DBRS Assigns Provisional Ratings to A10 Term Asset Financing 2016-1, LLC

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-1 (the Notes) to be issued by A10 Term Asset Financing 2016-1, LLC. All trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at A (low) (sf)
-- Class C at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)

Classes E and F are non-offered classes and are retained by the Issuer.

The collateral consists of 27 loans, secured by 33 commercial properties, all originated by A10 Capital, LLC (A10). A total of 11 underlying loans are cross-collateralized and cross-defaulted into five separate portfolios or crossed groups. The DBRS analysis of this transaction incorporates these crossed groups, resulting in a modified loan count of 21, and loan references within this report reflect this total. A10 specializes in mini-perm loans, which typically have three- to five-year terms with extension options and are used to finance properties until they are fully stabilized. The borrowers are often new equity sponsors of fairly well-positioned assets within their respective markets. A10’s initial advance is the senior debt component typically for the purchase of a real estate-owned acquisition or discounted payoff.

The pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity, based on the fully extended loan term. Because of the floating-rate nature of almost half the pool, the index (three-month LIBOR) was modeled at the lower of a DBRS stressed rate that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap, to the extent one is in-place, with the respective contractual loan spread added to determine a stressed interest rate over the loan term. For the hybrid loan, DBRS modeled the maximum debt service expected throughout the life of the loan, which occurred in the first 12 months of the loan’s switching to a floating interest rate. When the cut-off whole-loan balances were measured against the DBRS In-Place net cash flow (NCF) and their respective in-place (fixed-rate loans) or stressed constants (floating-rate loans), 16 loans, representing 70.7% of the total loan commitments, 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, DBRS applied its refinance constants to the balloon amounts. This resulted in 11 loans, representing 63.3% of the total commitments, having refinance DSCRs below 1.00x relative to the DBRS Stabilized NCF. The properties are often transitioning, with potential upside in the cash flow; however, DBRS does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place were insufficient to support such treatment. Furthermore, even with structure provided, DBRS generally does not assume the assets will stabilize above market levels.

The ratings assigned by DBRS contemplate timely payments of distributable interest and, in the case of the senior subordinate notes other than the Class A-1 and A-2 Notes, ultimate recovery of Deferred Collateralized Note Interest Amounts (inclusive of interest payable thereon at the applicable rate, to the extent permitted by law). Accordingly, DBRS will assign its Interest in Arrears designation to any class of Offered Notes (other than the Class A Notes) during any Interest Accrual Period when such class accrues Deferred Collateralized Note Amounts.

The ratings assigned to the Notes 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 and Unified Interest Rate Model for Rating U.S. Structured Finance Transactions, 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.