DBRS Morningstar Upgrades One Class of Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7, Confirms Remaining Classes

DBRS, Inc. (DBRS Morningstar) upgraded one class of Commercial Mortgage Pass-Through Certificates, Series 2013-C7 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7 as follows:

-- Class B to AAA (sf) from AA (high) (sf)

In addition, DBRS Morningstar confirmed the remaining classes in the transaction as follows:

-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class PST at A (low) (sf)
-- Class D at C (sf)
-- Class E at C (sf)
-- Class F at C (sf)
-- Class G at C (sf)

All trends are Stable, with the exception of Classes D through G, which have ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings.

The upgrade for Class B, now the most senior in the transaction waterfall, reflects the significant principal paydown of approximately $607.6 million since DBRS Morningstar’s last rating action in November 2022. As of the January 2023 remittance, 14 of the original 64 loans remained in the pool, representing a collateral reduction of 85.2% since issuance.

The confirmations for the remaining classes reflect the adverse pool concentration as five loans, representing 84.6% of the pool balance, are in special servicing. The two largest specially serviced loans, totaling 61.3% of the trust balance, are secured by distressed regional malls, which are discussed below. Three loans, representing 9.7% of the pool, are on the servicer’s watchlist and are being monitored for upcoming maturity, low debt service coverage ratio (DSCR), and/or deferred maintenance items.

The Solomon Pond Mall loan (Prospectus ID#2, 42.1% of the pool balance) is secured by the fee-simple interest in a regional mall in Marlborough, Massachusetts, approximately 30 miles west of downtown Boston. The loan, sponsored by Simon Property Group (SPG), transferred to special servicing in May 2020 because of imminent monetary default, and a receiver was appointed in September 2021. SPG lists the mall as a noncore asset in its quarterly filings. The noncollateral Sears anchor vacated in Q2 2021, bringing the mall occupancy down to 69%, but occupancy improved to 78% as of September 2022. The remaining anchors include Macy’s and JCPenney, both of which are noncollateral. The largest collateral tenant, Regal Cinemas (16.8% of the net rentable area), recently signed a five-year lease extension at a rental rate of $17.15 per square foot (psf) or $1.2 million per year, compared with its original rental rate of $19.88 psf or $1.3 million per year. The renewal was executed prior to the September 2022 bankruptcy filing by Regal Cinemas’ parent company, Cineworld. The company has announced that some leases will be rejected and those locations closed, but the subject location has not been announced for closure to date and the servicer has noted that the lease will be renegotiated.

Based on the most recent financials, the loan reported a DSCR of 0.94 times (x) for the trailing nine months (T-9) ended September 30, 2022, compared with the DSCR of 1.22x for the T-12 period ended September 30, 2021, and the YE2020 DSCR of 1.68x. The servicer reports ongoing discussions with the sponsor, but given that SPG has deemed the mall a noncore asset, DBRS Morningstar believes it is unlikely the sponsor is willing to inject additional equity to resolve the outstanding defaults and/or secure a replacement loan. Given the sharp performance decline in the last several years, the dark Sears space, and the uncertainty surrounding Regal Cinemas, the value of the property has likely dropped significantly from the issuance value of $200 million. Based on a significant haircut to the issuance value, DBRS Morningstar maintained a liquidation scenario for this loan, with a loss severity in excess of 55%.

The Valley West Mall loan (Prospectus ID#7, 19.2% of the pool balance) is secured by a regional mall in West Des Moines, Iowa. The loan transferred to special servicing in August 2019, and the special servicer filed a foreclosure action in late 2022 and a receiver was appointed. The servicer reported occupancy as of September 2022 at 64%; however, the largest tenant, Von Maur, vacated the subject upon its October 2022 expiration date, implying a physical occupancy rate of 42%. The leased rate may now be even lower, however, as the former Younkers space was occupied by a seasonal tenant, Spirit Halloween, as of the October 2022 rent roll. Given the substantial decline in performance and the general challenges in gaining meaningful leasing traction, the value of the property has likely dropped substantially from the issuance value of $95 million. Given these challenges, DBRS Morningstar assumed a substantial haircut to the issuance value, with a liquidation scenario applied that resulted in a loss severity in excess of 75%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 (May 17, 2022).

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Classes C and PST, as the quantitative results suggest a higher rating on those classes. The material deviations are warranted given the uncertain loan-level event risk tied to the loans in special servicing and the ultimate resolution of those loans.

Class X-B is an interest-only (IO) certificate that references 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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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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