Morningstar DBRS Confirms All Credit Ratings of Wells Fargo Commercial Mortgage Trust 2014-LC16
CMBSDBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the remaining classes of Commercial Mortgage Pass-Through Certificates, Series 2014-LC16 issued by Wells Fargo Commercial Mortgage Trust 2014-LC16 as follows:
-- Class B at BB (sf)
-- Class C at C (sf)
The trend on Class B remains Negative. Class C doesn't carry a trend as this class has a credit rating that does not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings.
The transaction is in wind down, with five matured loans remaining, all of which are specially serviced. The credit rating actions reflect concerns around the ultimate recoverability of the remaining loans and the increased propensity for interest shortfalls to accumulate, affecting the remaining Morningstar DBRS-rated certificates. Morningstar DBRS' analysis considered liquidation scenarios for all of the remaining loans to determine the recoverability of the remaining bonds and determined that losses will likely be contained to Class C. However, given the adverse selection and concentration of defaulted loans, Morningstar DBRS' credit ratings reflect the high credit risk of the remaining loans.
The two largest remaining loans, Harlequin Plaza (Prospectus ID#7; 42.3% of the pool) and Orchard Falls (Prospectus ID#13; 24.7% of the pool) are secured by suburban Denver office properties that have faced significant value declines since issuance of more than 60% and 80%, respectively. The Harlequin Plaza loan consists of two low-rise buildings comprising 329,926 square feet (sf). Despite the year-end (YE) 2023 debt service coverage ratio of 1.35 times (x), the loan transferred to special servicing in May 2024 because of imminent monetary default as a result of the borrower being unable to repay the loan at its June 2024 maturity. As of March 2024, property occupancy had declined to 72% from 86% as of YE2022. The most recent appraised value of $17.2 million, dated June 2024, represents a substantial decline from the issuance appraised value of $46.6 million, and implies a current loan-to-value ratio (LTV) of 162.8%. According to updates from the servicer, a foreclosure sale is scheduled for February 2025. Based on a liquidation scenario that considered a haircut to the 2024 appraisal, Morningstar DBRS expects a loss severity for this loan in excess of 50%.
According to servicer updates, the 146,276-sf Orchard Falls loan was 90% occupied as of February 2024, unchanged from the September 2023 occupancy rate when the servicer last reported a debt service coverage ratio (DSCR) figure of 0.90x. Morningstar DBRS also notes that three of the five largest tenants, representing 41.0% of net rentable area, have upcoming lease expiration dates in 2025, which suggests there's a high likelihood that DSCR will likely fall below breakeven in the near term. The loan transferred to special servicing in March 2024 because of imminent monetary default in advance of its May 2024 maturity date. The most recent appraised value of $4.8 million, dated June 2024, represents a significant decline from the issuance appraised value of $26.1 million, and implies a current loan-to-value ratio (LTV) of 343.9%. The lender is in negotiations with the borrower while also dual-tracking other remedy options. Based on a liquidation scenario that considered a haircut to the 2024 appraisal, Morningstar DBRS expects a loss severity for this loan of nearly 80%.
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 factor(s) 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 at (August 13, 2024; https://dbrs.morningstar.com/research/437781).
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 (December 13, 2024; https://dbrs.morningstar.com/research/444617).
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.
Morningstar DBRS notes that a traditional model-based sensitivity was not performed; however, Morningstar DBRS notes that the credit ratings are sensitive to the recoverability assumptions on the five remaining loans that are detailed in the accompanying press release. Should recoverability of the remaining loans be lower than that implied by the stressed values in the latest analysis, credit ratings lower in the capital stack would be those most negatively impacted.
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.
22 West Washington Street
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 (December 13, 2024;
https://dbrs.morningstar.com/research/444616/north-american-cmbs-multi-borrower-rating-methodology)
-- 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)
-- Legal Criteria for U.S. Structured Finance (December 3, 2024;
https://dbrs.morningstar.com/research/444064/legal-criteria-for-us-structured-finance)
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024;
https://dbrs.morningstar.com/research/438283/north-american-commercial-mortgage-servicer-rankings)
For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.