DBRS Publishes North American CMBS Interest-Only Certificates Methodology

DBRS published the methodology “Rating North American CMBS Interest-Only Certificates,” which further clarifies its approach to rating interest-only certificates (IOs) within both single-asset/single-borrower transactions and multi-borrower transactions. This methodology replaces the March 15, 2017, version of “Rating North American CMBS Interest-Only Certificates.” Please see the related press release dated March 15, 2017, for more information on the changes previously made to this methodology.

This methodology covers IOs issued in commercial mortgage-backed security (CMBS) multi-borrower conduits; agency, single-asset/single-borrower and commercial real estate collateralized loan obligations; and re-securitization of real estate mortgage investment conduits. A DBRS IO rating is an opinion that solely addresses the likelihood of the notional amount of an IO being adversely affected by collateral credit losses. In CMBS transactions, credit losses are allocated first to the most junior CMBS bonds and, when realized, second to the principal amount of those bonds when written down.

For single-tranche, multiple-tranche and weighted-average coupon (WAC)/stack IOs, the DBRS IO rating references the most junior rated class of bonds (the Reference Obligation), possibly adjusted upward by one notch. The rationale for adjusting upward by one notch is driven by the default probability of the underlying collateral, which incorporates both term and refinance defaults. Because CMBS loans have both term and refinance default risks that are weighted one-third toward refinance risk, the DBRS IO rating recognizes the muted impact on IOs by notching up the IO rating by one notch from the Reference Obligation rating.

Updates to this methodology clarify the application of WAC IOs to include the Applicable Reference Obligations or those tranches that, under a zero-default scenario, generate excess interest proceeds for the IO holder. Accordingly, this update has resulted in limited rating actions for the WAC IOs rated by DBRS. DBRS has upgraded six WAC IO ratings and confirmed 26 WAC IO ratings, all with Stable trends.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

The ratings for the four classes listed below 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. These deviations are the result of DBRS considering actual loan, transaction and sector performance where a rating based on the lowest notional class may not reflect the observed risk.

-- Institutional Mortgage Securities Canada Inc., 2012-2, Commercial Mortgage Pass-Through Certificates Series 2012-2, Class XC
-- Institutional Mortgage Securities Canada Inc., Series 2013-3, Commercial Mortgage Pass-Through Certificates Series 2013-3, Class X
-- Institutional Mortgage Securities Canada Inc., Series 2013-4, Commercial Mortgage Pass-Through Certificates, Series 2013-4, Class X
-- MCAP CMBS Issuer Corporation, Series 2014-1, Commercial Mortgage Pass-Through Certificates, Series 2014-1, Class X

Notes:
The principal methodology is Rating North American CMBS Interest-Only Certificates Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

DBRS rating definitions and the terms of use of such ratings are available at www.dbrs.com