DBRS Confirms 11 Classes and Places Two Classes Under Review with Negative Implications of Merrill Lynch Financial Assets Inc., Series 2007-Canada 21

DBRS Limited (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2007-Canada 21 (the Certificates) issued by Merrill Lynch Financial Assets, Inc., Series 2007-Canada 21:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class XC 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 F at BB (high) (sf)
-- Class G at BB (sf)
-- Class H at BB (low) (sf)
-- Class J at B (high) (sf)

All trends are Stable.

In addition, DBRS has placed the following two classes Under Review with Negative Implications:

-- Class K at B (sf)
-- Class L at B (low) (sf)

DBRS does not rate the first loss piece, Class M.

DBRS has placed Class K and Class L Under Review with Negative Implications because of concerns and uncertainties surrounding the Hardin Street Building (Hardin) loan (Prospectus ID#12, representing 4.1% of the current pool balance). This loan is secured by a four-storey 82,549 square foot (sf) office building located in Fort McMurray, Alberta. This week, a wildfire broke out in Fort McMurray causing the community to evacuate the area as homes and buildings were destroyed. The subject is located within the affected area; however, as the situation is ongoing, the extent of the damages, if any, and the economic impact are unknown at this time. As a result, DBRS will continue to monitor this loan as the situation is assessed.

The rating confirmations of the remaining classes reflect the overall performance of the transaction. The transaction originally consisted of 41 loans. Due to scheduled loan amortization and the repayment of ten loans since issuance, the collateral has been reduced by 29.8%. As of the April 2016 remittance, of the 31 remaining loans, 30 loans, representing 96.8% of the current pool balance, are scheduled to mature by January 2017. Based on the most recent year-end reporting available, the weighted-average (WA) refinance (Refi) debt service coverage ratio (DSCR) and exit debt yield for these loans are 1.66 times (x) and 10.8%, respectively. The transaction benefits from defeasance collateral, as four loans, representing 5.7% of the current pool balance, are fully defeased. The largest 15 loans exhibit healthy performance, reporting a WA DSCR and debt yield of 1.57x and 13.9%, respectively.

There are nine loans secured by properties located in Alberta within the transaction, representing 35.0% of the current pool balance. Six of these loans, including the Hardin loan discussed above, representing 30.8% of the current pool balance, are among the largest 15 loans of the pool. Based on the most recent year-end reporting available, these loans report a WA YE2014 DSCR of 1.71x, a Refi DSCR of 1.73x and an exit debt yield of 14.2%. An additional Alberta loan representing 2.7% of the current pool balance, is shadow-rated investment grade. The province of Alberta is heavily reliant on the oil and gas industry and the declining energy market in recent years has negatively impacted the economic environment in the region. Overall, loans secured by properties in Alberta within this transaction have been performing at expected levels despite the economic downturn experienced in the province. DBRS has identified two loans with increased risk as a result of the economic conditions, which are highlighted below.

The 550 – 11th Avenue Office Building loan (Prospectus ID#3, representing 6.3% of the current pool balance) is secured by a 97,325 sf 11-storey Class B office building located in Calgary, Alberta. The subject is located in the Beltline District, just south of the downtown core. This loan benefits from partial recourse to its sponsor, Strategic Group, which owns, manages and develops commercial properties across Canada. According to the YE2014 financials, the loan reported a 1.10x DSCR, a decline from the YE2013 DSCR of 1.40x. The performance decline is attributable to increased vacancy at the property. According to the March 2016 rent roll, the property was 76.1% occupied, slightly less than the YE2014 occupancy of 78.8% and a further decrease from the YE2013 occupancy of 88.1%. In addition, tenants representing 50.6% of the net rentable area (NRA) have lease expirations in 2016, DBRS has asked the servicer to provide a current leasing update. According to the sponsor, 45.8% of the NRA is marketed as available. The most recent site inspection completed in October 2015 noted that major renovations were scheduled within the next 12 to 24 months at the property. Given the increased vacancy at the subject and the current economic outlook, DBRS modelled this loan with an increased probability of default.

The Franklin Atrium loan (Prospectus ID#10, representing 4.5% of the current pool balance) is secured by two adjoined low-rise office buildings in Calgary, Alberta. According to the May 2016 rent roll, the property is 66.1% occupied, which represents a significant decline compared with the May 2015 occupancy of 92.7%. The increased vacancy is attributable to multiple tenants vacating upon their respective lease expirations: Guest-Tek (16.8% of the NRA) vacated in April 2016, Pioneer Engineering (7.6% of the NRA) vacated in December 2015 and Rogers Data Centres Alberta vacated one of their units (3.0% of the NRA) in February 2016. According to the YE2014 financials, the loan reported a DSCR of 2.15x, which is in line with prior year performance. Given the increased vacancy, it is expected that the financial performance will decline as well. As a result, the loan was modelled with an elevated probability of default to reflect the significant increase in vacancy. On a positive note, this loan benefits from partial recourse to an experienced sponsor.

As of the April 2016 remittance, there are no loans in special servicing and two loans, representing 3.0% of the current pool balance, are on the servicer’s watchlist.

The largest loan on the servicer’s watchlist is 1450-1550 Appleby Line (Prospectus ID#19, representing 2.6% of the current pool balance). This loan is secured by an 110,947 sf industrial/office property located in Burlington, Ontario. The property was originally built-to-suit for Siemens Canada (Siemens) in 2000. Upon lease expiration in February 2013, Siemens downsized their space and currently occupies 49.0% of the NRA, with a lease expiration in February 2017. The remaining space was then converted to four smaller office spaces in 2014. According to the January 2016 rent roll, the subject is currently 62.1% occupied, with Invensys Systems taking occupancy in one of the four office spaces, representing 13.1% of the NRA with a lease that expires in March 2021. Invensys Systems signed in December 2014 and was provided a period of free rent until February 2015. As a result of the reconfiguration of the subject, the YE2014 DSCR was 0.13x, representing a further decline from the YE2013 DSCR of 0.31x. However, it is expected that as the new tenant’s rental revenue is realized, the financial performance of the loan will improve. Additionally, the borrower continues to the market the vacant space.

DBRS maintains an investment-grade shadow rating on the Maxxam Portfolio loan (Prospectus ID#20, representing 2.7% of the current pool balance). DBRS has today confirmed 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. The April 2016 monthly 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 (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.