DBRS Assigns Provisional Ratings to Wells Fargo Commercial Mortgage Trust 2017-RC1

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-RC1 (the Certificates), issued by Wells Fargo Commercial Mortgage Trust 2017-RC1.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB 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 (low) (sf)
-- Class E at BB (low) (sf)
-- Class X-E at BB (low) (sf)
-- Class F at B (low) (sf)
-- Class X-F at B (low) (sf)

All trends are Stable.

Classes X-D, D, X-E, E, F and X-F will be privately placed.

The Class X-A, X-B, X-D, X-E and X-F 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’ positions within the transaction payment waterfall when determining the appropriate ratings.

On January 17, 2017, DBRS released a Request for Comment on its proposed methodology, “Rating North American CMBS Interest-Only Certificates.” If this methodology is adopted without changes, DBRS indicates that potential rating actions could be either downgrades or confirmations to IO certificates. Please refer to the January 17, 2017, DBRS press release for further details on the proposed methodology.

The collateral consists of 61 fixed-rate loans secured by 78 commercial and multifamily properties, comprising a total transaction balance of $634,913,732. The transaction has a sequential-pay pass-through structure. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the 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, five loans, representing 8.3% of the total pool, 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 given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 21 loans, representing 44.8% of the pool, having refinance DSCRs below 1.00x.

Term default risk is low as indicated by the relatively strong weighted-average (WA) DBRS Term DSCR of 1.76x. In addition, 44 loans, representing 83.9% of the pool, have a WA DBRS Term DSCR in excess of 1.50x. Fifteen loans, representing 7.8% of the pool, are secured by cooperative properties and are very low-leverage, with minimal term and refinance default risk Even when excluding the 15 loans secured by cooperative properties contributed by National Cooperative Bank, N.A. (NCB), the deal exhibits a favorable WA DBRS Term DSCR of 1.60x. The DBRS Refi DSCR, excluding the 15 NCB loans, is 1.06x, indicating a higher refinance risk on an overall pool level. Five loans, representing 14.7% of the pool, have DBRS Refi DSCRs below 0.90x, including four of the top ten loans and seven of the top 15 loans. Eleven loans, representing 33.1% of the pool, including six of the top 15 loans, are structured with IO payments for the full term. An additional 18 loans, representing 36.9% of the pool, have partial IO periods, ranging from ten months to 60 months. The DBRS Term DSCR is calculated by using the amortizing debt service obligation and the DBRS Refi DSCR is calculated considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines the POD based on the lower of Term or Refi DSCR, so loans that lack amortization will be treated more punitively.

The pool is concentrated based on loan size, with a concentration profile equivalent to that of a pool of 22 equal-sized loans. The largest five and ten loans total 32.3% and 50.8% of the pool, respectively. Three loans, comprising 19.3% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. Loans secured by properties occupied by single tenants have been found to suffer from higher loss severities in the event of default. As such, DBRS applied a higher POD and cash flow volatility to single-tenant properties with a compared with multi-tenant properties.

The DBRS sample included 28 of the 61 loans in the pool. Site inspections were performed on 33 of the 78 properties in the portfolio (68.1% of the pool by allocated loan balance). The DBRS average sample NCF adjustment for the pool was -8.4% and ranged from –24.9% to 0.0%. The average DBRS sampled NCF haircut is in line with recent transactions by DBRS where the average DBRS sampled haircut has averaged -8.5%.

The ratings assigned to Class D, Class E and Class F differ from the higher rating implied by the Large Pool Multi-borrower Parameters. DBRS considers this difference to be a material deviation from the methodology and, in this case, the ratings reflect the dispersion of loan-level cash flows expected to occur post-issuance.

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.

The principal methodology is North American CMBS Rating Methodology, which can be found on www.dbrs.com under Methodologies.

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

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.