Morningstar DBRS Downgrades Credit Ratings on Seven Classes of CSAIL 2015-C2 Commercial Mortgage Trust, Changes Trends on Four Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on seven classes of Commercial Mortgage Pass Through Certificates, Series 2015-C2 issued by CSAIL 2015-C2 Commercial Mortgage Trust as follows:
 
-- Class X-B to A (sf) from AA (sf)
-- Class B to A (low) (sf) from AA (low) (sf)
-- Class C to BBB (low) (sf) from A (low) (sf)
-- Class D to B (high) (sf) from BB (sf)
-- Class X-E to CCC (sf) from B (sf)
-- Class E to CCC (sf) from B (low) (sf)
-- Class F 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)
 
Morningstar DBRS changed the trends on Classes B, C, D, and X-B to Negative from Stable. Classes A-3, A-4, A-SB, A-S, and X-A continue to carry Stable trends. There are no trends for Classes E, F, and X-E, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS).

The credit rating downgrades on Classes E, F, and X-E reflect Morningstar DBRS' increased loss projections for the loans in special servicing. Morningstar DBRS used liquidation scenarios for all four specially serviced loans, resulting in total implied losses of approximately $25 million, an increase from Morningstar DBRS' projected losses of $14 million across three specially serviced loans at the time of the last credit rating action. The current implied losses will erode the vast majority of the remaining balance of the unrated Class NR and further reduce credit enhancement to the junior bonds. The primary contributors to the increase in Morningstar DBRS' projected losses are the additional liquidation of Bayshore Mall (Prospectus ID#17, 1.8% of the current pool balance) and the weakening performance of California Corporate Center (Prospectus ID#11, 1.9% of the current pool balance).

The credit rating downgrades and Negative trends on Classes B, C, D, and X-B are reflective of Morningstar DBRS' concerns about increased default risk for 18 non-specially serviced loans, representing approximately 24% of the pool balance. All but three of the remaining loans in the transaction are scheduled to mature in the next 12 months. In a wind-down scenario, Morningstar DBRS expects that the majority of non-specially serviced loans will successfully repay at maturity. However, Morningstar DBRS has identified several loans that exhibit increased default risk given weak credit metrics and/or upcoming rollover. Morningstar DBRS expects that some of these loans will default as they near their respective maturity dates. To account for the increased risk, Morningstar DBRS used stressed loan-to-value (LTV) ratios and/or elevated probabilities of default (PODs) for these loans to increase the expected loss (EL) as applicable. The resulting weighted-average (WA) EL for these loans was approximately double the pool's WA EL. Should performance of these loans deteriorate further and defaults occur, those classes with Negative trends may be subject to further credit rating downgrades.

The credit ratings for the remaining Classes A-3, A-4, A-SB, A-S, and X-A were confirmed at AAA (sf), reflective of the otherwise overall steady performance of the remaining loans in the pool and Morningstar DBRS' expectation that these classes are sufficiently insulated from losses and will be recovered from loans expected to pay at maturity, based on their most recent year-end (YE) WA debt service coverage ratio (DSCR) above 2.0 times (x) and WA debt yield of approximately 13.0%. Specifically for the subsenior Class A-S, while the majority of the outstanding bond balance is expected to be repaid by maturing loans, the recovery of this class is ultimately reliant on principal received from specially serviced loans and loans Morningstar DBRS deems to be at high risk of default. Morningstar DBRS' analysis suggests there will be sufficient principal to repay the remaining balance of this bond in a conservative liquidation scenario.

As of the May 2024 remittance, 104 of the original 118 loans remained in the trust, with an aggregate balance of $1.1 billion, representing a collateral reduction of 19.0% since issuance. There are 26 fully defeased loans, representing 20.1% of the current pool balance. There are 24 loans on the servicer's watchlist, representing 27.8% of the pool balance, that are being monitored primarily for DSCR and occupancy concerns. There are four loans with the special servicer, representing 4.7% of the pool balance. To date, there has been $17.5 million of realized losses to the trust, which has eroded approximately 40% of the nonrated Class NR. Excluding the defeased loans, the pool is most concentrated by retail and office properties, which represent 38.1% and 20.4% 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, challenging landlords' efforts to backfill vacant space, and, in certain instances, contributing 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 office loans exhibiting weakened performance, which resulted in a WA EL that is approximately 1.5x the pool's average EL.

The largest loan in special servicing is California Corporate Center (Prospectus ID#11, 1.9% of the pool balance), which is secured by two mid-rise office buildings in the financial district of Bakersfield, California. The loan transferred to the special servicer in December 2021 at the borrower's request because of imminent monetary default. A major tenant, ManageCare Systems (which formerly occupied 43.9% of the net rentable area (NRA)), expressed its intent to downsize its footprint at the subject. As per the January 2024 rent roll, the tenant currently occupies 20.3% of the NRA on a lease through January 2030. Following the loan's transfer to special servicing, the special servicer discovered an event of default (EOD) related to cash management provisions and the misappropriation of rents. The EOD breached the special-purpose entity covenants, thereby triggering recourse to the guarantor. The loan was accelerated and the borrower consented to a third-party fiduciary that will comply with cash management. As per the May 2024 remittance, the loan remained 30 to 59 days delinquent on debt payments. According to the special servicer's commentary from May 2024, foreclosure is being pursued.

