Morningstar DBRS Downgrades the Credit Rating on One Class of Wells Fargo Commercial Mortgage Trust 2015-NXS2, Confirms All Remaining Credit Ratings

DBRS Limited (Morningstar DBRS) downgraded its credit rating on one class of Commercial Mortgage Pass-Through Certificates, Series 2015-NXS2 issued by Wells Fargo Commercial Mortgage Trust 2015-NXS2 as follows:

-- Class D 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 B at A (low) (sf)
-- Class C at BBB (low) (sf)
-- Class PEX at BBB (low) (sf)
-- Class E at C (sf)
-- Class F at C (sf)
-- Class X-A at AAA (sf)
-- Class X-E at C (sf)

Classes A-2, A-3, and A-SB were discontinued as they were repaid with the January 2025 remittance.

The trend on Class B was changed to Stable from Negative; Classes C and PEX continue to carry a Negative trend. All remaining trends are Stable with the exception of Classes D, E, F, and X-E, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The downgrade reflects Morningstar DBRS' increased loss projections for the loans in special servicing. There are six specially serviced loans, representing 20.4% of the current pool. Morningstar DBRS' analysis considered liquidation scenarios for all specially serviced loans and determined that estimated liquidated losses are likely to almost fully erode the Class E certificate, a primary consideration in the downgrade of Class D. Morningstar DBRS' analysis also included consideration of a wind-down scenario given the near-term maturity of nearly all remaining loans. While Morningstar DBRS expects the majority of maturing loans are likely to repay from the pool, three loans representing 13.9% of the current pool balance, were identified as being at increased risk of maturity default based on concentrated upcoming rollover or recent declines in performance. The possibility for additional defaults, further value decline for loans already in special servicing and an increase in Morningstar DBRS' loss projections is considered a key driver in the Negative trend on Class C. Morningstar DBRS' wind-down scenario also indicated that the senior classes are well insulated from losses, with nearly $80 million in remaining credit support beneath the Class B certificate based on current loss projections, thereby supporting the trend change on Class B to Stable from Negative.

As of the January 2025 remittance, 50 of the original 63 loans remain in the trust, with an aggregate balance of $596.8 million, representing a collateral reduction of 34.7% since issuance. Since the last credit rating action, a previously specially serviced loan, Colman Building (Prospectus ID#10) was liquidated from the trust resulting in a realized loss in line with Morningstar DBRS' projections. All the remaining loans in the pool are scheduled to mature by July 2025, with the exception of five loans, totaling 9.8% of the pool, which are scheduled to mature in 2035. Morningstar DBRS expects most of the loans will successfully repay at their respective maturity dates based on the performance of the underlying collateral; this is exhibited by a weighted-average (WA) debt service coverage ratio (DSCR) of 1.71 times (x) and WA debt yield of 11.9% as of YE2023 financials.

Morningstar DBRS' loss expectations are primarily driven by Sea Harbor Office Center (Prospectus ID#6, 6.7% of the pool), which is secured by a 359,514-square-foot (sf) suburban office building in Orlando, Florida. The loan originally transferred to the special servicer in January 2019 for nonmonetary default related to noncompliance with a cash management trigger. As of the January 2025 remittance, the loan is current on debt payments and the workout strategy remains unclear. The subject was 94.0% occupied as of the June 2024 rent roll; however, there is significant near-term rollover. The largest tenant, Wyndham Hotels & Resorts occupies 72.4% of net rentable area (NRA) on a lease through October 2025. In May 2024, the tenant publicly announced its plans to relocate upon its October 2025 lease expiration. This departure is expected to drive occupancy at the subject down to 21.6%. Moreover, the second largest tenant, Visit Orlando (12.4% of the NRA), also has a near-term lease expiration in October 2025, making a resolution or refinance of the loan increasingly challenging. As per the most recent servicer commentary, the borrower has listed the property for sale and reports interest from potential buyers and redevelopers. The property was reappraised in March 2023 at $44.5 million, 32.6% less than the issuance appraised value of $66.0 million. Given the concentrated near-term rollover risk, significant value deterioration, and softening submarket metrics, Morningstar DBRS' analysis includes a liquidation scenario, based on a 40% haircut to the 2023 appraised value to account for the expected further value deterioration. The resulting projected loss severity is approximately 40%, or $15.5 million.

The largest loan in the pool is Campbell Technology Park, which is secured by a four-building, 280,000-sf office complex in Campbell, California. The loan was added to the watchlist in February 2022 because of declining occupancy/DSCR figures. The property was 50.3% occupied as of the September 2024 rent roll, significantly less than the issuance occupancy rate of 93.4%. Moreover, all remaining leases are scheduled to expire by December 2025. Given the high maturity default risk stemming from the declining performance and concentrated upcoming rollover, Morningstar DBRS applied an elevated loan-to-value adjustment and probability of default penalty, resulting in a loan-level expected loss that is more than two times higher than the pool-level expected loss.

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.

Classes X-A 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 (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 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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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/North American CMBS Insight Model v 1.2.0.0 (December 13, 2024), https://dbrs.morningstar.com/research/444616
-- Morningstar DBRS North American 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 (December 3, 2024), https://dbrs.morningstar.com/research/444064

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 (July 17, 2023).

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