DBRS Assigns Provisional Ratings to BSPRT 2017-FL1 Issuer, Ltd.

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of secured Floating-Rate Notes (the Notes) to be issued by BSPRT 2017-FL1 Issuer, Ltd.:

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (high) (sf)
-- Class C Notes at BBB (low) (sf)

All trends are Stable.

The transaction also features Preferred Shares that are not part of this offering.

The transaction is a managed collateralized loan obligation pool that totals $418.1 million. The initial collateral consists of retail, office, industrial, multifamily, hotel and manufacturing housing assets that generally have some level of transition or stabilization, which is the premise for seeking floating-rate short-term debt. The transaction has a Reinvestment Period that is expected to expire in July 2018, and DBRS will have the ability to provide a Rating Agency Confirmation on loans that are added to the pool during the Reinvestment Period in order to evaluate any credit drift caused by potential loan concentrations. The initial pool consists of 25 loans, 15 of which, or 57.9% of the loan pool, have a pari passu companion participation held by a subsidiary of the seller and sponsor, Benefit Street Partners Realty Operating Partnership, L.P.

The floating-rate mortgages were analyzed to determine the probability of loan default over the term of the loan and the refinance risk at maturity based on a fully extended loan term. Because of the floating-rate nature of the loans, DBRS assumed the index (one-month LIBOR) to be the lower of the DBRS stressed rate that corresponded to the remaining fully extended term of the loans (81.1% of the pool) and the strike price of the interest rate cap (18.9% of the pool), with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS In-Place Net Cash Flow (NCF) and their respective stressed constants, there were 21 loans, representing 82.2% of the pool, with term debt service coverage ratios (DSCRs) below 1.15 times (x), a threshold indicative of a higher likelihood of term default. Additionally, to assess refinance risk, DBRS applied its refinance constants to the balloon amounts, resulting in 19 loans, or 80.2% of the loans, 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 are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS generally does not assume the assets will stabilize above market levels.

The loans were sourced by an experienced commercial mortgage originator. The Preferred Shares will initially be held by BSPRT 2017-FL1 Holder, LLC, an indirect wholly owned subsidiary of the seller. The Preferred Shares represent 18.8% of the transaction balance. The properties are primarily located in core markets — 2.0% super-dense urban, 14.5% urban and 68.2% suburban — which benefit from greater liquidity. Only 15.2% of the loans are secured by properties located in tertiary markets, and there are no loans secured by collateral in rural markets. Property quality is considered good overall as 70.6% of the loans in the DBRS sample have Average property quality and one loan, comprising 7.5% of the DBRS sample, has Above Average property quality. Only one loan, representing 4.4% of the DBRS sample, has a property quality of Below Average.

The overall weighted-average (WA) DBRS Term and Refinance (Refi) DSCRs of 0.98x and 0.90x, respectively, and corresponding DBRS Debt and Exit Debt Yields of 6.9% and 8.2%, respectively, are considered to be representative of high-leverage financing. The DBRS Term and Refi DSCRs are based on the DBRS In-Place NCF and debt service calculated using a stressed interest rate. The DBRS Term DSCR is based on the DBRS In-Place NCF, and debt service is calculated using a stressed interest rate. The WA stressed interest rate used is 6.83%, which is higher than the current WA interest rate of 5.87% (based on a WA mortgage spread and a 1.05% one-month LIBOR index). Regarding the significant refinance risk that is indicated by the DBRS Refi DSCR of 0.90x, the credit enhancement levels are reflective of the increased leverage, which is substantially higher than recent fixed-rate conduit transactions. The assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the overall debt yield of the loans. DBRS associates its probability of default based on assets’ in-place cash flow, which does not assume that the stabilization plan and cash flow growth will ever materialize. The pool has a large concentration of office properties, with nine loans accounting for 31.3% of the pool. DBRS sampled 77.1% of the pool, representing 94.6% coverage of the total office loan cut-off balance, thereby providing comfort for the DBRS NCF. Additionally, 100.0% of the office collateral is located in super-dense urban, urban or suburban markets as well as mature, developed submarkets with a great deal of built-in demand.

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 ratings 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 principal methodologies are North American CMBS Multi-borrower Rating Methodology, Unified Interest Rate Model for Rating U.S. Structured Finance Transactions and Commercial Real Estate Property Analysis Criteria, which can be found on dbrs.com under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E), which contains a 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.