DBRS Finalizes Provisional Ratings on Morgan Stanley Bank of America Merrill Lynch Trust 2016-C28

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C28 (the Certificates) to be issued by Morgan Stanley Bank of America Merrill Lynch Trust 2016-C28. The trends are Stable.

-- 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-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-D at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class E-1 at BBB (sf)
-- Class E-2 at BBB (low) (sf)
-- Class F at BB (sf)
-- Class F-1 at BB (sf)
-- Class F-2 at BB (sf)
-- Class EF at BB (sf)
-- Class G at B (low) (sf)
-- Class G-1 at B (high) (sf)
-- Class G-2 at B (low) (sf)
-- Class EFG at B (low) (sf)

Classes D, E, E-1, E-2, F, F-1, F-2, EF, G, G-1, G-2 and EFG will be privately placed.

The Class X-A, X-B and 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 42 fixed-rate loans secured by 161 commercial and multifamily properties comprising a total transaction balance of $955,648,355. The conduit pool was analyzed to determine the 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 five loans, representing 12.3% 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 26 loans, representing 77.9% of the pool, having a DBRS Refinance (Refi) DSCR below 1.00x; however, the DBRS Refi DSCRs for the loans are based on a weighted-average (WA) stressed refinance constant of 9.86%, which implies an interest rate of 9.24%, amortizing on a 30-year schedule. This represents a significant stress of 4.62% 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.

Two loans in the top ten exhibit credit characteristics consistent with investment-grade shadow ratings: Penn Square Mall and GLP Industrial Portfolio A. Combined, these two loans represent 16.7% of the pool. Penn Square Mall has credit characteristics consistent with a AAA shadow rating, while GLP Industrial Portfolio A is given an “A” rating. Overall, the pool exhibits a relatively strong DBRS WA term DSCR of 1.57x based on the whole loan balances, which indicates moderate term default risk. Based on A-note balances only, the DBRS Term DSCR is even stronger at 1.77x. Even with the exclusion of Penn Square Mall and GLP Industrial Portfolio A, the deal continues to exhibit a favorable DBRS Term DSCR of 1.41x. No loans were modeled with Below Average or Poor property quality. Additionally, two loans, representing 8.1% of the pool balance, were modeled with Above Average property quality by DBRS. Higher-quality properties are more likely to retain existing tenants and more easily attract new tenants, resulting in a more stable performance. There are only four loans, representing 2.3% 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 POD and cash flow volatility compared with multi-tenant properties.

Six loans, representing 27.0% of the pool, are structured with full IO payments for the full term, including the top three loans. An additional 23 loans, representing 54.3% of the pool, have partial IO periods remaining, ranging from five to 59 months, including seven 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.

The DBRS sample included 17 of the 42 loans in the pool. Site inspections were performed on 37 of the 161 properties in the pool (69.2% 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 63.5% of the pool. The DBRS average sample NCF adjustment for the pool was -9.5% and ranged from -25.0% to -2.7%. Ten properties, comprising 17.6% of the pool, are located in tertiary markets. Properties located in tertiary and rural markets are modeled with significantly higher loss severities than those located in urban and suburban markets. No loans are secured by properties located in rural markets. DBRS identified four loans, representing 18.6% of the pool, with unfavorable sponsor strength, including three 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.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

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