Morningstar DBRS Downgrades Credit Ratings on Three Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2015-C21, Changes Trends on Six Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C21 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2015-C21 as follows:

-- Class C to B (sf) from BB (sf)
-- Class PST to B (sf) from BB (sf)
-- Class D to C (sf) from CCC (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 AA (low) (sf)
-- Class B at A (high) (sf)
-- Class 555A at A (sf)
-- Class 555B at BBB (sf)
-- Class E at C (sf)
-- Class F at C (sf)
-- Class G at C (sf)

Morningstar DBRS changed the trends on Classes AS, B, C, XA, XB, and PST to Negative from Stable. Classes 555A and 555B carry Stable trends from the April 15, 2024, credit rating action. Classes D, E, F and G are assigned credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS). The remaining Classes A3, A4, and ASB carry Stable trends.

The credit rating downgrades reflect Morningstar DBRS' increased loss projections for the loans in special servicing, which collectively represent 12.7% of the current pool balance. With this review, Morningstar DBRS considered liquidation scenarios for all three specially serviced loans, which include the largest loan in the pool, Westfield Palm Desert (Prospectus ID#1; 8.9% of the pool balance), resulting in total implied losses of approximately $70.0 million. These losses are projected to fully erode the balance of the nonrated Class H, as well as rated Classes G, F, E, and reduce the balance of Class D by approximately 20%, significantly reducing credit support for the transaction as a whole.

The Negative trends are reflective of Morningstar DBRS' concerns about the increased default risk for several non-specially serviced loans as the pool enters its maturity year. All but three loans, representing 12.1% of the pool, are scheduled to mature in the next nine months. While Morningstar DBRS expects the majority of non-specially serviced loans will repay at maturity, several loans, representing about 8.0% of the pool balance, have been identified as being at increased risk of maturity default given observed performance declines, concentrated upcoming tenant roll, and other refinance concerns. For these loans, Morningstar DBRS used stressed loan-to-value ratios (LTVs) and/or elevated probabilities of default (PODs) to increase the expected loss (EL) at the loan level as applicable. Should the performance of these loans fail to stabilize, should they deteriorate further, or should future defaults occur, classes with Negative trends may be subject to credit rating downgrades. The credit rating confirmations and Stable trends reflect the otherwise overall stable performance of the performing loans in the pool, which Morningstar DBRS generally expects to repay at maturity based on the most recent year-end, weighted-average debt service coverage ratio (DSCR) that is above 2.20 times (x).

As of the April 2024 remittance, 56 of the original 64 loans remained in the trust with an aggregate balance of $732.9, representing a collateral reduction of 19.3% since issuance. Ten loans, representing 8.2% of the current pool balance, are fully defeased. Twelve loans, representing 16.1% of the pool balance, are on the servicer's watchlist, being monitored primarily for debt service coverage ratio (DSCR) concerns and the activation of servicing trigger events. As noted above, three loans, representing 12.7% of the pool, are in special servicing.

The largest specially serviced loan is secured by a 572,724 square-foot (sf) portion of the 977,888 sf Westfield Palm Desert regional mall in Palm Desert, California. The $125.0 million interest-only (IO) whole loan is pari passu with a note securitized in the Wells Fargo Commercial Mortgage Trust 2015-C27 transaction, which is also rated by Morningstar DBRS. The loan transferred to special servicing in July 2020 because of payment default and a receiver was appointed in October 2021 after the property was rebranded as The Shops at Palm Desert. The special servicer began pursuing foreclosure shortly thereafter; however, in November 2023, Pacific Retail Capital Partners (PRCP) acquired the property and assumed the existing debt. The company specializes in repositioning malls through value-add strategies and reportedly plans to redevelop portions of the property to include green space, multifamily housing, and entertainment offerings. In conjunction with the assumption, the loan was modified to include, among other things, a two-year maturity extension through March 2027, with two one-year extension options available. As of the April 2024 reporting, the loan was reported late and is expected to return to the master servicer as a corrected loan after a period of monitoring; however, the loan will remain in a cash sweep period through the extended maturity, with all excess cash flow held in reserve.

