DBRS Confirms 13 Classes of Merrill Lynch Financial Assets Inc., Series 2007-Canada 21 and Changes Trend on Two Classes

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

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

The trends on all classes remain Stable, excluding Class K and Class L, to which DBRS has assigned Negative trends because of concerns surrounding the ability of certain borrowers to secure refinancing capital for their respective loans as these loans near maturity. Concerns include poor financial performance and loans secured by properties in markets with limited liquidity. Two loans are highlighted in further detail below.

The rating confirmations reflect the overall performance of the transaction. As of the September 2016 remittance, 28 of the original 41 loans remain in the transaction, as there has been collateral reduction of 41.6% since issuance due to successful loan repayments and scheduled loan amortization. Of the remaining 28 loans, 27 loans, representing 96.2% 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 debt service coverage ratio (DSCR) and exit debt yield for these loans are 1.67 times (x) and 12.8%, respectively. The transaction benefits from defeasance collateral, as four loans, representing 6.7% of the current pool balance, are fully defeased. The largest 15 loans exhibited healthy performance, reporting a WA DSCR and debt yield of 1.54x and 13.0%, respectively; however, one loan, which is highlighted below, is secured by a property in Fort McMurray, which has seen an overall market softening in recent years.

The Hardin Street Building loan (Prospectus ID#12, representing 4.9% of the current pool balance) is secured by a four-storey, 82,549 square foot (sf) office building. While the region was significantly affected by a wildfire in May 2016, the servicer confirmed that the subject was not affected and continues to be in full operation. According to the August 2016 rent roll, the property was 100.0% occupied, increasing over the April 2016 occupancy of 89.8% as a result of two tenants signing short-term leases for the vacant space. These leases expire in November 2016 and January 2017. The largest tenant at the property is the Regional Municipality of Wood Buffalo (RMWB), representing 74.3% of the total net rentable area (NRA) on leases with multiple expiration dates. Approximately 23.4% of the RMWB space expires in 2017 with an additional 47.9% of its space scheduled to expire in 2018. According to YE2015 financials, loan performance remains strong as the reported DSCR of 3.02x remained in line with the YE2013 DSCR of 3.08x. While financial performance appears stable at present, DBRS is concerned about the long-term space needs of the RMWB given the economic slowdown in the region. Additionally, the loan matures in December 2016 and the lack of lender activity in the region may result in difficulties for the borrower to secure take-out financing. As a result, DBRS modelled this loan with an increased probability of default.

As of the September 2016 remittance, there are ten loans on the servicer’s watchlist, representing 52.1% of the current pool balance. The majority of the loans on the servicer’s watchlist are flagged due to upcoming maturity, including the largest loan in the pool, representing 15.8% of the current pool balance. One of the loans on the watchlist is highlighted below.

The 5055 Satellite Drive loan (Prospectus ID#5, representing 6.0% of the current pool balance) is secured by a 151,745 sf flex industrial/office building located in Mississauga, Ontario. The property is a part of an industrial park just south of the Toronto Pearson International Airport. This loan was originally placed on the servicer’s watchlist in August 2010 because of low occupancy. According to the March 2016 rent roll, the property was 72.7% occupied with tenants paying an average rental rate of $13.39 per sf (psf). Occupancy has decreased significantly from March 2014 when the property was 96.0% occupied. The decrease was attributable to the departure of Bell Mobility (18.9% of the NRA), which vacated when its lease expired in August 2014. The largest tenant at the property is ConAgra Foods Canada Inc., representing 28.4% of the NRA, with a lease that expires in November 2023. According to the Cushman & Wakefield Industrial Snapshot for Q2 2016, the overall vacancy rate for the Mississauga submarket was 4.0% with an overall WA net rent of $5.75 psf. At YE2015, the loan reported a DSCR of 1.06x, decreasing from the YE2014 DSCR of 1.54x. The decline in performance year over year is directly attributable to lower rental revenue and expense reimbursements as a result of lower occupancy. While the loan may still be a good candidate for refinance given that the current exit debt yield is 8.4%, the loan matures in December 2016 and there has been little positive leasing momentum since the departure of Bell Mobility.

DBRS maintains an investment-grade shadow rating on the Maxxam Portfolio loan (Prospectus ID#20, representing 3.2% of the current pool balance). DBRS has today confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

The ratings assigned to Classes C, F, G, H and J differ from the ratings implied by the quantitative model. DBRS considers this difference to be a material deviation, and in this case, the ratings reflect the uncertain loan-level event risk.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction. The September 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.

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