DBRS Morningstar Finalizes Provisional Ratings on BANK 2022-BNK39

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2022-BNK39 issued by BANK 2022-BNK39:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class X-D at BBB (high) (sf)
-- Class X-F at BBB (low) (sf)
-- Class X-G at BB (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (sf)
-- Class F at BB (high) (sf)
-- Class G at BB (low) (sf)

All trends are Stable.

Classes X-D, X-F, X-G, X-H, D, E, F, G, and H will be privately placed. The RR Interest Certificates will not be offered.

Class A-3-1, Class A-3-2, Class A-3-X1, Class A-3-X2, Class A-4-1, Class A-4-2, Class A-4-X1, Class A-4-X2, Class A-S-1, Class A-S-2, Class A-S-X1, Class A-S-X2, Class B-1, Class B-2, Class B-X1, Class B-X2, Class C-1, Class C-2, Class C-X1, and Class C-X2 certificates are also offered certificates and, together with the Class A-3, Class A-4, Class A-S, Class B, and Class C Certificates, constitute the "Exchangeable Certificates."

DBRS Morningstar analyzed the conduit pool to determine the ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. The trust’s collateral consists of 66 fixed-rate loans secured by 96 commercial and multifamily properties with an aggregate cutoff date balance of $1.2 billion. Four loans, representing 22.7% of the pool, are shadow-rated investment grade by DBRS Morningstar. Additionally, 15 loans in the pool, representing 6.9% of the pool, are backed by residential co-operative loans, which typically have very low expected losses. When the cutoff balances were measured against the DBRS Morningstar Net Cash Flow and their respective actual constants, the initial DBRS Morningstar Weighted-Average (WA) Debt Service Coverage Ratio (DSCR) of the pool was 3.19 times (x). The DBRS Morningstar WA Loan-to-Value (LTV) ratio of the pool at issuance was 53.7%, and the pool is scheduled to amortize down to a DBRS Morningstar WA LTV of 52.0% at maturity. These credit metrics are based on the A-note balances. Excluding the shadow-rated loans, the deal still exhibits a favorable DBRS Morningstar WA LTV of 57.5%. The pool additionally includes 10 loans, representing 21.4% of the allocated pool balance, that exhibit a DBRS Morningstar LTV in excess of 67.1%, a threshold generally indicative of above-average default frequency.

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

Twenty-two loans, representing 36.5% of the pool, are in areas identified as DBRS Morningstar Market Ranks 7 or 8, which are generally characterized as highly dense urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. Furthermore, 29 loans, representing 40.7% of the pool balance, have collateral in the DBRS Morningstar Metropolitan Statistical Area (MSA) Group 3, which represents the best-performing group in terms of historical commercial mortgage-backed securities (CMBS) default rates among the top 25 MSAs. Lastly, only 10.4% of the pool is secured by collateral in MSA Group 1, which have historically shown higher probabilities of default (PODs) resulting in greater loan level expected losses.

Four of the loans (22.7% of the pool)—601 Lexington Avenue, 333 River Street, CX – 350 & 450 Water Street, and Park Avenue Plaza—exhibited credit characteristics consistent with investment-grade shadow ratings. 601 Lexington Avenue, 333 River Street, and CX – 350 & 450 Water Street have credit characteristics consistent with an "A" shadow rating. Park Avenue Plaza exhibits credit characteristics with a AAA shadow rating.

21.1% of the pool is backed by multifamily loans, which is considerably higher than recent conduit transactions rated by DBRS Morningstar and the property type has historically had lower PODs and loss severity given default (LGDs) when compared with most other commercial property types. Multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves.

Thirty-four loans, representing a combined 42.0% of the pool by allocated loan balance, exhibit issuance LTVs of less than 59.3%, a threshold historically indicative of relatively low-leverage financing and generally associated with below-average default frequency. Even with the exclusion of the shadow-rated loans and the loans secured by co-operative properties, collectively representing 29.6% of the pool, the transaction exhibits a favorable DBRS Morningstar WA Issuance LTV of 62.4%.

Term default risk is low, as indicated by a strong DBRS Morningstar DSCR of 3.20x. Even with the exclusion of the shadow-rated loans and the loans secured by the co-operative properties, the deal exhibits a very favorable DBRS Morningstar DSCR of 2.02x.

Eleven loans, representing 49.1% of the pool balance, received a property quality of Average + or better, including three loans, representing 12.1% of the pool, deemed to have Above Average quality and one loan, representing 4.4% of the pool, deemed to have the highest property quality of Excellent. It is noted that no loans had a property quality score below Average.

Six loans, representing 28.3% of the pool, were classified by DBRS Morningstar as having Strong sponsorship strength. Furthermore, DBRS Morningstar identified only four loans, representing 8.6% of the pool, with Weak sponsorship strength.

The pool has a relatively high concentration of loans secured by office and retail properties with 22 loans, representing 55.6% of the pool balance. The ongoing Coronavirus Disease (COVID-19) pandemic continues to pose challenges globally, and the future demand for office and retail space is uncertain, with many store closures, companies filing for bankruptcy or downsizing, and more companies extending their remote-working strategy.

Three of the nine office loans, 601 Lexington Avenue, CX – 350 & 450 Water Street, and Park Avenue Plaza, representing 16.5% of the total pool, are shadow-rated investment grade by DBRS Morningstar. Furthermore, six of the office loans, representing 23.8% of the total pool, are in DBRS Morningstar Market Ranks 7 and 8, which represent the lowest historical CMBS PODs and LGDs.

The office and retail properties exhibit a favorable DBRS Morningstar WA DSCR of 2.36x. Additionally, both property types exhibit favorable DBRS Morningstar WA Issuance and Balloon LTVs of 58.1% and 55.8%, respectively.

Six office and retail properties in the transaction, representing 28.3% of the total pool balance, have a DBRS Morningstar sponsorship strength of Strong.

Forty-four loans, representing 79.5% of the pool balance, are structured with full-term interest only (IO) periods. An additional 10 loans, representing 13.2% of the pool balance, are structured with partial-IO terms ranging from 24 months to 72 months. Loans that are full-term IO or partial-IO do not benefit from amortization.

Of the 44 loans structured with full-term IO periods, 21 loans, representing 47.6% of the pool by allocated loan balance, are in areas with a DBRS Morningstar MSA Group 2 or 3. These markets benefit from increased liquidity even during times of economic stress.

Four of the loans, representing 22.7% of the total pool balance, are shadow-rated investment grade by DBRS Morningstar.

The full-term IO loans are effectively preamortized, as evidenced by the very low DBRS Morningstar WA Issuance LTV of only 53.5% for this concentration of loans.

Fifty-one loans, representing 71.7% of the total pool balance, are refinancing existing debt. DBRS Morningstar views loans that refinance existing debt as more credit negative compared with loans that finance an acquisition as sponsors generally have more skin in the game.

The loans that are refinancing existing debt exhibit relatively low leverage. Specifically, the DBRS Morningstar WA Issuance LTV of the loans refinancing existing debt is 50.0%.

The loans that are refinancing existing debt are generally in stronger DBRS Morningstar Market Ranks than the broader pool of assets in the transaction. The DBRS Morningstar WA Market Rank of the loans refinancing existing debt is 5.14 while the DBRS Morningstar WA Market Rank of the entire transaction is much lower at 4.74.

DBRS Morningstar increased the implied cap rate for six refinance loans (12.2% of the pool), which resulted in higher LTVs for these loans.

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-A, X-B, X-D, X-G, and X-H are 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.

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.

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

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.

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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