DBRS Assigns Provisional Ratings to Wells Fargo Commercial Mortgage Trust 2016-C32

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C32 (the Certificates) to be issued by Wells Fargo Commercial Mortgage Trust 2016-C32. 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-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 B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class X-D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

Classes X-E, X-F, X-D, D, E, and F will be privately placed.

The Class X-A, Class X-B, Class X-E, Class X-F and Class X-D 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.

The collateral consists of 112 fixed-rate loans secured by 152 commercial and multifamily properties, comprising a total transaction balance of $959,979,761. 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 (NCF) and their respective actual constants, there were seven loans, representing 6.2% of the pool, with 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. This resulted in 36 loans, representing 49.2% of the pool, having DBRS Refinance (Refi) DSCRs below 1.00x; however, the DBRS Refi DSCRs for the loans are based on a weighted-average (WA) stressed refinance constant of 9.87%, which implies an interest rate of 9.25%, amortizing on a 30-year schedule. This represents a significant stress of 4.9% over the WA contractual interest rate of the loans in the pool. The loans’ probability of default (POD) is based on the more constraining of the DBRS Term or Refi DSCR.

Overall, the pool exhibits a relatively strong DBRS weighted-average term DSCR of 1.66x based on the whole loan balances, which indicates moderate term default risk. Thirty-one loans, representing 12.7% of the pool, are secured by cooperative properties and are very low leverage, with minimal term and refinance default risk. There are only nine loans, representing 9.0% of the pool, leased to single tenants. Loans secured by properties occupied by single tenants have been found to have higher loans in the event of default. As such, DBRS modeled single-tenant properties with a higher probability of default (POD) and cash flow volatility compared with multi-tenant properties. In addition, 17 loans, representing 8.2% of the pool, are located in tertiary/rural markets. The pool is relatively diverse based on loan size, with a concentration profile equivalent to that of a pool of 38 equal-sized loans. Diversity is further enhanced by nine loans, representing 19.6% of the pool, that are secured by multiple properties (49 in total), including three loans in the top 15. Increased pool diversity helps to insulate the higher-rated classes from event risk.

Four loans, representing 15.6% of the pool, are structured with full IO payments for the full term, including three of the top ten loans and the largest loan in the pool, North Dallas Retail Portfolio, which represents 8.5% of the pool. An additional 38 loans, representing 47.9% of the pool, have partial IO periods remaining, ranging from eight to 83 months, including six of the top ten loans. The DBRS Term DSCR is calculated by using the amortizing debt service obligation and the DBRS Refinance (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. Twenty one loans, representing 14.5% of the pool, are secured by non-traditional and specialty-use property types, including two of the top 15 largest loans in the pool. DBRS increased the LGD penalty to mitigate risk associated with these non-standard property types.

The DBRS sample included 27 of the 112 loans in the pool. Site inspections were performed on 46 of the 152 properties in the pool (53.0% of the pool by allocated loan balance). DBRS conducted meetings with the on-site property manager, leasing agent or a representative of the borrowing entity for 41.0% of the pool. The DBRS average sample NCF adjustment for the pool was -7.7% and ranged from -18.8% to +0.2%. DBRS identified ten loans representing 14.9% of the pool, with unfavorable sponsor strength, including two of the top ten loans. DBRS increased the POD for the loans with identified sponsorship concerns.

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 15-E) 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 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.