Morningstar DBRS Downgrades Three Classes of Citigroup Commercial Mortgage Trust 2015-GC27

DBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2015-GC27 issued by Citigroup Commercial Mortgage Trust 2015-GC27 as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class PEZ at A (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (low) (sf)
-- Class G at C (sf)

Morningstar DBRS also discontinued the credit rating on Class A-AB.

Morningstar DBRS changed the trend on Class D to Negative from Stable. All other trends are Stable, with the exception of Classes E, X-E, F, and G, which have credit ratings that generally do not carry trends in commercial mortgaged-backed securities (CMBS) credit ratings.

The credit rating downgrades reflect Morningstar DBRS' increased loss expectations for the pool, primarily attributed to the largest loan in special servicing, 393-401 Fifth Avenue, a nearly dark office property in New York City, which is further discussed below. The loan was not specially serviced at last review. Morningstar DBRS' total loss projections as a result have increased to approximately $37.3 million, suggesting significant credit erosion for multiple junior bonds, including the unrated Class H certificate as well as the Morningstar DBRS-rated Class F and G certificates.

As of the July 2024 remittance, 88 of the original 100 loans remained in the pool with an aggregate balance of $904.2 million, representing a collateral reduction of 24.28% since issuance. Two loans, representing 11.3% of the pool, are in special servicing, and Morningstar DBRS' analysis for both of these loans included liquidation scenarios. Forty loans, representing 42.3% of the current pool balance, have been fully defeased. All but four loans, representing 1.5% of the pool balance, are scheduled to mature within the next six months. Although Morningstar DBRS expects the majority of these will repay from the trust, Morningstar DBRS has identified six non-specially serviced loans, representing 7.7% of the pool, to be at increased risk of maturity default for performance concerns including declining occupancy, debt service coverage ratio (DSCR), and/or concentrated upcoming tenant rollover. Where applicable, Morningstar DBRS increased the probability of default penalties, and, in certain cases, applied stressed loan-to-value ratios for loans exhibiting performance concerns. The resulting weighted-average expected loss for the loans exhibiting signs of elevated refinance risk is nearly 60% higher than the pool average. Morningstar DBRS changed the trend on Class D to Negative from Stable to reflect concerns about adverse selection in a wind-down scenario where only defaulted or underperforming assets are left in the pool. Should additional defaults occur or individual loan performance continue to decline, classes may be subject to further downgrades.

The largest loan in special servicing and the largest contributor to Morningstar DBRS' increased loss projections is 393-401 Fifth Avenue (Prospectus ID#2, 10.5% of the pool). The loan is secured by an eight-story office building with ground-floor retail totaling 218,162 square feet (sf) in the Grand Central submarket of Manhattan, New York. The loan transferred to special servicing in April 2024 following news that the largest tenant, American Eagle Outfitters (AEO) (88.2% of the net rentable area), intends to vacate the property prior to its lease expiry in May 2026. As a result, a cash flow sweep was initiated, which should generate funds that can be used to re-lease the space, given the current DSCR and the expectation that AEO will continue to pay rent according to its lease terms. Morningstar DBRS requested an update from the servicer regarding the balance of the cash sweep account but has not received a response as of this press release; however, according to the loan terms, the cash sweep amount is capped at $50 per sf.

The re-leasing efforts may be challenging given the current office market environment and large upcoming availability at the subject. While the loan remains current and an updated appraisal has not yet been ordered, Morningstar DBRS believes the property value has deteriorated given the vacancy of one of the only tenants at the property and softened submarket fundamentals. Although the interim rental income paid by AEO and the cash sweep help to offset some of these concerns, Morningstar DBRS does not expect the loan will repay at its January 2025 maturity and believes it unlikely that the borrower will be able to secure traditional takeout financing unless the dark space is subleased and/or a replacement tenant is found. To reflect these concerns, Morningstar DBRS' analysis of this loan included a liquidation scenario based on a conservative haircut to the issuance appraised value, resulting in an implied loss severity approaching 40.0%.

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 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 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, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

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 (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

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