Morningstar DBRS Downgrades Credit Ratings on Eight Classes of BANK 2017-BNK6, Changes Trends on Five Classes to Negative From Stable

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on eight classes of Commercial Mortgage Pass-Through Certificates, Series 2017-BNK6 issued by BANK 2017-BNK6 as follows:

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

In addition, Morningstar DBRS confirmed its credit ratings on the following classes:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class B 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, X-B, and X-D to Negative from Stable. The trends on all other classes are Stable with the exception of Classes E, F, X-E and X-F, which are assigned credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions.

The credit rating downgrades and Negative trends reflect Morningstar DBRS' increased loss projections for the pool, primarily attributed to liquidation scenarios for several distressed assets, the details of which are described below. In addition, Morningstar DBRS notes increased credit risk for a select number of office-backed loans that could see reduced commitment from the respective borrowers and/or face difficulty securing replacement financing as performance declines from issuance and softening market conditions have likely eroded property values. In addition to liquidating the sole specially serviced loan, Trumbull Marriott (Prospectus ID#12: 2.3% of the pool), Morningstar DBRS also considered a liquidation scenario for the Hall Office G4 loan (Prospectus ID#16; 2.0% of the pool) given the property is now 100.0% vacant. Cumulative projected losses totaling $30.3 million would erode the entirety of the non-rated Class G balance and a portion of the Class F balance, significantly reducing credit support to the lowest-rated principal bonds in the transaction. Furthermore, the fourth-largest loan in the pool, Gateway Net Lease Portfolio loan (Prospectus ID#2; 6.2% of the pool), matured in June 2024 and recently received a forbearance. Morningstar DBRS also has concerns with the accruing interest shortfalls currently affecting Classes F and G. Shortfalls are accruing at a rate of approximately $80,000 per month, having increased to $2.1 million as of the July 2024 reporting from $1.2 million in August 2023. The classes above Class F are now more susceptible to additional shortfalls, a consideration for the Negative trends assigned with this review.

As of the July 2024 remittance, 65 of the original 72 loans remain in the pool with a trust balance of $830.2 million representing a collateral reduction of 11.0% since issuance. Loans secured by retail properties represent the largest property-type concentration, accounting for 28.0% of the current pool balance, followed by loans secured by office properties at 17.5%. Twelve loans, representing 27.6% of the pool balance, are on the servicer's watchlist; however, only four of those loans, representing 10.8% of the pool balance, are being monitored for performance-related reasons. In addition, one loan, representing 2.3% of the pool balance, is in special servicing and eight loans, representing 5.4% of the pool balance, are fully defeased.

The Hall Office G4 loan is secured by a 117,500 square foot Class B suburban office building in Frisco, Texas. The loan was added to the servicer's watchlist in November 2020 for upcoming lease expirations primarily related to the former largest tenant Randstad Professional (Randstad; previously 34.9% of net rentable area (NRA)). Randstad subsequently vacated the property in August 2021, triggering a cash flow sweep. In February 2022, the second-largest tenant Schlumberger (previously 33.4% of NRA) also vacated the property after its lease expired, causing the occupancy rate to fall to just 16.0%. Consequently, cash flow and the debt service coverage ratio (DSCR) have declined since issuance and have been well below breakeven since YE2021. The borrower has not been successful in backfilling vacant space and a property inspection dated March 2024 indicated that the only remaining tenant, University of Northern Texas (16.0% of NRA), had also vacated the property ahead of its lease expiration in December 2025 although it continues to pay rent at a rate of $25.30 per square foot. According to Reis, office properties in the Plano/Allen submarket reported a Q1 2024 vacancy rate of 28.7% compared with the Q1 2023 vacancy rate of 26.6%. No updated appraisal has been provided since issuance when the property was valued at $25.8 million; however, given the sponsor's inability to backfill vacant space, combined with soft submarket fundamentals and general challenges for office properties in today's environment, Morningstar DBRS expects that the collateral's as-is value has likely declined significantly, elevating the credit risk to the trust. Morningstar DBRS' liquidation scenario considered a conservative haircut to the property's appraised value at issuance resulting in a loss severity in excess of 60.0%.

