Morningstar DBRS Downgrades Two Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2014-C19

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2014-C19 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2014-C19 as follows:

-- Class E to CCC (sf) from B (sf)
-- Class X-E to CCC (sf) from B (high) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-C at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class PST at A (high) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class F at C (sf)

Morningstar DBRS changed the trends on Classes D and X-D to Negative from Stable. Classes E, F, and X-E no longer carry a trend given their CCC (sf) or lower credit rating. The trends on all remaining classes are Stable.

The credit rating downgrades and Negative trends reflect Morningstar DBRS’ increased loss projections for select loans in the transaction, most notably for the PacStar Retail Portfolio loan (Prospectus ID#9; 4.4% of the pool), which is collateralized by two retail properties that were recently re-valued at a lower amount compared with the previous appraisal obtained by the special servicer. Of the eight specially serviced loans as of the February 2024 remittance, six loans received updated appraisals since Morningstar DBRS’ last credit rating action, with seven of the eight loans liquidated in the analysis for this review. Morningstar DBRS estimates the total liquidated losses to be approximately $50.0 million (with an average loan-level loss severity exceeding 40.0%), which would erode the entirety of the unrated Class G and more than 60.0% of Class F, supporting the credit rating downgrades with this review. The trend change on Class D to Negative from Stable reflects the significant credit erosion to the transaction as the pool winds down, with the majority of the remaining loans scheduled to mature by the end of 2024.

According to the February 2024 remittance, 62 of the original 77 loans remain in the pool, representing a collateral reduction of 34.3% since issuance. Of the remaining pool, 16 loans, representing 20.5% of the pool, are fully defeased. Five loans, representing 14.8% of the pool, are on the servicer’s watchlist and eight loans, representing 11.4% of the pool, are in special servicing. The transaction is concentrated by property type with seven loans, representing 27.1% of the pool, secured by office collateral, including the largest loan, 300 North LaSalle (Prospectus ID#2; 11.2% of the pool). All but two of the remaining loans, including all seven office loans, are scheduled to mature in 2024. Outside of the specially serviced loans, the overall maturity profile is generally healthy, with a select few non-specially serviced loans exhibiting increased refinance risk. As the transaction is in wind-down, the analysis for this review generally focused on the recoverability prospects for the remaining loans in the pool.

The largest loan in the pool, 300 North LaSalle, is secured by a trophy Class A office building in Chicago, totaling 1.3 million square feet (sf). According to the March 2023 rent roll, the property was 93.5% occupied with an average rental rate of $39.84 per square foot. Tenants representing 27.5% of the net rentable area (NRA) are scheduled to roll in 2024, including the second largest tenant, Boston Consulting Group (BCG;12.2% of NRA, lease expiry in December 2024). BCG has confirmed its plans to vacate at lease expiry for a relocation to 360 North Green Street. In July 2023, the loan’s sponsor, Irvine Company, announced that Winston & Strawn had been signed as a replacement tenant, taking over all of BCG’s former space. The lease terms have been requested from the servicer but have not been provided as of the date of this press release.

The largest tenant, Kirkland & Ellis, LLP (Kirkland & Ellis; 51.5% of NRA, original lease expiry in February 2029), had a one-time termination available effective February 2025, which was exercised to accommodate the tenant’s plans to relocate to the newly constructed Salesforce Tower Chicago at Wolfpoint, which opened in 2023. As part of the lease termination, the tenant is required to pay a termination fee of $51.2 million, which has been posted in the form of a letter of credit that is on file with the servicer. While no replacement tenants for the Kirkland & Ellis space have been signed to date, the sponsor appears to be committed to the property as evidenced by an announced upcoming $30.0 million capital improvement plan that is expected to include an expansion of the subject’s ground-floor restaurant, upgrades to the fitness and conference centers, and refurbished indoor and outdoor spaces. The property’s ability to attract a replacement for the BCG space as well as an expansion for another tenant, private equity firm GTCR, as part of a five-year lease extension through 2029 bodes well for the sponsor’s ability to attract tenants to the building but the significant footprint that will be left by the absence of Kirkland & Ellis will undoubtedly add complexity to efforts to secure a replacement loan at the August 2024 maturity. Mitigating factors include the low A-note loan-to-value ratio of 22.5%, based on its appraised value at issuance and current A-note balance, planned capital improvement project, and the $51.2 million in termination funds available as additional collateral on the loan.

The largest loan in special servicing, PacStar Retail Portfolio (Prospectus ID#9; 4.4% of the pool), is secured by two anchored retail properties totaling 398,131 sf. The larger of the two properties, Yards Plaza, is a 259,137-sf shopping center located eight miles southwest of downtown Chicago. The smaller property, Willowbrook Court Shopping Center, is a 137,650-sf shopping center located within a highly trafficked retail corridor of northwest Houston. The loan transferred to special servicing in September 2021 for imminent nonmonetary default but defaulted on its payment as the loan was last paid through April 2022. Collateral occupancy has continuously declined following the departure of an anchor tenant at the Willowbrook Court property in 2018 and the sponsor has been unable to drive meaningful leasing activity. Through Q2 2023, the loan reported a combined occupancy rate of 54.0% with a debt service coverage ratio of 0.05 times. The borrower has indicated a willingness to transfer the properties back to the lender and a new appraisal was published as of July 2023, valuing the collateral at $25.7 million. The July 2023 value represents a -16.9% variance from the November 2022 value of $30.9 million and a -63.1% variance from the issuance value of $69.6 million. Based on the most recent appraised value, Morningstar DBRS analyzed this loan with a liquidation scenario, resulting in a loss severity in excess of 70.0%.

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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Classes X-A, X-B, X-C, X-D, and X-E are interest-only (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 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 the 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a 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 Limited
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Tel. +1 416 593-5577

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 v 1.2.0.0, https://dbrs.morningstar.com/research/422859

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

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

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

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279. (July 17, 2023).

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