DBRS Publishes Final North American CMBS Multi-borrower Rating and Surveillance Methodologies and CMBS Insight Model, Takes Rating Actions

DBRS published its “North American CMBS Multi-borrower Rating Methodology,” which includes the new DBRS CMBS Insight Model used to generate loan-level expected losses and base-case pool losses in combination with the use of multiple ranges that vary based on rating categories. The multiple ranges will be used by DBRS to evaluate the adequacy of credit enhancement in light of the expected base-case pool loss and a given rating level. DBRS also published its updated “North American CMBS Surveillance Methodology” where multiple ranges will be used during the surveillance process. The surveillance process also includes an additional analytical step where the DBRS CMBS Insight Seasoned Module will be run following at least three, five and seven years of seasoning, corresponding to full-year financial reporting. Publication of these methodologies follows the conclusion of the Request for Comment period that began on March 8, 2019. DBRS did not receive any comments during the period.

These methodologies supersede the prior versions published prior to and on March 8, 2019, and are effective as of March 26, 2019.

These methodologies present the criteria for commercial mortgage-backed security (CMBS) multi-borrower conduit transactions (both United States and Canadian), agency transactions, small-balance transactions, seasoned loan transactions, resecuritizations and commercial real estate (CRE) collateralized loan obligations (CLOs) for which ratings are assigned and/or monitored.

As a result of the application of the above methodologies, DBRS has taken the following rating actions on the classes of debt indicated below. Generally, DBRS applied the following analysis when applying the methodologies: (1) All defeased loans were liquidated at 100.0% recovery. (2) Specially serviced loans were liquidated based on recent information, such as updated appraised values. The combination of these two actions resulted in a liquidated credit enhancement for the bond stack, which was compared with the multiple ranges referred to above. For specially serviced loans that were not liquidated and remained in the pool, DBRS increased the loan-level probability of default (POD) to 100.0%. DBRS adjustments, such as sponsor strength, property quality or the DBRS Haircut, were generally maintained from issuance. Several performing loans may have had adjustments made to loan-level expected loss via a POD or loss given default adjustment to address pertinent loan-level risk. For example, regional malls that may have recently lost an anchor or anchors may have been adjusted to account for this ongoing concern.

Transactions issued in 2014 and earlier were also subject to the DBRS CMBS Insight Seasoned Module to factor in updated performance metrics, including an updated property-level net cash flow. Some multi-borrower conduit or resecuritization transactions were excluded from this analysis as their pool size has shrunk to a level where the “DBRS Single-Asset/Single-Borrower Methodology” may be more applicable to assess loan-level risk or the transactions. A few other deals that are winding down or have provided notice of cleanup calls or trust redemption were also excluded. If the transactions included a rake bond that would be subject to the DBRS Large Loan Sizing Hurdles, the hurdles from the last review, if recent, were used or were updated as applicable.

For CRE CLOs, for the purposes of this application, DBRS ran the DBRS CMBS Insight Model assuming all as-is metrics in order to capture any potential negative credit drift in the pools. DBRS is placing the ratings of all CRE CLOs Under Review with Developing Implications as it works to establish a DBRS Business Plan Score for a sample of the loans in the pools that will allow the loan-level expected loss to benefit from as-stabilized metrics. Please refer to Appendix B of the “North American CMBS Multi-borrower Rating Methodology” for more details on DBRS’s approach to CRE CLOs and the DBRS Business Plan Score.

DBRS also applied its criteria for rating CMBS interest-only certificates, as referenced in the surveillance methodology. Rating changes on the applicable reference obligations may have triggered an action on the CMBS interest-only certificate as well.

Following the review and application of the methodologies, 2,625 classes of 223 transactions were reviewed. The vast majority of the resulting actions for the conduit, agency, small-balance, seasoned loan and re-securitization transactions were confirmations. There were also a fair number of rating upgrades, a few rating downgrades and, in addition to the CRE CLO transactions, a small number of bonds placed Under Review with Developing Implications in one resecuritization. For those transactions placed Under Review with Developing Implications, DBRS needs more information to factor into its final analysis. Those are expected to be resolved within three months.

DBRS also notes material deviations, defined as three or more notches from the DBRS CMBS Insight Model, for a number of classes. Generally, there are two categories that drive the material deviations, where the model was directionally higher or lower for the classes noted below.

(1) Classes that are perceived to have uncertain loan-level event risk that was not captured in the model.
(2) Classes where the sustainability of loan performance trends are not yet demonstrated.

Additionally, material deviations from DBRS’s “Rating North American CMBS Interest-Only Certificates” have been maintained for interest-only classes for which consideration was given for actual loan, transaction and sector performance where a rating based on the lowest-rated notional class may not reflect the observed risk. Also, there were two classes with material deviations from the DBRS CMBS Insight Model as a result of structural features (loan or transaction) and/or the expectations pursuant to other related methodologies that constrain the quantitative model input.

A summary of the rating actions, along with the rating action for each class, can be found by clicking the following link:

https://www.dbrs.com/research/342416

DBRS notes that the above press release was amended on March 19, 2020, to revise the rating action on ReadyCap Commercial Mortgage Trust 2014-1 Commercial Mortgage Pass-Through Certificates, Class A and Class IO-A to Discontinued-Repaid. The Class A and Class IO-A Notes were mistakenly Confirmed at AAA (sf) despite being repaid as of December 26, 2018. The press release has now been corrected.

Notes:
DBRS methodologies are publicly available on its website www.dbrs.com under Methodologies & Criteria.

For more information on this methodology, the above-referenced credits or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

The principal methodology is North American CMBS Surveillance Methodology, which can be found on dbrs.com under Methodologies & Criteria. The actions incorporate the new DBRS CMBS Insight Model, which is further described in the North American CMBS Multi-borrower Rating Methodology. 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 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.

The ratings of two securities are endorsed by DBRS Ratings Limited for use in the European Union:

-- Commercial Mortgage Pass-Through Certificates, Series 2014-C17, Class D (Class D) of Morgan Stanley Bank of America Merrill Lynch Trust 2014-C17 (MSBAM 2014-C17)
-- Commercial Mortgage Pass-Through Certificates, Series 2014-C21, Class D (Class D) of WFRBS Commercial Mortgage Trust 2014-C21 (WFRBS 2014-C21)

The following additional regulatory disclosures apply to these endorsed ratings:

The credit rating has been disclosed to the master servicer and trustee of each securitization, as representatives of the issuer, through the 17g-5 information provider, master servicer directly and/or the depositor.

The last rating action on the MSBAM 2014-C17 transaction took place on December 20, 2018, when all classes, including the endorsed Class D, were confirmed.

The last rating action on the WFRBS 2014-C21 transaction took place on October 29, 2018, when all classes, including the endorsed Class D, were confirmed.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Gwen Roush, Vice President, North American CMBS
Rating Committee Chair: Erin Stafford, Managing Director, Head of North American CMBS
Initial Rating Date: MSBAM 2014-C17 – July 23, 2014 / WFRBS 2014-C21 – July 14, 2014

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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