consistent with a AAA shadow rating and was modeled as such by DBRS.

Ten loans, representing 36.3% of the pool (including six in the top 15), are structured with IO payments for the full loan term. An additional 17 loans, representing 31.3% of the pool, have partial IO periods ranging from 12 to 60 months. The DBRS Term DSCR is calculated by utilizing the amortizing debt service obligation, and the DBRS Refi DSCR is calculated considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines POD based on the lower of Term or Refi DSCR, so loans that lack amortization will be treated more punitively.

The DBRS sample included 31 of the 63 loans in the pool, representing 75.7% of the pool by loan balance. The DBRS average sample net cash flow adjustment for the pool was -9.0%, excluding one positive outlier (100 West 57th Street). DBRS identified eight loans, representing 19.4% of the pool, that have sponsorship associated with a prior discounted payoff, loan default, voluntary bankruptcy filing, limited net worth and/or liquidity, a historical negative credit event and/or inadequate commercial real estate experience. DBRS increased the probability of default (POD) for loans with identified sponsorship concerns. Overall, the pool exhibits a relatively strong DBRS weighted-average (WA) term debt service coverage ratio (DSCR) and debt yield of 1.68 times (x) and 8.5%, respectively, based on the whole loan balances, which indicates moderate default risk.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E) which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.