The second-largest loan on the watchlist, Gateway Net Lease Portfolio, is secured by a portfolio of 41 single-tenant office and industrial properties across 20 states, all of which operate under triple-net leases. The loan transferred to special servicing in 2021 for imminent monetary default and a subsequent loan modification included a conversion to interest-only payments until the loan's maturity date in June 2024. The loan was added to the servicer's watchlist in December 2023 given the impending maturity date. The borrower requested a forbearance in May 2024 that was granted by the lender and has taken effect for the 60-day period between June 5, 2024, and August 5, 2024, during which time the borrower is attempting to obtain replacement financing. Morningstar DBRS has requested additional information from the servicer; however, as of the date of this press release, a response remains pending. According to the YE2023 financial reporting, the portfolio-level occupancy rate and net cash flow (NCF) remain relatively consistent with the prior year at 96.2% and $47.9 million (reflecting DSCR of 2.20 times (x)), respectively. Although the borrower is actively attempting to obtain replacement financing, the loan is past its maturity date and the portfolio has significant exposure to single-tenant office properties. As a result, Morningstar DBRS removed the BBB (high) (sf) shadow rating assigned to the loan at issuance in addition to applying an elevated probability of default penalty in its analysis.

The specially serviced loan, Trumbull Marriott, is secured by a 325-key full-service hotel in Trumbull, Connecticut. The loan transferred to special servicing in May 2020 for imminent default. A friendly foreclosure agreement was filed at which time GF Hotels & Resorts was appointed receiver. The hotel is managed by Marriott International with no formal franchise agreement. A receivership sale was conducted, which reportedly yielded an offer the lender has recommended moving forward with.

The property was reappraised in November 2023 for $7.3 million, a significant decline from both the January 2023 and issuance appraised values of $11.5 million and $35.1 million, respectively. The property is significantly underperforming its competitive set with a revenue per available room (RevPAR) penetration rate of just 76.6% as of the March 2024 STR report. According to the financial reporting for the trailing12 months ended June 30, 2023, the property was 57.0% occupied with a reported NCF of $1.8 million (a DSCR of 1.33x), an improvement from the YE2022 figure of -$1.7 million (a DSCR of -1.23x) but well below the issuance figure of $2.5 million (a DSCR of 1.8x).The property was underperforming prior to the pandemic and is in need of significant upgrades that are estimated to cost in excess of $20.0 million -- further contributing to the collateral's decline in value. In the analysis for this review, Morningstar DBRS assumed a full loss to the loan.

At issuance, Morningstar DBRS shadow-rated three loans -- General Motors Building (Prospectus ID#1; 10.8% of the pool), Gateway Net Lease Portfolio, and Del Amo Fashion Center (Prospectus ID#3; 7.2% of the pool) -- as investment grade. With this review, Morningstar DBRS removed the shadow rating from the Gateway Net Lease Portfolio loan, as outlined above. Morningstar DBRS confirms that the characteristics of the other two loans remain consistent with the investment-grade shadow ratings, as supported by the strong credit metrics, strong sponsorship strength, and the historically stable performance of the collateral underlying those loans.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 XA, XB, XD, XE, and XF 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 credit rating assigned to Class C materially deviates from the credit rating 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 deviation is uncertain loan-level event risk. As noted above, the Gateway Net Lease Portfolio loan is past its maturity date but received a forbearance that provided additional time for the borrower to seek replacement financing. Additionally, select loans of concern in the pool, although posing some credit risk to the transaction at large, are currently performing, providing the sponsor time to work toward stabilization prior to loan maturity, if required. The Negative trends that Classes B, C, and D now carry reflect these loan-level concerns and suggest downgrades could occur as part of future review cycles should the operating performance of the underlying collateral continue to deteriorate.

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 info-DBRS@morningstar.com.

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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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 (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- 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 (July 17, 2023).

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.