Morningstar DBRS Downgrades One Class of Wells Fargo Commercial Mortgage Trust 2014-LC16, Changes Trend to Negative

DBRS, Inc. (Morningstar DBRS) downgraded the credit rating on one class of Commercial Mortgage Pass-Through Certificates, Series 2014-LC16 issued by Wells Fargo Commercial Mortgage Trust 2014-LC16 as follows:

-- Class B to BB (sf) from BBB (low) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class C at C (sf)
-- Class D at C (sf)
-- Class E at C (sf)
-- Class F at C (sf)

Morningstar DBRS changed the trend on Class B to Negative from Stable. Classes C, D, E, and F no longer carry a trend as these classes have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. The trends on all remaining classes are Stable.

Morningstar DBRS’ barbelled credit ratings for this maturing pool reflect the uncertainty around the recoverability of loans in special servicing, including the largest loan in the pool (representing 20.4% of the pool balance) as well as other pivotal loans with upcoming maturity dates and the increased propensity for interest shortfalls. Morningstar DBRS expects the majority of the loans will repay from the pool. However, in addition to the specially serviced loans, there are a handful of loans exhibiting increased risk of maturity default because of deteriorating credit metrics, including four loans secured by office collateral, representing 10.5% of the pool balance, supporting the Negative trend. As the pool continues to wind down, Morningstar DBRS analyzed the likelihood of successful repayment for the remaining loans in the pool with this review. The pool’s defeasance concentration of approximately 30% of the pool balance, combined with the healthy weighted-average debt service coverage ratio of 1.73 times for the nonspecially serviced loans, support the credit rating confirmations for the senior classes.

As of the January 2024 remittance, 50 of the original 82 loans remain in the pool. The initial pool balance of $974.07 million has been reduced by 46.4% to $521.63 million, which includes $31.98 million of liquidated loan losses nearly fully eroding the balance of the unrated Class G certificate. Since the last credit rating action, Oak Court Mall (Prospectus ID#18, previously 2.2% of the pool) was liquidated from the trust in December 2023 at a loss of approximately $8.8 million, which was approximately $1.6 million higher than Morningstar DBRS’ most recently projected loss. Three loans, representing 22.2% of the pool, are in special servicing and the remainder of the loans, representing 48.4% of the pool balance, are on the servicer's watchlist because of upcoming maturities as the entire pool is scheduled to mature in the first half of 2024. In the analysis for this review, Morningstar DBRS assumed a liquidation scenario for the three loans in special servicing, resulting in a loss forecast of $102.3 million.

Morningstar DBRS’ expected losses have increased for the largest loan in the pool, Woodbridge Center (Prospectus ID#1), which is secured by the fee-simple interest in a 1.1 million-square-foot (sf) portion of a 1.7 million-sf super-regional mall in Woodbridge, New Jersey, following an updated appraisal with a value decline of more than 10%. The loan transferred to special servicing in June 2020 for payment default. Initially, the special servicer was discussing a potential loan modification with the sponsor, but those discussions ultimately fell through, and a receiver was installed in October 2021. As of the January 2024 remittance, the loan was delinquent, having last paid in March 2022. The servicer reported the property is currently being marketed for sale by the court-appointed receiver. The collateral was appraised in October 2023 with an as-is value of $79.0 million, which represents a continued decline compared with the May 2022 as-is value of $89.0 million, the December 20220 as-is value of $104.0 million, and the issuance value of $366.0 million. As previously mentioned, Morningstar DBRS analyzed this loan with a liquidation scenario, resulting in a loss severity above 90.0%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024), https://dbrs.morningstar.com/research/427030.

Class X-A is an interest-only (IO) certificate that references a single rated tranche or multiple rated tranches. The IO credit rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), https://dbrs.morningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down. In those cases, the Morningstar DBRS credit ratings are typically based on a recoverability analysis for the remaining loans. Additionally, sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit 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 conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model v1.2.0.0, https://dbrs.morningstar.com/research/422859

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261

-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

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