DBRS Morningstar Downgrades 18 Classes of Hudson's Bay Simon JV Trust 2015-HBS; Maintains All Classes Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) downgraded the ratings on 18 classes of Commercial Mortgage Pass-Through Certificates, Series 2015-HBS issued by Hudson’s Bay Simon JV Trust 2015-HBS as follows:

-- Class A-FL to AA (high) from AAA (sf)
-- Class B-FL to A (low) from AA (low) (sf)
-- Class C-FL to BB (sf) from BBB (sf)
-- Class D-FL to B (low) from BB (low) (sf)
-- Class E-FL to CCC (sf) from B (low) (sf)
-- Class X-2-FL to B (sf) from BB (sf)

-- Class A-7 to AA (high) from AAA (sf)
-- Class B-7 to A (low) from AA (low) (sf)
-- Class C-7 to BB (sf) from BBB (sf)
-- Class D-7 to B (low) from BB (low) (sf)
-- Class E-7 to CCC (sf) from B (low) (sf)
-- Class X-B-7 to A (sf) from AA (sf)

-- Class A-10 to AA (high) from AAA (sf)
-- Class B-10 to A (low) from AA (low) (sf)
-- Class C-10 to BB (sf) from BBB (sf)
-- Class D-10 to B (low) from BB (low) (sf)
-- Class E-10 CCC (sf) from B (low) (sf)
-- Class X-B-10 to A (sf) from AA (sf)

In addition, DBRS Morningstar confirmed the ratings on two classes as follows:

-- Class X-A-7 at AAA (sf)
-- Class X-A-10 at AAA (sf)

DBRS Morningstar has maintained the Under Review with Negative Implications designation on all classes. The downgrades are a reflection of DBRS Morningstar’s view that the values for the underlying collateral have been significantly reduced since issuance, and the Under Review with Negative Implications designations reflect the uncertainty surrounding the ongoing litigation against the borrower and the potential for additional value declines over the near to moderate term for the underlying collateral. The loan remains outstanding for the April 2020 and all subsequent debt service payments with outstanding advances totaling $71.5 million across the three loan components. The current ratings assigned by DBRS Morningstar do not carry trends.

The transaction consists of an $846.2 million first-mortgage loan secured by 34 cross-collateralized properties previously leased to 24 Lord & Taylor stores and 10 Saks Fifth Avenue stores in 15 states. The collateral properties represent 19 fee-simple ownership interests (64.1% of the pool balance) and 15 leasehold interests (35.9% of the pool balance), totaling 4.5 million square feet (sf). Individual tenant storefronts are located in various malls and freestanding locations with a concentration in New Jersey and New York, totaling 15 stores across the two states. The loan includes a $149.9 million floating-rate Component A that had a two-year initial term and three one-year extension options and has now passed its final maturity; a $371.2 million fixed-rate Component B with a seven-year term; and a $324.9 million fixed-rate Component C with a 10-year term.

The loan is sponsored by a joint venture between Hudson Bay Company (HBC) and Simon Property Group (SPG). Whole loan proceeds of $846.2 million, SPG equity of $63.0 million, and implied equity of $609.5 million from the contribution of HBC’s then-owned properties financed the acquisition of the properties for $1.4 billion and funded tenant improvements totaling $63.0 million. The portfolio was formerly 100% leased to Lord & Taylor and Saks Fifth Avenue on two master leases with 20-year initial terms and six five-year extension options for each store. The operating leases are fully guaranteed by HBC. Following Lord & Taylor’s bankruptcy filing in 2020, all Lord & Taylor stores were closed, resulting in 24 of the 34 collateral properties becoming fully vacant.

In April 2020, the loan transferred to special servicing and SitusAMC (Situs), the special servicer at the time, discovered that the loan’s Operating Lease Guarantor was subject to a post-privatization corporate restructuring that appeared to have taken place in March 2020 without lender consent. In May 2020, the lender filed litigation against the borrower in federal court in an effort to obtain documentation and knowledge regarding the activities affecting the Operating Lease Guarantor. The lender has not been able to obtain sufficient documentation and transparency to accurately assess the Operating Lease Guarantor’s current creditworthiness. Situs alleged that HBC violated loan covenants and related guarantees and that the entity that guaranteed the rental payments no longer exists. Additionally, Situs asserted that the financial strength of the Operating Lease Guarantor was a key consideration in the funding and structure of the loan and that the corporate restructuring has likely materially reduced the financial strength and capabilities of the Operating Lease Guarantor. As a result of the ongoing litigation, correspondence with the special servicer has been limited and a workout strategy is still being negotiated. A potential restructuring of the loan is being discussed, which could include a combination of property sales, site redevelopment, and the continuation of the existing retail business at certain other properties, although this is still in the preliminary stages. Updated appraisals have been ordered; however, they will not be made publicly available because of the ongoing litigation.

At issuance, the portfolio was valued at $1.4 billion; however, updated appraisals commissioned by HBC in connection with privatization plan produced an aggregate portfolio value of $1.235 billion, representing a decline of -11.8% since issuance. Furthermore, the aggregate dark value for the portfolio was determined to be $723.4 million; although, the special servicer disputed these valuations when they were disclosed in December 2019. DBRS Morningstar analyzed the individual November 2019 appraisals, calculating an aggregate go-dark value of $298.7 million for the Lord & Taylor stores. Combined with the aggregate as-is value of the Saks Fifth Avenue stores of $540.3 million, the total implied portfolio value totaled $839.0 million (LTV of 100.9%); however, DBRS Morningstar opines that the true value of the collateral is likely lower today. The DBRS Morningstar analysis for this review was based on a stressed value derived using the 2019 appraisals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-2-FL, X-A-7, X-B-7, X-A-10, and X-B-10 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 26, 2021), 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.

These ratings 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 [email protected].

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