DBRS Confirms All Classes of Merrill Lynch Financial Assets Inc., Series 2007-Canada 21

DBRS Limited (DBRS) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2007-Canada 21 issued by Merrill Lynch Financial Assets Inc., Series 2007-Canada 21 (the Trust):

-- Class XC at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class G at BB (sf)
-- Class H at BB (low) (sf)
-- Class J at B (high) (sf)
-- Class K at B (sf)
-- Class L at B (low) (sf)

All trends are Stable, including trends for Classes K and L, which were previously assigned Negative trends to reflect concerns surrounding the refinance prospects for the largest remaining loan in the pool.

The rating confirmations and Stable trend assignments on Classes K and L reflect the DBRS view and outlook for the remaining loans in the transaction. As of the April 2018 remittance, there are two of the original 52 loans remaining in the Trust with an aggregate principal balance of $17.3 million, reflecting a collateral reduction of 95.5% since issuance. Both loans have either partial or full recourse to the respective sponsors.

Based on YE2016 figures, the transaction reported a weighted-average (WA) debt service coverage ratio (DSCR) of 0.88 times (x) and a WA debt yield of 7.2%. The poor overall performance is attributable to the largest loan, 550-11th Avenue Office Building (Prospectus ID#3; 52.9% of the current pool balance), which is located in a market with limited liquidity and has been granted an extension on the original December 2016 maturity date with options that run through September 2020. The loan is secured by a 97,325-square-foot Class B office building located in downtown Calgary within the city’s Beltline District and has been on the watchlist since 2012 due to decreased occupancy. The subject had an in-place occupancy rate of 38.4% as of January 2018. The soft market in Calgary has been a factor for several years, with most forecasts predicting continued stress through the next few years.

The loan has a partial-recourse guarantee to Riaz Mamdani, the CEO of Strategic Group, for up to $10 million. According to the Annual Review 2017 report released by Strategic Group, 10% of the sponsor’s portfolio mix consists of assets that have exposure to the downtown Calgary office market. The sponsor’s portfolio is concentrated in office properties, representing 41.6% of the overall portfolio by square footage. Overall, Strategic Group manages $1.5 billion in real estate assets. As of April 2018, the sponsor’s Trust had an outstanding balance of $9.2 million, bringing the recourse obligation up to more than enough to cover the Trust’s exposure. DBRS believes the continued difficulties in the Calgary market could necessitate further extensions to the maturity date, but it does acknowledge the positives in the sponsor’s continued commitment to the property and a successful takeout.

The other remaining loan in the pool, La Tour d’Auteuil (Prospectus ID#17; 47.1% of the pool balance), is secured by a multifamily property in Montréal, Québec, and is scheduled to mature in December 2018. As of the most recent reporting available, the loan reported a YE2017 DSCR of 1.45x and an occupancy rate of 98.1% as of March 2018. Both figures represent improvements over previous years’ figures. These factors, as well as the exit debt yield in excess of 12.1% and the sponsor’s full recourse obligation, suggest a successful refinance is likely.

Class XC is an interest-only (IO) certificate that references a single rated tranche or multiple rated tranches. The Class XC is in wind-down with only one of the originally scheduled loan maturities remaining. After that loan repays or extends, it is expected that the rating on Class XC will be retired. The rating of Class XC was confirmed as the transaction has entered the wind-down period, and due to limited loan defaults during the life of the transaction, the Class XC has received its initial expected cash flows. In the wind-down period, DBRS deployed DBRS Hurdles for individual loans, while any pool-derived rating ceiling would predominantly reflect refinance risk of the remaining loans and therefore deemed not applicable because it affects IOs far less than it does principal and interest bonds. The rating ceiling for WA coupon/stack IOs is applicable to transactions with meaningful remaining term default risk and less applicable to transactions that are entering, or are already in, wind-down.

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

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for the remaining loans in the transaction:

-- Prospectus ID#3: 550-11th Avenue Office Building
-- Prospectus ID#17: La Tour d’Auteuil

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire commercial mortgage-backed securities universe, as well as deal and loan-level commentary for all DBRS-rated transactions.

The ratings assigned to Classes E, F, G, H, J, K and L 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 uncertain loan-level event risk.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is CMBS North American Surveillance, 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.

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 under Related Documents or by contacting us at info@dbrs.com.

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.

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