DBRS Upgrades Two Classes of Waterfall Victoria Mortgage Trust, Series 2011-SBC2, Changes Trend on One Class to Positive from Stable and Confirms One Class

DBRS Limited (DBRS) upgraded two classes of the Mortgage-Backed Certificates Series 2011-SBC2 issued by Waterfall Victoria Mortgage Trust, Series 2011-SBC2 (the Trust) as follows:

-- Class M-2 to AAA (sf) from AA (high) (sf)
-- Class M-3 to AA (high) (sf) from AA (sf)

In addition, DBRS changed the trend on Class M-3 to Positive from Stable and confirmed Class M-1 at AAA (sf). The trends on classes M-1 and M-2 are Stable. DBRS does not rate Class M-4, Class M-5 or the notional bond, Class XC.

The rating upgrades and Positive trend change reflect the overall strong performance of the transaction, with collateral reduction of 75.5% since issuance as of the January 2019 remittance. Since issuance, 89 of the original 175 loans have been repaid in advance of maturity, while 22 loans have been liquidated from the Trust. Loan repayments, scheduled amortization and proceeds from liquidated loans have significantly increased the credit support for the senior and mezzanine classes, with losses of $3.5 million contained to the junior Class M-5, which had a balance of $4.3 million as of the January 2019 remittance. The transaction is composed of small balance loans, with an average remaining loan balance of approximately $375,000 as of January 2019.

To date, 47 loans (76.8% of the pool) have reported YE2017 net cash flow (NCF) figures and six loans (8.7% of the pool) have reported YE2016 NCF figures, while the remainder of the loans have reported previous year NCF figures or have not reported since issuance. Based on the most recent year-end financials available, the top 15 loans, which account for 38.4% of the current pool balance, have a weighted-average debt yield of 9.5%.

As of the January 2019 remittance report, there are four loans in special servicing, representing 4.5% of the pool. DBRS analyzed these loans assuming a 100.0% probability of default (POD) to properly capture the increased credit risk. There are also 35 loans on the servicer’s watchlist, representing 56.2% of the outstanding pool balance. These loans remain current, but are being monitored for various issues, including low debt service coverage ratios, low occupancy rates and the borrower’s failure to provide updated financials. Although the servicer’s watchlist concentration is high, this is not uncommon for pools composed of small balance loans that are secured by properties with the potential for above-average cash flow volatility. DBRS analyzed the loans on the servicer’s watchlist with a cash flow stability penalty to increase the POD.

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

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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.

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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

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