Morningstar DBRS Downgrades Three Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2013-C7 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7 as follows:

-- Class C to BB (low) (sf) from A (low) (sf)
-- Class X-B to BB (sf) from A (sf)
-- Class PST to BB (low) (sf) from A (low) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class D at C (sf)
-- Class E at C (sf)
-- Class F at C (sf)
-- Class G at C (sf)

The trends on Classes C, X-B, and PST are Negative. Classes D, E, F, and G have credit ratings that generally do not carry a trend in commercial mortgage-backed securities (CMBS).

The credit rating downgrades on Classes C, X-B, and PST are a result of the outstanding interest shortfalls throughout the capital stack, which total $9.2 million as of November 2024 reporting and are expected to increase given the concentration of delinquent and specially serviced assets in the transaction (four loans, representing 92.7% of the current trust balance). The resolution and disposition strategies of these loans are likely to be drawn out, supporting the Negative trends as increased resolution timelines would result in additional expenses incurrent by the trust.

At the last credit rating action in January 2024, cumulative unpaid interest shortfalls totalled $5.0 million. As of the November 2024 remittance, interest shortfalls affect up to the Class D certificate, currently rated C (sf). Morningstar DBRS' tolerance for unpaid interest is limited to one to two remittance periods at the A (sf) credit rating category and six remittance periods at the BB (sf) and B (sf) credit rating categories. As of the November 2024 remittance, 11 loans remain in the pool, representing a collateral reduction of 88.6% since issuance. There have been no additional paydowns or liquidations since the last credit rating action. The four specially serviced loans are secured by regional malls and smaller retail properties, which have reported significant value declines from issuance. All four loans were liquidated from the trust with this review, discussed further below. The remaining seven loans, representing 7.3% of the pool, are secured by single-tenant retail properties, 100% leased to Walgreens. These loans are fully amortizing fixed-rate loans with maturity dates ranging from June 2025 to November 2035.

The largest remaining loan is Solomon Pond Mall (Prospectus ID#2, 51.4% of the pool), which is backed by 399,266 square feet (sf) of in-line space in an 884,758-sf regional mall in Marlborough, Massachusetts, approximately 30 miles west of downtown Boston. The mall is anchored by noncollateral tenants JCPenney and Macy's. A third anchor space previously occupied by a noncollateral Sears remains dark following the store closure in 2021. The loan transferred to special servicing in June 2020 for imminent monetary default and a receiver was appointed in September 2021. The loan was last paid in December 2023. The receiver continues its attempts to stabilize the property and has begun the receiver sale process. According to the June 2024 rent roll, occupancy has increased to 85.4%, up slightly from 83.7% in February 2023 and the low occupancy rate of 69.0% in June 2021. Within the next 12 months, there is a cumulative tenant rollover risk of approximately 36.0% of the collateral net rentable area. According to the most recent financials provided by the servicer, the net cash flow (NCF) as of YE2023 was $2.6 million, resulting in a debt service coverage ratio (DSCR) of 0.42 times (x). The NCF figure remained well below the issuance figure of $13.2 million. A January 2024 appraisal valued the subject at $29.7 million, similar with the March 2023 value of $30.4 million, but a steep decline from the issuance appraised value of $200.0 million. The sponsor, Simon Property Group, has classified the subject property in its "Other Properties" category as of its Q3 2024 supplement report, which aligns with the 11 months of delinquent debt service payments and illustrates the lack of sponsor commitment. Given the sustained value decline with the most recent appraisal, tenant rollover risk, lack of sponsor commitment, and poor financial performance, Morningstar DBRS assumed a stressed scenario in its analysis, resulting in a full loss to the loan.

The second-largest loan is Valley West Mall (Prospectus ID#7, 23.5% of the pool), an 856,248-sf, regional mall in West Des Moines, Iowa. The loan transferred to special servicing in September 2019 for imminent default and a receiver was appointed in 2020. In an effort to entice a potential sale, the receiver worked with the municipality to rezone the subject to a mixed-use property as of June 2024, according to several online articles. Although the rezoning is a positive development, occupancy continues to decline, which was most recently reported at 43.0% as of the June 2024 rent roll, down from the 62.0% occupancy rate as of September 2023. At issuance, the subject was anchored by JCPenney, Younkers, and Von Maur; however, only JCPenney remains at the property, as Younkers vacated in 2018 and Von Maur relocated in 2022 to a competing mall located five miles from the subject. Financial performance continues to decline with negative cash flow figures reported since 2022. The January 2024 appraisal valued the subject at $14.5 million, a continued decline from the $18.0 million valuation as of February 2023 and well below the $95.0 million valuation at issuance. Morningstar DBRS assumed a stressed scenario in its liquidation analysis, resulting in a full loss to the loan.

The final two specially serviced loans are 494 Broadway (Prospectus ID#19, 11.6% of the pool) and 440 Broadway (Prospectus ID#28, 6.2% of the pool), secured by two retail properties in the Soho neighborhood of New York City. Both loans transferred to special servicing for maturity default. 440 Broadway is now real estate owned while the foreclosure process remains ongoing for 494 Broadway. Both loans received updated appraised values in 2024 below the 2023 and issuance appraised values. Both loans were liquidated from the pool in Morningstar DBRS' analysis at a cumulative loss in excess of $21.0 million.

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/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-factors-in-credit-ratings).

Class X-B is an interest-only (IO) certificate that references 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/north-american-cmbs-surveillance-methodology).

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 only eleven loans remaining. In such cases, Morningstar DBRS credit ratings are typically based on a recoverability 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.

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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 01, 2024; https://dbrs.morningstar.com/research/428797/north-american-cmbs-multi-borrower-rating-methodology)

-- Legal Criteria for U.S. Structured Finance (December 3, 2024; https://dbrs.morningstar.com/research/444064/legal-criteria-for-us-structured-finance

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024; https://dbrs.morningstar.com/research/439702/morningstar-dbrs-north-american-commercial-real-estate-property-analysis-criteria)

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024; https://dbrs.morningstar.com/research/438283/north-american-commercial-mortgage-servicer-rankings)

-- Rating North American CMBS Interest-Only Certificates (June 28, 2024; https://dbrs.morningstar.com/research/435294/rating-north-american-cmbs-interest-only-certificates)

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.