The property's occupancy rate has improved to 85.7% as of January 2024; however, occupancy has historically shown volatility, falling as low as 77.0% in December 2021 and still well below 95.9% seen at issuance. During 2023, the receiver was able to renew Dick's Sporting Goods (4.7% of the net rentable area (NRA); expiration in January 2029) to a five-year term. According to the servicer-reported financials, the annualized net cash flow for the year-to-date period ended September 30, 2023, was $5.3 million (a DSCR of 1.63x), a decline from and the YE2022 NCF of $8.3 million (a DSCR of 1.70x) and YE2021 NCF $6.6 million (a DSCR of 1.80x). Per the January 2023 financial package, total in-line sales for 2022 were $386 per square foot (psf), a 25.3% drop from the previous year.

Morningstar DBRS expects the asset's performance to continue to show some volatility during the near term as PRCP works toward executing its business plan while managing upcoming tenant rollover. During the next 12 months, more than 45 tenants, representing approximately 29.0% of the NRA, have scheduled lease expirations, the largest of which are F21RED (3.8% of NRA), Macy's Furniture Gallery (3.8% of the NRA), and H&M (3.7% of NRA), all of which have lease expirations in January 2025. While no sales price has been provided, an updated appraisal dated June 2023 valued the property at $57.4 million, a decline from the June 2022 value of $68.8 million, showing volatility in tandem with fluctuations in occupancy over the past few years, but a significant decline from the issuance appraised value of $212.0 million. Morningstar DBRS' analysis, which includes a liquidation scenario based on a stress to the most recent appraisal, is indicative of a loss severity in excess of 75.0%.

Excluding defeasance, the pool is most concentrated by retail and office properties that represent 33.5%, and 24.7% of the pool balance, respectively. Morningstar DBRS has a cautious outlook on the office asset type given the anticipated upward pressure on vacancy rates in the broader office market that challenge landlords' efforts to backfill vacant space and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Morningstar DBRS' analysis includes an additional stress for select loans exhibiting weakened performance that resulted in a weighted-average EL that is three times above the pool average EL.

The second largest loan in the pool is 555 11th Street NW, which is secured by a 414,204 sf Class A office property known as the Lincoln Square, located less than a mile from the White House in Washington, D.C. The whole loan encompasses two pari passu senior notes totaling $90.0 million as well as three subordinate B-notes with a total balance of $87.0 million. The $60.0 million subject loan represents the controlling A-note of the $90.0 million senior component, the remaining balance is secured in a transaction that is not rated by Morningstar DBRS. The nonpooled rake bonds, also rated by Morningstar DBRS, are backed by the nonpooled $30.0 million 555 11th Street NW senior B-note. The loan's nonpooled $57.0 million junior B-notes are subordinate to both the rake bonds and the $90.0 million pooled A-note. To read more on Morningstar DBRS' recent rating action on these rake bonds, please see the press release titled "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties," published on April 15, 2024, on the Morningstar DBRS website.

The subject, originally constructed in 2001, underwent a $25.0 million renovation in 2015 associated with the lease renewal of the largest tenant the property, Latham & Watkins LLP (Latham; 58.0% of NRA, lease expires in January 2031). As per the site inspection conducted in January 2024, the property was 76.1% occupied, down from 85.3% as of the September 2023 rent roll. This decline is attributed to the departure of three tenants that vacated the premises upon their lease expiry dates in Q4 2023. The East End submarket vacancy rate is 16.5% as reported by Reis. Marketing of the vacant space appears to be in line with the submarket's average asking rate of $63.20 psf across office properties. The DSCR was reported to be 1.74x for the trailing nine month period ended September 30, 2023, compared with 1.58x as of YE2022 and 2.79x at issuance. Although the subject benefits from a good location and the long-term tenancy of its largest tenant, Latham, there are concerns with performance declines as occupancy levels are lower than at issuance, which may pose challenges for the borrower in securing refinancing at loan maturity.

In its analysis, Morningstar DBRS updated the senior debt LTV to reflect the Morningstar DBRS value of the property as concluded with the April 15, 2024, credit rating action, as well as a stressed POD to account for the declining performance metrics since issuance. This results in an expected loss that was approximately 10x the base-level expected loss. Morningstar DBRS confirmed the credit ratings on Classes 555A and 555B with the April 15, 2024, credit rating action, given the position of the nonpooled rake bonds in the capital stack. The credit ratings and Stable trends were again confirmed with this review.

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 and X-B are IO certificates that reference 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 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 1, 2024), https://dbrs.morningstar.com/research/428798.

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 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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Toronto, ON M5H 3M7 Canada
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 (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

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

North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799

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 (April 15, 2024), https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance

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

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