DBRS Morningstar Places Six Classes of Wells Fargo Commercial Mortgage Trust 2017-RC1 Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) placed six classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-RC1 issued by Wells Fargo Commercial Mortgage Trust 2017-RC1 Under Review with Negative Implications as follows:

-- Class X-D at BBB (sf), Under Review with Negative Implications
-- Class D at BBB (low) (sf), Under Review with Negative Implications
-- Class X-E at BB (low) (sf), Under Review with Negative Implications
-- Class E at BB (low) (sf), Under Review with Negative Implications
-- Class X-F at B (low) (sf), Under Review with Negative Implications
-- Class F at B (low) (sf), Under Review with Negative Implications

In addition, DBRS Morningstar confirmed the ratings on the following classes:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)

The ratings for the six classes placed Under Review with Negative Implications do not carry trends; all other trends are Stable.

DBRS Morningstar placed the aforementioned classes Under Review with Negative Implications as a result of the continued performance challenges for the largest loan in the pool, Hyatt Place Portfolio, which represents 8.9% of the current pool balance and is currently in special servicing. The loan is secured by a portfolio of six limited-service hotels totaling 754 keys, located across six states. The loan transferred to the special servicer in June 2020 for payment default and, with the December 2020 remittance, the loan is over 121 days delinquent.

A loan modification is being negotiated with the borrower most recently requesting a modification to allow for a 12-month waiver of debt service payments and an interest-only period following the forbearance period. The terms have not been finalized to date and the borrower and special servicer are continuing discussions. Although it appears that, for now, the sponsor is committed to the portfolio and trust loan, there are significant concerns with the sharp value decline for the portfolio as shown in the most recent appraisal obtained by the special servicer. According to the July 2020 appraisal, the as-is value was reported at $54.9 million with a stabilized value of $69.4 million, compared with the issuance value of $85.1 million.

Given the significant drop in value since issuance and the uncertainty surrounding the ultimate resolution of the loan, the lowest-rated bonds, which generally represent classes with relatively low credit enhancement in the transaction structure, would be particularly vulnerable to any sizable loss associated with this loan. As such, those classes have been placed Under Review with Negative Implications and the loan will continued to be monitored closely for developments. Generally, the conditions that lead to the assignment of reviews are solved within a 90-day period, but the circumstances surrounding these rating actions may result in a prolonged resolution period.

As of the December 2020 remittance, 58 of the original 60 loans remain in the trust, representing a collateral reduction of 3.6%. There are three loans, representing 3.8% of the pool, that are fully defeased and 14 loans, representing 17.3% of the pool, on the servicer’s watchlist. The watchlisted loans are being monitored for a variety of issues including a low debt service coverage ratio (DSCR), tenant rollover risk or deferred maintenance. According to the YE2019 financials, the trust reported a weighted-average (WA) DSCR of 1.89 times (x), compared with the DBRS Morningstar DSCR at issuance of 1.76x.

ESG CONSIDERATIONS
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.

Classes X-A, X-B, X-D, X-E, and X-F are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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 updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Hyatt Place Portfolio (8.9% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.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 U.S dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), 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.

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@dbrsmorningstar.com.

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.

The ratings on Classes X-D, D, X-E, E, X-F, and F are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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