The property was 75.0% occupied as per the January 2024 rent roll, in line with the YE2022 occupancy rate of 75.6% but representing a moderate decline from the occupancy rate of 87.9% at issuance. According to the servicer-reported financials, the YE2023 net cash flow (NCF) was $256,500 (a DSCR of 0.16x), a decline from the YE2022 figure of $2.2 million (a DSCR of 1.35x), attributed to declining rental rates and occupancy. Approximately 35.0% of the NRA is scheduled to roll over prior to loan maturity in May 2025, including the second- and third-largest tenants at the building. While there is no updated appraisal, Morningstar DBRS believes that value has likely deteriorated from issuance given the challenged office landscape and increased occupancy risk at the subject. Morningstar DBRS' analysis, which includes a liquidation scenario based on a significant haircut to the issuance appraised value, is indicative of a loss severity in excess of 75.0%.

Two loans that Morningstar DBRS has identified at risk of maturity default are Westfield Trumbull (Prospectus ID#5, 3.0% of the current pool balance) and Westfield Wheaton (Prospectus ID#1, 8.5% of the current pool balance). Both loans are pari passu with notes securitized in the CSAIL 2015-C1 and CSAIL 2015-C3 transactions, which are also rated by Morningstar DBRS.

Westfield Trumbull is secured by 462,869 square feet (sf) of a 1.1 million-sf regional mall in Trumbull, Connecticut. The collateral includes the Macy's (18.8% of NRA, lease expired in April 2023 — the store remains open and the servicer's commentary has stated a five-year renewal is in process) anchor pad and all in-line space. While the loan is not on the servicer's watchlist in this transaction, the controlling piece securitized in the CSAIL 2015-C3 transaction reported that this loan was added to the servicer's watchlist in March 2022 for cash management as a result of a low DSCR. A lockbox was established after the loan's debt yield fell below 7.5% and, according to servicer commentary, approximately $845,500 had been trapped as of May 2024. As noted in previous credit rating actions, the sponsor, Unibail-Rodamco-Westfield (URW), had indicated its intention to dispose all its retail assets within the U.S. by the end of 2023, as per various media articles. In December 2022, the subject and another mall owned by URW were sold to Mason Asset Management and Namdar Realty Group for a combined sale price of $196.0 million. As part of that transaction, the subject's debt was assumed. According to the servicer, the subject's sale price was reportedly $153.3 million, a 41.5% decline from the issuance value of $262.0 million, resulting in an implied LTV ratio of just under 100.0%.

As per the December 2023 rent roll, occupancy was reported at 93.7%, with all collateral tenants, excluding Macy's, representing less than 4.0% of the NRA. Additional noncollateral anchors in JCPenney and Target are open, and one noncollateral pad that was previously occupied by Lord & Taylor is now vacant. As per the most recent financial reporting, the loan reported a YE2023 DSCR of 2.23x (NCF of $13.1 million). While performance has shown improvement since the acquisition, Morningstar DBRS notes the precipitous decline in cash flows from issuance and the significant deterioration in value, suggesting elevated refinance risk at the loan's maturity in March 2025. In the analysis for this loan, Morningstar DBRS used a stressed value that indicated an LTV ratio approaching 200.0% and a POD penalty, resulting in an EL that is nearly 2.5x the pool's average EL.

Westfield Wheaton is secured by a 1.6 million-sf super-regional mall in Wheaton, Maryland. The loan is on the servicer's watchlist because of delinquent taxes; however, the master servicer has confirmed that the tax payments have been fulfilled as of March 2024, signaling that the loan may be taken off the servicer's watchlist in the near term. Performance remains generally insulated; however, as of December 2023, the subject was 84.0% occupied, representing a moderate decline from the 97.3% occupancy rate at YE2022 and 92.6% occupancy rate at issuance. The DSCR during the same time periods was reported at 2.02x, 2.28x, and 2.43x, respectively. While the subject loan remains a part of URW's portfolio as of May 2024, Morningstar DBRS notes the increased uncertainty surrounding this loan's refinancing prospects, given the sponsor's lack of commitment for the future as evidenced by its sale of the Westfield Trumbull loan. Although Westfield Wheaton poses no imminent monetary concerns, the subject may face a value decline from issuance when it is ultimately paid out from the trust. In its analysis for this loan, Morningstar DBRS used a stressed value that indicated a LTV ratio of approximately 150.0% and a POD penalty, resulting in an EL more than 1.5x the pool's average EL.

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, 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 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 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 (March 1, 2024)/North American CMBS Insight Model version 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

-- 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

A description of how Morningstar DBRS analyzes 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].