DBRS Morningstar Publishes Final North American Single-Asset/Single-Borrower Ratings Methodology

DBRS Inc. (DBRS Morningstar) finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology).

This methodology presents the criteria for which ratings are assigned to and/or monitored for NA SASB transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. The criteria also applies to certain large single-borrower commercial mortgages for the purpose of assigning and/or monitoring loan-level first-dollar loss ratings.

The NA SASB Methodology will be effective on March 1, 2020, for new DBRS Morningstar NA SASB rating engagements that are dated on or after this date. In addition, DBRS Morningstar will use the NA SASB Methodology to rate any NA SASB transactions that close on or after this date. As of March 1, 2020, Morningstar Credit Ratings, LLC (MCR) will no longer assign any new ratings to NA SASB transactions.

As part of the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it placed its outstanding ratings on NA SASB transactions (including the interest-only certificates of those transactions) Under Review – Analytical Integration Review and these rating actions were not taken for any credit reasons. As of the date of this press release, both MCR and DBRS Morningstar publicly rate four of those NA SASB transactions (24 classes of certificates). These MCR ratings will be removed from Under Review – Analytical Integration Review and withdrawn on or about March 6, 2020. DBRS Morningstar will use the NA SASB Methodology to assign new ratings to outstanding MCR NA SASB certificates that are not currently rated by DBRS Morningstar. Subsequent to the assignment of the relevant DBRS Morningstar ratings, these MCR ratings will be withdrawn at a future date. In accordance with MCR’s engagement letters covering these NA SASB transactions, upon withdrawal of these outstanding MCR NA SASB ratings, the relevant DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.

In addition, outstanding DBRS Morningstar-rated NA SASB transactions will be rated using the NA SASB Methodology at a future date. These DBRS Morningstar ratings will also be removed from Under Review with Developing Implications at that time.

As of March 1, 2020, the NA SASB Methodology replaces DBRS’s “North American Single-Asset/Single-Borrower Methodology” dated January 2019 and MCR will archive its “U.S. CMBS Single-Asset/ Single-Borrower Methodology” dated June 2018 following the withdrawal of the relevant MCR ratings.

In the finalized version of the NA SASB Methodology, DBRS Morningstar added a nonmaterial change describing the allocation of the Quality/Volatility Adjustment to investment-grade tranches based on property type.

The analytical framework outlined in the NA SASB Methodology relies on:

(1) The DBRS Morningstar stabilized net cash flow for commercial real estate (CRE) assets (please see the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria” dated September 2019 for further details); and
(2) The use of stressed DBRS Morningstar capitalization rates (Cap Rates Ranges) to derive the DBRS Morningstar Value for the CRE asset. The DBRS Morningstar Value is then used in conjunction with the loan-to-value (LTV) Sizing Benchmarks to determine ratings for each tranche. DBRS Morningstar performed a full backtest of the LTV Sizing Benchmarks and Cap Rate Ranges by core property type (multifamily, commercial, or lodging) to estimate Sizing Benchmarks and Cap Rate Ranges.

LTV SIZING BENCHMARKS
The LTV Sizing Benchmarks included in the NA SASB Methodology are a function of quantitative and qualitative analysis of NA SASB sector performance. DBRS Morningstar notes that defaults and losses in the NA SASB sector have been very limited and thus LTV Sizing Benchmarks could not be directly derived through statistical analysis of the performance of the NA SASB sector. Consequently, DBRS Morningstar subsequently backtested the LTV Sizing Benchmarks using a proxy data set that consisted of fully cycled (matured or defaulted) conduit loans with original whole-loan balances of at least $50 million, originated from 1997 to 2014, with performance updated through September 2019.

DBRS Morningstar expects the LTV Sizing Benchmarks to provide adequate cushion for value declines that occur in a severe downturn, similar to declines during the 2008 recession. For example, using a 61% LTV Sizing Benchmark, as defined in the NA SASB Methodology, indicates the ability of a tranche to withstand a 39% decline against the DBRS Morningstar Value. In comparison, Green Street Advisors’ Commercial Property Price Index registered a 38.8% peak-to-trough property price decline during this period. Furthermore, in general, DBRS Morningstar Values are lower than the property’s appraised value.

CAP RATE RANGES
The DBRS Morningstar Cap Rate Ranges generally reflect averages by core property type from 2000 through the second quarter of 2019. DBRS Morningstar Cap Rates are generally 1.5% to 3% higher than prevailing market cap rates, depending on the location and property type.

No comments were received during the request for comment (RFC) period.

DBRS Morningstar-rated NA SASB ratings were placed Under Review – Developing Implications following the RFC on the NA SASB Methodology. Please see the Issuers section in the sidebar to the right of this press release on www.dbrsmorningstar.com for the latest list of DBRS Morningstar-rated NA SASB transactions.

Additionally, all MCR-rated NA SASB transactions were placed Under Review – Analytical Integration Review following the RFC. Please see Appendix A to MCR’s accompanying press release below for the latest list of NA SASB transactions that are publicly rated by MCR:

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

DBRS Morningstar 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 [email protected].