DBRS Publishes Updates to CMBS Multi-borrower Rating Methodology

DBRS has today published its “CMBS Multi-borrower Rating Methodology,” updating its approach to rating North American commercial real estate (CRE) diversified pool transactions. This methodology, along with DBRS’s “North American Single-Asset/Single-Borrower Methodology” (published March 16, 2017), “Rating North American CMBS Interest-Only Certificates” (published March 15, 2017) and the “DBRS Commercial Real Estate Property Analysis Criteria” (published February 15, 2017), replaces DBRS’s “North American CMBS Rating Methodology” (published January 23, 2017). Please see the related press releases for disclosure regarding changes to each of these methodologies.

With respect to the DBRS “CMBS Multi-borrower Rating Methodology,” which is applied to large pools of CRE loans, the refinements incorporated in the updated methodology published today are not considered to be material; thus, a request for comment period was not required. The changes to the analytical approach applied to CRE pools are summarized below:

-- The addition of liquidation expenses in the event of default (4.5% to 1.5%) when estimating loss given default (LGD or loss severity),
-- A minor increase in the probability of default (POD) for loans that have high debt service coverage ratios and for loans in tertiary and rural markets.
-- A reduction in the cash flow volatility assumption used for limited-service and full-service hotel loans.
-- The addition of regional mall tiering, increasing LGD for malls that have lower total in-line sales figures. Please see the methodology entitled “DBRS Commercial Real Estate Property Analysis Criteria” for additional tiering details.
-- A minor increase in LGD for single-tenant properties.
-- Lower net cash flow volatility assumptions for Freddie Mac multifamily loans, which will result in lower POD, and lower debt yield benchmarks for Freddie Mac loans, creating a lower loss severity for this type of multifamily loan.

Accordingly, this update has resulted or is expected to result in limited rating actions and DBRS expects these rating actions to primarily affect seasoned Freddie Mac K-Series bonds that were already showing signs of improved performance. The ratings analysis is expected to be resolved over the next three months as more 2016 year-end cash flows are reported for the properties securing the loans within each transaction. Following this release, DBRS has placed seven ratings of six Freddie Mac K-Series bonds Under Review with Positive Implications. If updated loan performance remains strong, in line with current performance, DBRS expects one- to two-notch upgrades on the following ratings:

-- FREMF 2010-K8 Mortgage Trust, Series 2010-K8, Multifamily Mortgage Pass-Through Certificates Series 2010- K8, Class B
-- FREMF 2011-K15 Mortgage Trust, Series 2011-K15, Multifamily Mortgage Pass-Through Certificates Series 2011-K15, Class B
-- FREMF 2011-K702 Mortgage Trust, Series 2011-K702, Multifamily Mortgage Pass-Through Certificates, Series 2011-K702, Class B
-- FREMF 2012-K17 Mortgage Trust, Series 2012-K17, Multifamily Mortgage Pass-Through Certificates Series 2012-K17, Class B
-- FREMF 2012-K18 Mortgage Trust, Series 2012-K18, Multifamily Mortgage Pass-Through Certificates Series 2012-K18, Class B
-- FREMF 2012-K19 Mortgage Trust, Series 2012-K19, Multifamily Mortgage Pass-Through Certificates Series 2012-K19, Class C
-- FREMF 2012-K19 Mortgage Trust, Series 2012-K19, Multifamily Mortgage Pass-Through Certificates Series 2012-K19, Class B

Notes:
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.

The principal methodologies are CMBS North American Surveillance and North American CMBS Rating Methodology, which can be found on dbrs.com under Methodologies.

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

The methodology providing DBRS's processes and criteria is available by contacting us at info@dbrs.com.

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