DBRS Confirms Ratings on Merrill Lynch Financial Assets Inc., Series 2006-Canada 20

DBRS Limited (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2006-Canada 20 (the Certificates) issued by Merrill Lynch Financial Assets Inc., 2006-Canada 20:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AAA (sf)
-- Class XC at AAA (sf)
-- Class D at AA (sf)
-- Class E at A (high) (sf)
-- Class F at BBB (high) (sf)
-- Class G at BBB (sf)
-- Class H at BBB (low) (sf)
-- Class J at BB (high) (sf)
-- Class K at BB (low) (sf)
-- Class L at B (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class M.

The rating confirmations reflect the overall stable performance of the transaction. There are 42 loans remaining in the pool out of the original 66 loans at issuance, resulting in a collateral reduction of approximately 42.9%. All remaining loans are scheduled to mature by October 2016, with most scheduled to mature within the next three months. The transaction is reporting a weighted-average (WA) refinance debt service coverage ratio (DSCR) of 1.98 times (x), a WA current debt yield of 14.8% and a WA exit debt yield of 15.0%, based on most recent available financials. In addition to the overall healthy refinance metrics, this transaction benefits from defeasance collateral, as eight loans, representing 20.5% of the current pool balance, are fully defeased.

There are five loans, representing 22.0% of the current pool balance, that are secured by properties located in Calgary, Alberta, which has been affected in recent years by the declining energy markets. Four of the five loans are secured by office properties in downtown and suburban Calgary, with the fifth loan secured by an unanchored retail property located in suburban Calgary. The WA DBRS refinance DSCR for these loans is 1.97x (with a range 1.36x and 2.18x), and the WA exit debt yield is 17.8%. Each benefits from having full or partial recourse to the respective sponsors.

As of the February 2016 remittance, there are no loans in special servicing and eight loans, representing 16.6% of the current pool balance, on the servicer’s watchlist. Many of these loans have been on the watchlist for an extended period of time but have remained current on their debt service obligations throughout periods of depressed cash flows.

The largest loan on the servicer’s watchlist is Prospectus ID#2 Heritage Square, which represents 9.7% of the current pool balance. This property is secured by a 300,000-square foot (sf) suburban office building located about eight kilometres south of downtown Calgary. This loan was added to the watchlist because of low occupancy. The largest tenant, which occupied 63.2% of the net rentable area (NRA), vacated the property at the end of its lease in August 2015. According to the December 2015 rent roll, the property was 29.1% occupied. The borrower has identified WorleyParsons Ltd. as a replacement tenant that will occupy 65.3% of the NRA; however, that lease does not commence until April 2016. At the time of this review, the lease terms and rental rates for the new tenant are unknown. According to Altus Insite, there are eight spaces, including two sublet spaces, that are listed as being available at this property for a total of 5.4% of NRA. Avison Young reports an overall vacancy rate of 15.8% for the suburban south submarket in Calgary, up from 11.0% at Q1 2015.

The YE2015 DSCR for the subject loan was 1.99x, down from the YE2014 DSCR of 2.92x as a result of the revenue lost with the departure of the largest tenant in August 2015. Of the remaining tenancy at the property, near-term rollover is minimal, with less than 1.0% of the NRA scheduled to roll within the next 18 months around the scheduled 2016 maturity date. DBRS expects that the credit metrics in 2016 will be similar to 2015 as the new tenant’s lease does not begin until April 2016 and may include incentives in a free rent period. Given the property’s ability to quickly re-lease the space vacated in Q3 2015 for occupancy by early Q2 2016 in a submarket that has seen an uptick in vacancy with the declining energy markets and the corresponding reduced demand in Calgary and the strong full recourse sponsor in Artis REIT, which is rated BBB (low) by DBRS as of January 2015, DBRS expects the loan will continue to perform through maturity.

The second-largest loan on the watchlist is Prospectus ID#24 9025 Torbram Rd. (Torbram) & 1165 Rue Volta (Volta), representing 2.0% of the current pool balance. This loan is secured by two unanchored retail properties for a total of 39,230 sf located in Brampton, Ontario, and Boucherville, Québec. This loan was added to the watchlist because of a low DSCR as a result of low occupancy. According to the February 2016 rent roll, the Torbram property was 70.5% occupied and the Volta property was 100.0% occupied by a single tenant, a Casey’s restaurant, which has a lease expiration in September 2020. Overall occupancy across the two properties is 74.3%. According to servicer commentary, the borrower has purposely kept the occupancy at the Torbram property low for the purposes of redevelopment. According to the most recent financials, the YE2014 DSCR for the loan was 0.96x, decreasing from YE2013 of 1.40x. However, it was confirmed that the YE2014 figure did not include revenue or expenses from the Volta property as financials have not been provided since 2013. If the same net cash flow reported for the Volta property from 2013 were included, the YE2014 DSCR would improve to 1.28x.

Of the remaining loans, there is one loan that DBRS shadow-rated investment grade at issuance: Prospectus ID#21 CLSC Sherbrooke, representing 2.4% of the current pool balance. DBRS confirms with this review that the performance of this loan remains consistent with investment-grade loan characteristics.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report with additional information on the DBRS viewpoint for this transaction, including details on the largest loans in the pool and loans on the servicer’s watchlist. The February 2016 Monthly CMBS Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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