DBRS Morningstar Assigns Provisional Ratings to A10 Bridge Asset Financing 2021-D, LLC

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by A10 Bridge Asset Financing 2021-D, LLC (the Trust):

-- Class A-1 FL at AAA (sf)
-- Class A-1 FX at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The $335.0 million transaction includes an initial trust balance of $298.5 million, comprising loan assets and $36.5 million held in a reserve account. The reserve account can be used to fund a pre-identified additional underlying asset (a $15.2 million loan secured by The View on the Square, a student housing property located in San Marcos, Texas) or pre-approved future funding companion participations (collectively referred to as the post-closing underlying assets). The post-closing underlying assets can be brought into the Trust using funds available in the prefunded reserve account at closing or principal proceeds as a result of loan payoffs. As existing loans pay off, available principal proceeds will be distributed according to the priority of payments. Before distributing principal proceeds to noteholders, the Issuer has the option to divert principal proceeds toward pre-approved future funding companion participations. This option remains with the Issuer throughout the term of the transaction. To the extent funds are not utilized for purchasing pre-identified additional underlying loans or funding pre-approved future funding companion participations during the pre-funding period (the period ending on the 90th day following the closing date), the remaining funds may (1) continue to be held in the reserve account to purchase pre-approved future funding companion participations, (2) be distributed to holders of the senior notes on a pro rata basis based on the then-outstanding note principal amount, or (3) be distributed to noteholders as principal proceeds subject to the priority of payments.

The initial collateral consists of 26 fixed- or floating-rate mortgage loans secured by 32 mostly transitional real estate properties with a current balance totaling $298.5 million. Inclusive of the pre-identified additional underlying asset, the collateral is scheduled to consist of 27 mortgage loans secured by 33 mostly transitional real estate properties with a current portfolio balance totaling $313.7 million. DBRS Morningstar modeled the pool with all 27 mortgage loans and $21.3 million of additional capacity as part of the paydown analysis, which was conducted to bring future funded facilities into the Trust and provide estimated credit enhancement levels reflective of the full $335.0 million targeted pool balance. All pool-based statistics in the related presale report are based on the $313.7 million current portfolio balance that includes the pre-identified additional underlying asset and delayed close loans for a total mortgage loan count of 27. The loans are generally secured by cash flowing assets, many of which are in a period of transition with plans to stabilize and improve asset value. Twenty of the 27 mortgage loans, representing 73.7% of the current portfolio balance, are structured with outstanding future funding participations, which collectively total $83.2 million and may be acquired by the Issuer at a future date.

The transaction will have sequential-pay structure. Interest can be deferred for the Class C Notes, the Class D Notes, the Class E Notes, the Class F Notes, and the Class G Notes, and interest deferral will not result in an Event of Default.

DBRS Morningstar analyzed the pool to determine the provisional ratings, reflecting the long-term risk that the Issuer will default and fail to satisfy its financial obligations in accordance with the terms of the transaction. When the property-level as-is appraised values were measured against the fully funded mortgage loan commitments, the pool exhibited a moderately high weighted-average (WA) as-is loan-to-value (LTV) of 71.5%. However, the pool’s WA LTV ratio is estimated to improve to 52.0% through stabilization based on the fully funded mortgage loan commitments measured against the appraiser’s property-level stabilized value estimates. The DBRS Morningstar adjusted stabilized value estimates reflect a more conservative but still relatively low pool WA LTV of 56.3%.

For all floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded with the remaining fully extended loan term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the debt service payments associated with the fully funded loan balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF) estimates, 25 loans representing 87.1% of the current portfolio balance had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of higher default risk. The properties are often transitional with potential upside in cash flow. However, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other structural features are insufficient to support such treatment. Even with the structure provided, DBRS Morningstar generally does not assume the assets will stabilize above market levels. When the debt service payments associated with the fully funded loan balances were measured against the DBRS Morningstar Stabilized NCF estimates, 14 loans, representing 50.1% of the current portfolio balance, had a DBRS Morningstar Stabilized DSCR below 1.00x.

The transaction will be subject to a benchmark (or index) rate replacement. The current selected benchmark is compounded Secured Overnight Financing Rate (SOFR). The transaction will be exposed to a mismatch between the Libor benchmark of the underlying loans in the transaction and SOFR-pay notes. Currently, A10 Capital, LLC, in its capacity as designated transaction representative, will generally be responsible for handling any benchmark rate change to the underlaying loans and will only be held to a gross negligence standard with regard to any liability for its actions.

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.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar notes that this press release was amended on January 25, 2022, to correct the 15E filing note.

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

Consistent with both A10 BAF 2019-B and A10 BAF 2020-C, there was no 15E filing with respect to this transaction. A10 Capital elects to have all investors sign representation letters confirming they have received sufficient information from which to base their investment decision, effectively transferring liability in the event of unintentional misinformation. DBRS Morningstar reviewed historical financial data (where available), borrower cash flow projections, Issuer cash flow estimates, internal credit memos from the issuer, third-party reports, and other diligence items as part of its analysis in the determination of ratings. However, DBRS Morningstar could not confirm the accuracy of such information within the data tape.

The principal methodology is North American CMBS Multi-Borrower Rating 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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