DBRS Morningstar Places One Class of Merrill Lynch Financial Assets Inc., Series 2007-Canada 21 Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) placed one class of the Commercial Mortgage Pass-Through Certificates issued by Merrill Lynch Financial Assets Inc., Series 2007-Canada 21 Under Review with Negative Implications as follows:

-- Class L at BBB (low) (sf), Under Review with Negative Implications

There is no trend for this rating action. After the last surveillance review in March 2019, DBRS Morningstar maintained a Stable trend for Class L.

DBRS Morningstar has taken these actions because of the concerns and uncertainty surrounding the remaining loan in the pool, 550 – 11th Ave Office Building (Prospectus ID#3, 100.0% of the pool) amid recent developments with the loan sponsor, Strategic Group LL (Strategic Group).

On December 11, 2019, Strategic Group, a Calgary-based real estate investment firm, submitted an initial application filing under Canada’s Companies’ Creditors Arrangement Act (CCAA). The filing affects entities affiliated with 50 commercial properties within the company’s 171-property portfolio, including the 550 – 11th Avenue loan in this pool.

The subject loan was originally scheduled to mature in 2017, but extensions currently running through September 2020 have been approved to provide time for the property ownership to complete upgrades for the property and get newly signed tenants in place and paying rent. Occupancy rates had precipitously fallen in the years leading up to the original loan maturity, but with lease signings in the last few years, occupancy at the property was reported at 92.5% as of the February 2019 rent roll.

The debt service coverage ratio (DSCR) has increased to 0.34 times (x) as of year-end 2018 compared with -0.06x at year-end 2017, based on the original annual debt service amount. DBRS Morningstar notes the servicer reports an in-place DSCR of 0.62x for YE2018 and based on the February 2019 rent roll, DBRS Morningstar believes the in-place cash flows should cover the in-place debt service obligation at a level above 1.0x. For further information on this loan and the terms of the maturity extension processed in 2017, please see the DBRS Viewpoint platform, for which information has been provided below.

Strategic Group has noted restructuring plans as part of the CCAA filing are expected to include efforts to sell performing assets and based on the current occupancy rate for the subject property, DBRS Morningstar believes a sale could be likely.

Although the occupancy rate has stabilized and the remaining rated classes are cushioned by a sizable unrated bond in the Class M certificate, which has a balance of $4.8 million, DBRS Morningstar has placed the lowest-rated Class L certificates Under Review with Negative Implications given the general level of uncertainty and potential for an extended period of time for resolution for the subject loan. DBRS Morningstar has requested updated performance information for the subject property, and will use that information along with updates received as the CCAA process unfolds to determine the level of risk for the loan and, as applicable, impact to the rating for the Class L certificate.

For further information on the filing and exposure across the DBRS Morningstar rated book, please see the December 18, 2019, commentary titled “The Impact of Strategic Group’s Creditor Protection Filing on CMBS Loans” on the DBRS Morningstar website at www.dbrs.com.

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

DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

For complimentary access to this content, please register for an account at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in Canadian 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 Morningstar 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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 [email protected].

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