Morningstar DBRS Downgrades Credit Ratings on Four Classes of Wells Fargo Commercial Mortgage Trust 2015-C28, Changes Trends on Four Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C28 issued by Wells Fargo Commercial Mortgage Trust 2015-C28 as follows:

-- Class D to BB (low) (sf) from BBB (low) (sf)
-- Class X-E to CCC (sf) from B (high) (sf)
-- Class E to CCC (sf) from B (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)
-- Class B at AA (low) sf
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)

Morningstar DBRS changed the trends on Classes B, C, D, and PEX 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-F, which are assigned credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS).

The credit rating downgrades on Classes D, E, F, and X-E reflect Morningstar DBRS' increased loss projections for the loans in special servicing. Since the last credit rating action, 3 Beaver Valley Road (Prospectus ID#6, 4.2% of the pool balance), transferred to special servicing, and there are currently two specially serviced loans, representing 5.6% of the pool balance. Morningstar DBRS' analysis included a liquidation scenario for both specially serviced loans, resulting in implied losses of approximately $36.2 million, an increase from Morningstar DBRS' projected losses of $5.6 million from only one specially serviced loan, Washington Square (Prospectus ID#22, 1.4% of the pool balance), at the time of the last credit rating action. The current implied losses are projected to fully erode the unrated Class G certificate, and approximately 40.0% of the Class F certificate, further reducing credit enhancement to the junior bonds. The primary contributor to the increase in Morningstar DBRS' projected loss is the liquidation scenario for the recently transferred 3 Beaver Valley Road loan.

The Negative trends on Classes B, C, and PEX are reflective of the increased pool expected losses in addition to Morningstar DBRS' concerns regarding increased default risk as the pool nears maturity. Nearly all of the remaining loans in the transaction are scheduled to mature by May 2025. In a wind-down scenario, Morningstar DBRS expects that the majority of the non-specially serviced loans will successfully repay at maturity. However, Morningstar DBRS has identified 11 loans, representing 26.0% of the pool balance, that exhibit increased default risk given weak credit metrics and/or upcoming rollover risk. 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 ratios (LTVs) and/or elevated probabilities of default (PODs) for these loans to increase the expected loss (EL) as applicable. The resulting weighted-average (WA) expected loss for the pool increased by approximately 100 basis points with this review. Should performance of these loans deteriorate further or additional 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 WA debt service coverage ratio (DSCR) of 2.40 times (x) and WA debt yield above 15.0%.

As of the June 2024 remittance, 83 of the original 99 loans remained in the trust, with an aggregate balance of $941.5 million, representing a collateral reduction of 19.2% since issuance. There are 18 fully defeased loans, representing 10.2% of the current pool balance. There are 16 loans on the servicer's watchlist, representing 16.2% of the pool balance, that are being monitored primarily for performance concerns, deferred maintenance items, and the occurrence of trigger events. To date, there has been $7.2 million of realized losses to the trust, which has eroded more than 20% of the nonrated Class G. Excluding the defeased loans, the pool is most concentrated by retail and office properties, which represent 36.1% and 27.3% 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 2.0x the pool's average EL.

The largest loan in special servicing is 3 Beaver Valley Road, which is secured by a 263,503 square foot (sf) office building in Wilmington, Delaware. The loan transferred to the special servicer in December 2023 after the sole tenant, Farmers Insurance Exchange (Farmers; occupies 60.0% of the net rentable area (NRA), lease expires in December 2024), withheld partial rental payments in response to a casualty event at the property that resulted in unusable space at the subject. The borrower advised they will not cover for any payment shortfalls and foreclosure was later filed; a receiver was appointed on May 3, 2024. At issuance, the property was 95% occupied by two tenants - Farmers and Solenis LLC (Solenis). Farmers exercised its contraction option effective January 2022 in exchange for a $1.4 million fee and Solenis, which formerly occupied 14.8% of the NRA, exercised its early termination option and vacated in March 2020 in exchange for $2.5 million in termination fees. There is currently a total of $6.0 million that has accumulated across tenant, replacement, and other reserves.

The property is currently 40% vacant, compared to the Q1 2024 submarket vacancy of 20.7%, according to Reis. The DSCR has been reported below breakeven since Farmers' downsizing in 2022. As reported by CNN in August 2023, Farmers laid off 2,400 employees across the company, although specific impacts to the subject property are unclear. Online listings are marketing 60.0% of the property as available for leasing, indicative of potential further downsizing by Farmers. Given the company's recent efforts toward a reduction of operational expenses, Morningstar DBRS believes it is likely the tenant may depart altogether at its lease expiration, leaving the property fully vacant. While an updated appraisal has not yet been made available, Morningstar DBRS believes the property value has deteriorated significantly since issuance given the building's availability, single tenant exposure, suburban location within a softening submarket, and the currently challenged office landscape. Morningstar DBRS derived an updated dark value, based on the tenant's current rental rate, a stabilization period of two years, and a 10.0% stressed capitalization rate, which is on the higher end of the range used by Morningstar DBRS for office properties. The resulting dark value was approximately 40.0% lower than the issuer's dark value derived in 2015. Morningstar DBRS' analysis includes a liquidation scenario based on this dark value and suggests a loss severity of approximately 80.0%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factor(s) 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; https://dbrs.morningstar.com/research/427030).

Classes X-A and X-E are interest-only (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 credit ratings assigned to Classes B, C, and PEX materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan level event risk. The transaction is in wind down and the vast majority of the remaining loans in the pool have an upcoming maturity before May 2025. Although Morningstar DBRS expects the majority of these loans will repay, considerations were made for the potential of adverse selection and maturity defaults. This, in addition to increased propensity for interest shortfalls as the pool becomes more concentrated, are considered constraining factors in Morningstar DBRS' credit ratings.

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
DBRS Tower, 181 University Avenue, Suite 700
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)

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 DBRS Morningstar 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].