Fitch to Rate FREMF 2016-K57 Multifamily Mtge PT Ctfs & Freddie Mac SPC, Ser K-057; Presale Issued

NEW YORK--()--Fitch Ratings has issued a presale report on FREMF 2016-K57 Multifamily Mortgage Pass-Through Certificates and Freddie Mac Structured Pass-Through Certificates, Series K-057.

Fitch expects to rate the transaction and assign Rating Outlooks as follows:

FREMF 2016-K57 Multifamily Mortgage Pass-Through Certificates

--$119,521,000b class A-1 'AAAsf'; Outlook Stable;

--$865,000,000b class A-2 'AAAsf'; Outlook Stable;

--$55,956,000bc class A-M 'A+sf'; Outlook Stable;

--$984,521,000ab class X1 'AAAsf'; Outlook Stable;

--$55,956,000abc class XAM 'A+sf'; Outlook Stable;

--$984,521,000a class X2-A 'AAAsf'; Outlook Stable;

--$48,394,000 class B 'BBB+sf'; Outlook Stable;

--$30,246,000 class C 'BBB-sf'; Outlook Stable.

Freddie Mac Structured Pass-Through Certificates, Series K-057

--$119,521,000b class A-1 'AAAsf'; Outlook Stable;

--$865,000,000b class A-2 'AAAsf'; Outlook Stable;

--$55,956,000bc class A-M 'A+sf'; Outlook Stable;

--$984,521,000ab class X1 'AAAsf'; Outlook Stable;

--$55,956,000abc class XAM 'A+sf'; Outlook Stable.

(a) Notional amount and interest only.

(b) Guaranteed by Freddie Mac. Ratings are based solely on the underlying collateral and without respect to the Freddie Mac guarantee.

(c) Classes A-M and XAM could be rated 'AAAsf' if the Freddie Mac guarantee is accounted for.

These expected ratings are based on information provided by the issuer as of Sept. 12, 2016. Fitch does not expect to rate the following classes of FREMF 2016-K57: the $169,380,042 interest-only class X3, the $225,336,042 interest-only class X2-B, or the $90,740,042 class D.

Additionally, Fitch does not expect to rate the following class of Freddie Mac Structured Pass-Through Certificates, Series K-057: the $169,380,042 interest-only class X3.

The certificates represent the beneficial ownership interest in the trust, primary assets of which are 72 loans secured by 72 commercial properties having an aggregate principal balance of approximately $1.21 billion as of the cut-off date. The Freddie Mac Structured Pass-Through Certificates, Series K-057 (Freddie Mac SPC K-057) represents a pass-through interest in the corresponding class of securities issued by FREMF 2016-K57. Each Freddie Mac SPC K-057 security has the same designation as its underlying FREMF 2016-K57 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 62.1% of the properties by balance and cash flow analysis of 77.8% of the pool.

The transaction has a Fitch stressed debt service coverage ratio (DSCR) of 1.05x, a Fitch stressed loan-to-value (LTV) of 116.1%, and a Fitch debt yield of 7.35%. Fitch's aggregate net cash flow represents a variance of 9.1% to issuer cash flows.

KEY RATING DRIVERS

Higher Leverage Consistent with Recent Transactions: The pool's Fitch DSCR and LTV are 1.05x and 116.1%, 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 116.4%, respectively, but higher leverage than the respective 2015 averages of 1.08x and 115%. In addition, 58.8% of the loans in the pool have a Fitch DSCR lower than 1.00x; the average 2016 YTD percentage is 59.2%.

Limited Amortization: The pool is scheduled to amortize by 9.4% of the initial pool balance prior to maturity, below the Fitch-rated Freddie Mac 10-year 2016 YTD and 2015 averages of 10.8% and 10.2%, respectively. Fifteen loans (21.7%) are full-term interest-only, and 48 loans (71.2%) are partial interest-only. The remaining nine loans (7.2%) are amortizing balloon loans with a term of 10 years.

More Concentrated than Other Recent Freddie Mac Transactions: The top 10 loans compose 42.2% of the pool, which is higher than the Fitch-rated, Freddie Mac, 10-year 2016 YTD and 2015 averages of 33.8% and 33.2%, respectively. The largest loan in the pool, Chelsea Ridge Apartments, represents 7.7% of the pool, while the second largest loan, Sterling Pointe, represents 6.5% of the pool.

Low Mortgage Coupons: The pool's weighted average coupon is 4.15%, well below historical averages and slightly less than the 2016 YTD, Fitch-rated, 10-year, K-series Freddie Mac average of 4.22%. 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 8.57% on a weighted average basis.

RATING SENSITIVITIES

For this transaction, Fitch's net cash flow (NCF) was 15.3% below the most recent year's net operating income (NOI), for properties for which a full-year NOI was provided, excluding properties that were stabilizing during this period. Unanticipated further declines in property-level NCF could result in higher defaults and loss severities on defaulted loans and in potential rating actions on the certificates.

Fitch evaluated the sensitivity of the ratings assigned to FREMF 2016-K57 certificates and found that the transaction displays average sensitivity to further declines in NCF. In a scenario in which NCF declined a further 20% from Fitch's NCF, a downgrade of the junior 'AAAsf' certificates to 'Asf' could result. In a more severe scenario, in which NCF declined a further 30% from Fitch's NCF, a downgrade of the junior 'AAAsf' certificates to 'BBBsf' could result. The presale report includes a detailed explanation of additional stresses and sensitivities on page 11.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10

Fitch was provided with third-party due diligence information from Deloitte & Touche 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 72 mortgage loans. Fitch considered this information in its analysis and the findings did not have an impact on the 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.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated May 31, 2016.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)

https://www.fitchratings.com/site/re/886006

Criteria for Analyzing Multiborrower U.S. and Canadian Commercial Mortgage Transactions (pub. 01 Jul 2016)

https://www.fitchratings.com/site/re/882237

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016)

https://www.fitchratings.com/site/re/882401

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Rating Criteria for Structured Finance Servicers (pub. 01 Jul 2016)

https://www.fitchratings.com/site/re/884140

Rating Criteria for U.S. Commercial Mortgage Servicers (pub. 14 Feb 2014)

https://www.fitchratings.com/site/re/735382

U.S. and Canadian Fixed-Rate Multiborrower CMBS Surveillance and U.S. Re-REMIC Criteria (pub. 13 Nov 2015)

https://www.fitchratings.com/site/re/873395

Related Research

FREMF 2016-K57 Multifamily Mortgage Pass-Through Certificates and Freddie Mac Structured Pass-Through Certificates, Series K-057

https://www.fitchratings.com/site/re/887444

FREMF 2016-K57 Multifamily Mortgage Pass-Through Certificates and Freddie Mac Structured Pass-Through Certificates, Series K-057 - Appendix

https://www.fitchratings.com/site/re/887526

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011527

ABS Due Diligence Form 15E 1

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1011527&flm_nm=15e_1011527_1.pdf

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011527

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Robert Ritter
Associate Director
+1 212-908-0328
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Alphonse Briand
Analyst
+1 212-908-0810
or
Committee Chairperson
Eric Rothfeld
Managing Director
+1 212-908-0761
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Ritter
Associate Director
+1 212-908-0328
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Alphonse Briand
Analyst
+1 212-908-0810
or
Committee Chairperson
Eric Rothfeld
Managing Director
+1 212-908-0761
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com