DBRS Morningstar Assigns Provisional Ratings to FS Rialto 2022-FL6 Issuer, LLC

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by FS Rialto 2022-FL6 Issuer, LLC (FS RIAL 2022-FL6):

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D-1 at BBB (high) (sf)
-- Class D-2 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.

Classes F and G will be privately placed.

The initial collateral consists of 24 floating-rate mortgage loans and participation interests in mortgage loans secured by 58 mostly transitional properties with a cut-off balance totaling $600.0 million, excluding $175.4 million of remaining future funding commitments and $1.4 billion of pari passu debt. Two loans (NYC Multifamily Portfolio and NYC Midtown West Multifamily Portfolio) are cross-collateralized loans and are treated as a single loan in the DBRS Morningstar analysis, resulting in a modified loan count of 23. All figures below and throughout this report reflect this modified loan count. The holder of the future funding companion participations will be FS CREIT Finance Holdings LLC (the Seller), a wholly owned subsidiary of FS Credit Real Estate Income Trust, Inc. (FS Credit REIT), or an affiliate of the Seller.

The holder of each future funding participation has full responsibility to fund the future funding companion participations. The collateral pool for the transaction is managed with a 24-month reinvestment period. During this period, the Collateral Manager will be permitted to acquire reinvestment collateral interests, which may include Funded Companion Participations, subject to the satisfaction of the Eligibility Criteria and the Acquisition Criteria. The Acquisition Criteria requires that, among other things, the Note Protection Tests are satisfied, no event of default (EOD) is continuing, and Rialto Capital Management, LLC (Rialto) or one of its affiliates acts as the subadvisor to the Collateral Manager. The Eligibility Criteria has minimum and maximum debt service coverage ratios (DSCRs) and loan-to-value ratios (LTVs), Herfindahl (HERF) scores of at least 18.0, and property-type limitations, among other items. The transaction stipulates that any acquisition of any reinvestment collateral interests will need a rating agency confirmation regardless of balance size. The loans are mostly secured by cash-flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. The transaction will have a sequential-pay structure.

For the floating-rate loans, DBRS Morningstar incorporates an interest rate stress that is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended 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 were measured against the DBRS Morningstar As-Is NCF, 21 loans, comprising 92.8% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.00 times (x) or below, a threshold indicative of default risk. Additionally, 17 loans, comprising 72.3% of the initial pool balance, had a DBRS Morningstar Stabilized DSCR 1.00x or below, which is indicative of elevated refinance risk. The properties are often transitioning 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 in place are insufficient to support such treatment.

Three loans, representing 21.4% of the pool balance, are secured by properties in areas with a DBRS Morningstar Market Rank of 6, 7, or 8, which are characterized as urbanized locations. These markets generally benefit from increased liquidity that is driven by consistently strong investor demand. Such markets therefore tend to benefit from lower default frequencies than less dense suburban, tertiary, or rural markets. Areas with a DBRS Morningstar Market Rank of 7 or 8 are especially densely urbanized and benefit from significantly elevated liquidity. Two loans, comprising 14.6% of the cut-off date pool balance, are secured by a property in such an area. While the transaction represents slightly weaker markets than the FS Rialto 2022-FL5 transaction (17.3% of the initial pool represented by DBRS Morningstar Markt Rank 7 or 8), the transaction demonstrates much stronger markets than the FS Rialto 2022-FL4 and FS Rialto 2021-FL3 transactions that DBRS Morningstar also rated, which had only 11.9% and 0.0% of the pool, respectively, in a DBRS Morningstar Market Rank of 7 or 8.

Nine loans, representing 50.2% of the pool balance, are in a DBRS Morningstar MSA Group of 2 or 3, which represent MSAs with below-average historical default rates. More specifically, there are seven loans, representing 40.1% of the pool, in a DBRS Morningstar MSA Group of 3, which is the best-performing group in terms of historic CMBS default rates among the top 25 MSAs. The transaction’s MSAs are considerably stronger than the FS Rialto 2022-FL4 and FS Rialto 2021-FL3 transactions, which had 63.2% and 33.6%, respectively, in DBRS Morningstar MSA Group of 2 or 3, and is comparable to the FS Rialto 2022-FL5 transaction which had 65.6% of loans secured by properties in the DBRS Morningstar MSA Group of 2 or 3. Additionally, the FS Rialto 2022-FL4 and FS Rialto 2021-FL3 transactions had only 22.1% and 7.8%, respectively, in a DBRS Morningstar MSA Group of 3.

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

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.

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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