Morningstar DBRS Downgrades Credit Ratings on Two Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-C8

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2012-C8 issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-C8 as follows:

-- Class X-B to CCC (sf) from B (sf)
-- Class G to CCC (sf) from B (low) (sf)

Classes G and X-B have credit ratings that do not carry a trend in commercial mortgage-backed securities (CMBS).

The credit rating downgrades reflect the elevated risk of potential loss to the trust given the further decline in the appraised value reported for the office collateral that secures the remaining loan in the pool, Ashford Office Complex (Prospectus ID#5), which is likely to be further stressed by the elevated tenant rollover risk during the next 12 months. In addition, Morningstar DBRS has concerns over the increased propensity for interest shortfalls, as the non-rated Class NR has accumulated $0.5 million of interest shortfalls as of the October 2024 reporting, only collecting 5.0% of its interest payments during the month.

The loan transferred to special servicing in August 2022 for maturity default and has been deemed a nonperforming matured balloon as of the August 2024 reporting. Per the servicer's most recent update, the sale and loan assumption strategy that Morningstar DBRS noted at last review is no longer active, and there is now another buyer pursuing the sale at a lower price. While the sale price has not been disclosed, Morningstar DBRS considered a liquidation scenario for the loan to test the recoverability of the remaining certificates, and applied a conservative haircut to the most recent appraised value and concluded that losses will erode the majority of the balance for Class NR, leaving minimal cushion for Class G.

The Ashford Office Complex is secured by three eight-story Class B office buildings totaling 570,000 square feet in the Energy Corridor of Houston. The property has reported sustained decline in performance since 2017 due to volatility in the oil and gas industry, further exacerbated by the effects of the Coronavirus Disease pandemic. As of the trailing three-month period ended March 31,2024, the property reported a negative cash flow, and was 56.6% occupied, with an in-place rental rate that is well below the asking rent of the submarket. In addition, the largest tenant, CH2M HILL (14.5% of the net rentable area), which accounts for 41.2% of the property's total base rent and subleases a portion of its space, has a lease expiration at the end of November 2024.

An updated appraisal, dated September 2023, valued the property at $32.5 million, nearly half the former value from November 2022 of $59.7 million and significantly below the issuance value of $80.2 million. While the recent appraised value could be reduced by more than half before a loss fully erodes the unrated Class NR, the property is located the West/Kay Freeway submarket, which has reported one of the highest vacancy rates in the U.S. for the last several years, signaling the lack of investor appetite for office properties in the area, as highlighted by the discussion on the disposition of the asset above.

As a result, Morningstar DBRS anticipates a prolonged workout period, which may result in increased property protection and other expenses accruing over the workout period, increasing the propensity for interest shortfalls. As such, Morningstar DBRS factored in additional stress in deriving the liquidated value, resulting in a loss severity of 76.0%, which erodes more than 95.0% of the Class NR balance, supporting the rating actions.

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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Class X-B is an 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 the 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 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.

Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction is in wind down, with the outstanding loans nearing maturity. In such cases, Morningstar DBRS credit ratings are typically based on a recoverability analysis. Factors which could contribute to credit ratings sensitivity in these cases are described in the regulatory disclosures provided in conjunction with this press release.

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.

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 Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.