DBRS Upgrades Three Classes and Discontinues One Class of Merrill Lynch Financial Assets Inc., Series 2007-Canada 21

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

-- Class J to AAA (sf) from B (high) (sf)
-- Class K to AA (sf) from B (sf)
-- Class L to BBB (low) (sf) from B (low) (sf)

All trends are Stable.

In addition, DBRS withdrew the rating on Class XC, as the transaction is winding down and the remaining loan is past its original maturity.

The rating upgrades to Classes J, K and L reflect the increased credit support to the bonds as a result of the successful repayment of Classes E, F, G and H. With those repayments, the Class J certificate is now the most senior class outstanding. At issuance, the transaction consisted of 41 loans with an original balance of $385.0 million. As of the February 2019 remittance, only one loan remains with an outstanding balance of $8.9 million.

The remaining loan is 550-11th Avenue Office Building (Prospectus ID#3), a 97,325-square-foot 11-storey Class B office building located in Calgary. The loan was added to the servicer’s watchlist in January 2012 due to decreased occupancy. This loan was originally scheduled to mature in December 2016, but a maturity extension was granted with options that run through September 2020. The subject had an in-place occupancy rate of 92.1% as of February 2019, a significant increase from the January 2018 occupancy rate of 59.9%. Rangeland Engineering Co. Ltd. (30.9% of the net rentable area through October 2030) took occupancy in November 2018, driving the occupancy improvement in the last year. Although the subject’s occupancy rate has significantly improved over the last few years, challenges remain due to market volatility within Calgary, where Class B and C properties continue to have relatively high vacancy rates. The loan reported a debt service coverage ratio (DSCR) of -0.03 times (x) as of YE2017 (most recent reporting), in comparison with the YE2016 DSCR of 0.58x. With the most recent leasing activity at the subject, the loan would have an implied DSCR of 1.16x as of May 2019.

The loan has a recourse to Riaz Mamdani, the Chief Executive Officer of Strategic Group, for up to $10.0 million, a figure in excess of the current loan balance. According to the sponsor’s website, Strategic Group has over $1.0 billion in assets, specializing in office, retail and residential properties located in Alberta and British Columbia. The sponsor has shown the ability in the past to pay down significant debt obligations, including a loan amount in excess of $44.0 million in 2017. DBRS believes that the improvement in occupancy, the sponsor’s continued commitment to the property and recent success with paying down debt are all mitigating factors to the increased risks in the previous performance declines that led to the maturity extension and market deterioration in Calgary.

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

DBRS provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the remaining loan in the transaction.

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 most outstanding commercial mortgage-backed securities transactions (including non-DBRS rated), as well as loan-level and transaction-level commentary for most DBRS-rated and -monitored transactions.

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

The principal methodology is the 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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