DBRS Finalizes Provisional Ratings of BANK 2017-BNK7

DBRS, Inc. (DBRS) finalized the provisional ratings of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-BNK7 (the Certificates) to be issued by BANK 2017-BNK7:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at A (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (sf)
-- Class F at B (low) (sf)

All trends are Stable.

Classes X-D, X-E, X-F, X-G, D, E, F and G will be privately placed. The Class X-A, X-B, X-D, X-E, X-F and X-G balances are notional.

The collateral consists of 65 fixed-rate loans secured by 83 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The conduit pool was analyzed to determine the 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, one loan, representing 0.5% of the pool balance, 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 20 loans, representing 47.3% of the pool, having refinance DSCRs below 1.00x, and 12 loans, representing 27.4% of the pool, having refinance (Refi) DSCRs below 0.90x. These credit metrics are based on whole-loan balances. General Motors Building, which represents 9.2% of the transaction balance and is one of the pool’s loans with a DBRS Refi DSCR below 0.90x, is shadow-rated investment grade by DBRS and has a large piece of subordinate mortgage debt outside the trust. Based on A-note balances only, the deal’s weighted-average (WA) DBRS Refi DSCR improves to 1.23x, and the concentration of loans with DBRS Refi DSCRs below 1.00x and 0.90x reduces to 38.1% and 18.2%, respectively.

Five of the largest 13 loans in the pool – General Motors Building, Westin Building Exchange, The Churchill, Overlook at King of Prussia and Moffett Place B4 – exhibit credit characteristics consistent with shadow ratings of AAA, AAA, AAA, BBB (low) and A (low), respectively. These loans represent 24.8% of the transaction balance. Furthermore, 19 loans, representing 9.5% of the pool, are secured by cooperative properties and are very low-leverage with minimal term and refinance default risk. Twenty-one loans, representing 46.8% of the pool, are located in urban markets with increased liquidity that benefit from consistent investor demand, even in times of stress. Of these, eight loans, totaling 23.7% of the transaction balance, are considered to be located in Super Dense Urban markets, which DBRS defines as gateway locations with extremely high liquidity and low cap rates. Both term default risk and refinance risk are low, as indicated by the strong WA DBRS Term and Refi DSCRs of 2.04x and 1.19x, respectively. In addition, 51 loans, representing 75.2% of the pool, have a DBRS Term DSCR in excess of 1.50x, and 31 loans, totaling 27.5%, have a DBRS Refi DSCR in excess of 1.15x. Five of the largest 13 loans in the pool meet both criteria. Even when excluding the five loans shadow-rated investment grade and the co-operative loans, the deal exhibits a robust WA DBRS Term and Refi DSCR of 1.69x and 1.00x, respectively.

The pool is concentrated based on loan size, with a concentration profile equivalent to that of a pool of 23 equal-sized loans. The largest five and ten loans total 36.7% and 57.9% of the pool, respectively. The pool also has a relatively high concentration of loans secured by non-traditional property types, such as self-storage, hospitality and MHC assets, which, on a combined basis, represent 17.1% of the pool across 13 loans. There are four loans, totaling 12.5% of the pool, secured by hotels, and nine loans, totaling 4.6% of the transaction balance, secured by self-storage properties. Each of these asset types is vulnerable to high NCF volatility because of the relatively short-term leases compared with other commercial properties, which can cause NCF to quickly deteriorate in a declining market. Three of the largest 12 loans are secured by hospitality properties. Twenty-two loans, representing 49.3% of the pool, including seven of the largest 15 loans, are structured with interest-only (IO) payments for the full term. An additional 13 loans, representing 23.2% of the pool, have partial IO periods ranging from 24 months to 60 months. The percentage of loans structured with full term and partial IO payments relative to the total pool is elevated at 72.5%.

The DBRS sample included 24 of the 65 loans in the pool. Site inspections were performed on 22 of the 83 properties in the portfolio (72.5% of the pool by allocated loan balance). DBRS conducted meetings with the on-site property manager, leasing agent or a representative of the borrowing entity for 71.0% of the pool. A cash flow review, as well as a cash flow stability and structural review, were completed on 24 of the 65 loans, representing 80.5% of the pool by loan balance. The DBRS sample had an average NCF variance of -10.2% and ranged from -29.7% (Fresenius Distribution Center SC) to +1.0% (Metro Towne Center).

For more information on this transaction and supporting data, please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

The ratings assigned to Class F materially deviate from the higher ratings implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviations are warranted given the expected dispersion of loan-level cash flows post-issuance.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), 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 require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is North American Multi-borrower CMBS 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 rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or 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.