DBRS Morningstar Upgrades Four Classes of Cherrywood SB Commercial Mortgage Loan Trust 2016-1

DBRS, Inc. (DBRS Morningstar) upgraded the ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2016-1 (the Certificates) issued by Cherrywood SB Commercial Mortgage Loan Trust 2016-1 (the Trust) as follows:

-- Class M-1 to AAA (sf) from AA (sf)
-- Class M-2 to AA (sf) from A (high) (sf)
-- Class M-3 to A (sf) from BBB (high) (sf)
-- Class M-4 to BBB (high) (sf) from BBB (low) (sf)

Additionally, DBRS Morningstar confirmed the ratings on four classes of the Certificates issued by the Trust as follows:

-- Class A-FL at AAA (sf)
-- Class A-FX at AAA (sf)
-- Class B-1 at BB (sf)
-- Class B-2 at B (sf)

All trends are Stable.

The rating upgrades reflect the overall improved credit support for the transaction since issuance, with collateral reduction of 55.9% as of the February 2020 remittance, 75 of the original 205 loans remaining in the pool, and a trust balance of $49.6 million. At issuance, the collateral consisted of 151 individual loans secured by 205 commercial and multifamily properties with a trust balance of approximately $112.5 million. Fifteen of these loans were sponsored by cross-collateralized borrowing groups; therefore, those loans were analyzed as six portfolio loans.

The pool remains relatively granular as the largest 15 loans comprise 46.1% of the pool balance. The pool also benefits from the high concentration of multifamily loans, representing 37.8% of the pool balance, and features no exposure to higher-volatility property types such as hotels. Approximately 70.0% of the pool balance is secured by properties located in secondary or tertiary markets. There are 68 loans that feature quick amortization schedules as the loans fully amortize over the 12- to 28-year loan terms.

The sponsors are generally less sophisticated operators of commercial real estate with limited real estate portfolios and experience. The risk is partially mitigated by borrower or guarantor recourse, regardless of credit history. Ongoing property financials are not provided to DBRS Morningstar as part of the surveillance reviews. DBRS Morningstar assigned a Bad (Litigious), Weak, or Average sponsor strength to all loans in the pool to reflect the relative inexperience of the loan sponsors.

As of the February 2020 remittance, there were eight loans, representing 13.6% of the pool balance, with the special servicer for delinquent payments, and an additional three loans, representing 3.3% of the pool balance, that were in the foreclosure process or are already real estate owned. DBRS Morningstar applied a 100% probability of default to these 11 loans in the analysis for this review, significantly increasing the expected loss for each.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

DBRS Morningstar materially deviated from its related methodology when determining the ratings assigned to Classes M-3, M-4, B-1, and B-2 by as the quantitative results suggest a higher rating. DBRS Morningstar considers a material deviation from a methodology to exist when there may be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider the material deviation to be a significant factor in evaluating the rating. The material deviations is warranted given the lack of periodic property financials, sponsor inexperience, and the macroeconomic stress caused by the Coronavirus Disease (COVID-19) pandemic. The coronavirus pandemic caused several government entities across the United States to mandate a shutdown of nonessential businesses, which could likely result in delinquent lease payments to the borrowers.

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

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.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 dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.

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 Morningstar 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.dbrsmorningstar.com or contact us at [email protected].

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