DBRS Morningstar Confirms Rating on Sutherland Commercial Mortgage Trust 2018-SBC7

DBRS Limited (DBRS Morningstar) confirmed its rating on the Commercial Notes, Series 2018-SBC7 issued by Sutherland Commercial Mortgage Trust 2018-SBC7 as follows:

-- Class A at A (low) (sf)

The trend is Stable.

This confirmation reflects the overall stable performance of the transaction, which comprises individual fixed- and floating-rate small-balance loans secured by commercial and multifamily properties, with an average loan balance of approximately $445,735. The pool is well diversified, as the top 15 loans represent 26.5% of the pool, with the largest loan only representing 4.7% of the pool. The pool diversity helps to insulate the rated class from loan-level event risks.

There have been significant paydowns of this transaction since issuance, and as of the January 2021 remittance, 271 of the original 454 loans remain in the pool, representing a collateral reduction of 54.0% since issuance. The vast majority of the loans that have been repaid were paid in advance of their scheduled maturity dates. About 70.3% of the current pool is fully amortizing, compared with 55.4% of the pool at issuance. Loan repayments and scheduled amortization have significantly increased the credit support for the senior class. In addition, the pool has not had realized losses to date.

As of the January 2021 remittance, the transaction consists of 128 fixed-rate loans (representing 55.7% of the pool), while the remaining 143 loans (representing 44.3% of the pool) have floating-rate structures tied to 15 different indexes, with interest rate floors ranging from 0.0% to 6.0% and interest rate margins ranging from 0.0% to 6.5%. Based on a combination of fixed and DBRS Morningstar-stressed interest rates, the pool is likely to amortize by 69.7% over the transaction term, which significantly reduces refinance risk.

As of the January 2021 remittance report, there are 12 loans in special servicing, representing 8.6% of the pool. In addition, there are four loans, representing 1.8% of the pool, showing 60+ days delinquent. DBRS Morningstar applied a probability of default penalty for these loans to account for the increased credit risk to the trust. The second-largest loan in special servicing is real estate owned, and DBRS Morningstar liquidated it from the pool for this review, with an implied loss severity of 25.7%.

Although there have been significant repayments since issuance and no losses have been incurred to date, the significant reduction in loan count is noteworthy, as is the relatively high concentration of loans in special servicing and/or delinquent as of the January 2021 remittance. The typical borrower for loans this small may not have the liquidity to withstand the cash flow disruptions that followed the Coronavirus Disease (COVID-19) pandemic, and that may be a contributing factor to the loans that are currently in default. In general, however, DBRS Morningstar believes the strong performance of the underlying loans as a whole since issuance is a strong mitigating factor and believes the sponsors should generally be incentivized to work with the special servicer to resolve any outstanding issues in the near to moderate term.

The transaction is a sequential-pay pass-through structure.

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 principal methodology when determining the rating assigned to Class A by assigning a rating four notches higher than the quantitative model output. The material deviation is warranted given the structural features (loan or transaction) and/or provisions in other relevant methodologies that outweigh the quantitative model output.

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 (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.

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.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

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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