NEW YORK--(BUSINESS WIRE)--Fitch Ratings has issued a presale report on FREMF 2016-K56 Multifamily Mortgage Pass-Through Certificates and Freddie Mac Structured Pass-Through Certificates, Series K-056.
Fitch expects to rate the transaction and assign Rating Outlooks as follows:
FREMF 2016-K56 Multifamily Mortgage Pass-Through Certificates
--$164,761,000 class A-1 'AAAsf'; Outlook Stable;
--$798,687,000 class A-2 'AAAsf'; Outlook Stable;
--$51,640,000 class A-M 'A+sf'; Outlook Stable;
--$963,448,000* class X1 'AAAsf'; Outlook Stable;
--$51,640,000* class XAM 'A+sf'; Outlook Stable;
--$963,448,000* class X2-A 'AAAsf'; Outlook Stable;
--$47,213,000 class B 'BBB+sf'; Outlook Stable;
--$29,509,000 class C 'BBB-sf'; Outlook Stable.
Freddie Mac Structured Pass-Through Certificates, Series K-056
--$164,761,000 class A-1 'AAAsf'; Outlook Stable;
--$798,687,000 class A-2 'AAAsf'; Outlook Stable;
--$51,640,000 class A-M 'A+sf'; Outlook Stable;
--$963,448,000* class X1 'AAAsf'; Outlook Stable;
--$51,640,000* class XAM 'A+sf'; Outlook Stable.
*Notional amount and interest only.
The expected ratings are based on information provided by the issuer as of July 21, 2016. Fitch does not expect to rate the following classes of FREMF 2016-K56: the $165,247,541 interest-only class X3, the $216,887,541 interest-only class X2-B or the $88,525,541 class D.
Additionally, Fitch does not expect to rate the following class of Freddie Mac Structured Pass-Through Certificates, Series K-056: the $165,247,541 interest-only class X3.
The certificates represent the beneficial interests in a pool of 82 commercial mortgages secured by 82 properties. The Freddie Mac Structured Pass-Through Certificates, Series K-056 (Freddie Mac SPC K-056) represents a pass-through interest in the corresponding class of securities issued by FREMF 2016-K56. Each Freddie Mac SPC K-056 security has the same designation as its underlying FREMF 2016-K56 class. All loans were originated specifically for Freddie Mac by approved Seller Servicers. The certificates follow a sequential-pay structure.
Fitch reviewed a comprehensive sample of the transaction's collateral, including site inspections on 67.8% of the properties by balance and cash flow analysis of 77.1% of the pool.
The transaction has a Fitch stressed debt service coverage ratio (DSCR) of 1.04x, a Fitch stressed loan-to value (LTV) of 115.1%, and a Fitch debt yield of 7.36%. Fitch's aggregate net cash flow represents a variance of 10.18% to issuer cash flows.
KEY RATING DRIVERS
Higher Leverage Consistent with Recent Transactions: The pool's Fitch DSCR and LTV are 1.04x and 115.1%, respectively. These levels represent slightly lower leverage than the Fitch-rated 2016 YTD DSCR and LTV for 10-year, K-series Freddie Mac deals of 1.02x and 116.7%, respectively, but higher leverage than the respective 2015 averages of 1.08x and 115%. In addition, 60.1% of the loans in the pool have a Fitch DSCR lower than 1.00x; the average 2016 YTD percentage was 58.9%.
Limited Amortization: The pool is scheduled to amortize by 10.9% of the initial pool balance prior to maturity, in line with the 2016 YTD and 2015 averages of 10.7% and 10.2%, respectively. Eight loans (13.7%) are full-term interest-only, and 54 loans (67.3%) are partial interest-only. The remaining 20 loans (19%) are amortizing balloon loans with a term of 10 years.
Average Loan Diversity: The top 10 loans compose 33.9% of the pool, which is in line with the 2016 YTD and 2015 averages of 33.7% and 33.2%, respectively. The largest loan in the pool, Blue Rock Village, represents 5.7% of the pool, while the second largest loan, Verde at Howard Square, represents 4% of the pool.
Low Mortgage Coupons: The pool's weighted average coupon is 4.170%, well below historical averages and slightly less than the 2016 YTD, Fitch-rated, 10-year, K-series Freddie Mac average of 4.24%. Fitch accounted for increased refinance risk in a higher interest rate environment by reviewing an interest rate sensitivity that assumes an interest rate floor of 4.5% for multifamily properties, in conjunction with Fitch's stressed refinance rates, which were 8.59% on a weighted average basis.
RATING SENSITIVITIES
Fitch performed two model-based break-even analyses to determine the level of cash flow and value deterioration the pool could withstand prior to $1 of loss being experienced by the 'BBB-sf' and 'AAAsf' rated classes. Fitch found that the FREMF 2016-K56 pool could withstand a 44.6% decline in value (based on appraised values at issuance) and an approximately 15.3% decrease to the most recent actual cash flow prior to experiencing $1 of loss to any 'AAAsf' rated class. Additionally, Fitch found that the pool could withstand a 37.3% decline in value and an approximately 4% decrease in the most recent actual cash flow prior to experiencing $1 of loss to the 'BBB-sf' rated class.
DUE DILIGENCE USAGE
Fitch was provided with third-party due diligence information from Ernst & Young LLP. The third-party due diligence information was provided on Form ABS Due Diligence-15E and focused on a comparison and re-computation of certain characteristics with respect to each of the 82 mortgage loans. Fitch considered this information in its analysis and the findings did not have an impact on its analysis. A copy of the ABS Due Diligence Form-15E received by Fitch in connection with this transaction may be obtained through the link contained on the bottom of the related rating action commentary.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884963
Criteria for Analyzing Multiborrower U.S. and Canadian Commercial Mortgage Transactions (pub. 01 Jul 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882237
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882401
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883130
Rating Criteria for Structured Finance Servicers (pub. 01 Jul 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884140
Rating Criteria for U.S. Commercial Mortgage Servicers (pub. 14 Feb 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735382
U.S. and Canadian Fixed-Rate Multiborrower CMBS Surveillance and U.S. Re-REMIC Criteria (pub. 13 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873395
Related Research
FREMF 2016-K56 Multifamily Mortgage Pass-Through Certificates and Freddie Mac Structured Pass-Through Certificates, Series K-056
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=885435
FREMF 2016-K56 Multifamily Mortgage Pass-Through Certificates and Freddie Mac Structured Pass-Through Certificates, Series K-056 - Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=885591
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009432
ABS Due Diligence Form 15E 1
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009432
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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