DBRS Assigns Provisional Ratings to A10 Bridge Asset Financing 2019-B, LLC

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-B to be issued by A10 Bridge Asset Financing 2019-B, LLC:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)

All trends are Stable.

The initial collateral consists of 36 fixed-rate and eight floating-rate mortgages secured by 45 mostly transitional properties with a cut-off balance as of March 31, 2019, totaling approximately $281.1 million, excluding approximately $83.3 million of future funding commitments. The pool will have a maximum balance of $320.0 million inclusive of $38.9 million of Future Funding Companion Participations that may be acquired using amounts in the $38.9 million pre-funding account. Most loans are in a period of transition with plans to stabilize and improve the asset value. During the Reinvestment Period, the Issuer may acquire Pre-Approved Future Funding Companion Participations and additional eligible loans subject to the Reinvestment Conditions.

For the floating-rate loans, DBRS used the one-month LIBOR index, which is based on the lower of a DBRS stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS As-Is net cash flow (NCF), 29 loans, comprising 64.9% of the initial pool balance, had a DBRS As-Is debt service coverage ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. Additionally, the DBRS Stabilized DSCR for six loans, comprising 20.0% of the initial pool balance, is below 1.00x, which is indicative of elevated refinance risk. The properties are often transitioning with potential upside in cash flow; however, DBRS does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS generally does not assume the assets to stabilize above market levels. The transaction will have a sequential-pay structure.

The transaction is governed by a trust indenture that will hold all of the commercial real estate (CRE) loans as collateral in addition to other accounts assigned to the Issuer. Collateral of the Issuer includes loans and various accounts established for and on behalf of the Issuer. Collateral does not include any Membership Interest or Membership Distribution Account. A10 Capital, LLC (A10 Capital), the loan originator, provides a unique strategy in its lending platform and serves a segment of the commercial mortgage market largely underserved by community banks because of their overexposure to CRE. Specifically, A10 Capital specializes in mini-perm loans, which typically have an initial three- to five-year term with extension options and are used to finance properties until they are fully stabilized. Most of the loans contain a future funding component that, subject to A10 Capital’s sole discretion, is to be disbursed for tenant improvement costs, letters of credit or other value-added propositions presented by the borrowers of the underlying CRE loans. The borrowers are typically new equity sponsors of fairly well-positioned assets within their respective markets. A10 Capital’s initial advance is the senior debt component, typically for the purchase of a real estate-owned acquisition or a discounted payoff.

Three loans, totaling 6.2% of the pool, are in markets with a DBRS Market Rank of 8, while seven loans, totaling 21.6% of the pool, are in markets with a DBRS Market Rank of 7 and 6. The market ranks correspond to zip codes that are more urbanized in nature. As measured, including all future funding in the calculation, the weighted-average (WA) DBRS As-Is loan-to-value (LTV) is low at 71.8%. Further, the WA As-Stabilized LTV is also quite low at 55.1%. The WA DBRS As-Is LTV reflects upward as-is appraised value adjustments to nine loans based on the appraiser’s as-complete value, which are based on upfront capex facilities that address deferred maintenance. Additionally, downward as-is and stabilized value adjustments were made to two loans. Please see the model adjustment section below for more on the above-mentioned adjustments. The origination is generally found to be on projects that have a reasonable likelihood of achieving stabilization with the capital injected by the loan sponsor and/or the A10 Capital future advance conditioned upon execution of leases approved by A10 Capital. The collateral of the underlying loans primarily consists of traditional office, retail, industrial and multifamily property types and minimal exposure to assets with very high expense ratios, such as hotels or property types where conventional takeout financing may not be as readily available. An affiliate of A10 Capital will be holding the first-loss position (including Classes E and F and equity tranches), and as part of the Trust Indenture, it or an affiliate must retain that position for as long as the Offered Notes remain outstanding.

The pool consists of transitional assets. Given the nature of the assets, DBRS determined a sample size representing 77.6% of the cut-off date balance. This is higher than the typical sample size for traditional conduit CMBS transactions. Physical site inspections were also performed, including management meetings. DBRS also notes that when DBRS analysts visit the markets, they may actually visit properties more than once to follow the progress (or lack thereof) toward stabilization. The servicer is also in constant contact with the borrowers to track progress. DBRS has assigned a stabilized cash flow to a level that is above the in-place level. There is a possibility that the sponsors will not execute their business plans as expected and that the higher stabilized cash flow will not materialize during the loan term. DBRS made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS analyzes loss given default (LGD) based on the DBRS As-Is LTV, assuming that the loan is fully funded. Based on the weighted initial pool balances, the overall WA DBRS As-Is DSCR of 0.77x is reflective of high-leverage financing. The assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and also improve the overall debt yield of the loans. DBRS associates its LGD based on the assets’ As-Is LTV that does not assume that the stabilization plan and cash flow growth will ever materialize. There is an inherent conflict of interest between the special servicer and the seller, as they are related entities. Given that the special servicer is typically responsible for pursuing remedies from the seller for breaches of the representations and warranties, this conflict could be disadvantageous to the certificateholders. While the special servicer is classified as the enforcing transaction party, if a loan repurchase request is received, the trustee and originator shall be notified, and the originator is required to correct the material breach or defect, or repurchase the affected loan within a maximum period of 270 days. The repurchase price would amount to the outstanding principal balance and unpaid interest less relevant Issuer expenses and protective advances made by the servicer. The Issuer retains 13.9% equity in the transaction holding the first-loss piece.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

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

The principal methodology is North American CMBS Multi-borrower Rating Methodology, which can be found on 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 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 full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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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