Morningstar DBRS Downgrades Seven Classes of Wells Fargo Commercial Mortgage Trust 2016-NXS6

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on seven classes of Commercial Mortgage Pass-Through Certificates, Series 2016-NXS6 issued by Wells Fargo Commercial Mortgage Trust 2016-NXS6 as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-2 at AAA (sf)
-- 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 (high) (sf)
-- Class G at C (sf)

Morningstar DBRS changed the trends on Classes D, C and X-B to Negative from Stable. Classes E, F, G, X-D, and X-E have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings. All other classes have Stable trends.

The credit rating downgrades to Classes D, E, F, X-D, and X-E reflect ongoing interest shortfalls, which have exceeded Morningstar DBRS' tolerance for timely interest to rated bonds. As of the November 2024 remittance, cumulative unpaid interest totalled approximately $3.8 million, up from $2.5 million at the last credit rating action in March 2024. Unpaid interest continues to accrue month over month, primarily driven by special servicing fees and appraisal subordinate entitlement reduction from the largest loan in special servicing, Cassa Times Square (Prospectus ID#6; 5.8% of the pool). Morningstar DBRS' tolerance for unpaid interest is limited to three to four remittance periods at the BBB (sf) credit rating category and six remittance periods at the BB (sf) and B (sf) credit rating categories.

The credit rating downgrades and trend change to Negative on Classes C and X-B reflect the increased propensity for interest shortfalls and the uncertain resolution of the Crate and Barrel loan (Prospectus ID#12; 3.7% of the pool), which transferred to special servicing in March 2024. The single tenant office building in the Northbrook suburb of Chicago is fully leased to Crate and Barrel with a lease expiration coterminous with the loan maturity in November 2025. The tenant has not yet renewed its lease and, should the tenant vacate at its lease expiry, the loan's refinancing prospects will be severely challenged. To reflect the increased credit risk, Morningstar DBRS analyzed this loan with an elevated probability of default and loan-to-value, resulting in an expected loss that is approximately three times (x) the pool average.

As of the November 2024 remittance, 46 of the original 50 loans remain in the pool, representing a collateral reduction of 22.1% since issuance. The pool is well diversified by property type, with the four largest concentrations being retail (24.7% of the pool), mixed-use (20.2%), multifamily (18.3%), and office properties (17.9%). The office loans in the pool are generally performing in line with issuance expectations with a weighted-average YE2023 debt service coverage ratio of 2.06 times.

Morningstar DBRS' loss expectations for Cassa Times Square remains unchanged from the prior credit rating action. The loan is secured by an 86-key boutique hotel along with 8,827 square feet of retail space in Manhattan, New York. The servicer is dual tracking foreclosure while also considering an option for a potential note sale. Given the loan's continued delinquency, Morningstar DBRS' analysis of this loan included a liquidation scenario based on a stressed haircut to the most recent appraisal, which valued the property at $33.8 million as of May 2024. Morningstar DBRS' liquidation scenario resulted in an implied loss severity in excess of 65.0%, which would erode the entirety of the unrated Class H.

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, or 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).

Classes X-A, X-B, X-D, 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 assigned to Class D materially deviates from the 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 material deviation is warranted given the structural transaction features and/or provisions in other relevant methodologies outweigh the quantitative model output. Morningstar DBRS' tolerance for unpaid interest is limited to three to four remittance periods at the BBB (sf) credit rating category.

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
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
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

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.