Fitch Ratings has issued a presale report on German American Capital Corp.'s CD 2016-CD2 mortgage trust commercial mortgage pass-through certificates, series 2016-CD2.
Fitch expects to rate the transaction and assign Rating Outlooks as follows:
--$17,465,263 class A-1 'AAAsf'; Outlook Stable;
--$69,061,053 class A-2 'AAAsf'; Outlook Stable;
--$34,742,105 class A-SB 'AAAsf'; Outlook Stable;
--$252,631,579 class A-3 'AAAsf'; Outlook Stable;
--$308,873,684 class A-4 'AAAsf'; Outlook Stable;
--$721,789,474b class X-A 'AAAsf'; Outlook Stable;
--$39,015,789 class A-M 'AAAsf'; Outlook Stable;
--$721,789,474c class V1-A 'AAAsf'; Outlook Stable;
--$76,811,579ab class X-B 'AA-sf'; Outlook Stable;
--$76,811,579 class B 'AA-sf'; Outlook Stable;
--$76,811,579c class V1-B 'AA-sf'; Outlook Stable;
--$42,673,684ab class X-C 'A-sf'; Outlook Stable;
--$42,673,684 class C 'A-sf'; Outlook Stable;
--$42,673,684c class V1-C 'A-sf'; Outlook Stable;
--$57,304,211ab class X-D 'BBB-sf'; Outlook Stable;
--$57,304,211a class D 'BBB-sf'; Outlook Stable;
--$57,304,211c class V1-D 'BBB-sf'; Outlook Stable;
--$28,043,158ab class X-E 'BB-sf'; Outlook Stable;
--$28,043,158a class E 'BB-sf'; Outlook Stable;
--$10,972,632ab class X-F 'B-sf'; Outlook Stable;
--$10,972,632a class F 'B-sf'; Outlook Stable.
(a) Privately placed and pursuant to Rule 144A.
(b) Notional amount and interest only.
(c) Exchangeable certificates
Expected ratings do not reflect final ratings and are based on information provided by the issuer as of Nov. 11, 2016. A vertical credit risk retention interest representing 5% of each class (as of the closing date) is expected to be retained as part of risk retention compliance. Fitch does not expect to rate the $37,797,120 class X-G, the $37,797,120 class G, the $76,812,910 class V1-E or the $975,391,857 class V2.
The certificates represent the beneficial ownership interest in the trust, primary assets of which are 30 loans secured by 37 commercial properties having an aggregate principal balance of approximately $975.4 million as of the cut-off date. The loans were contributed to the trust by German American Capital Corporation and Citigroup Global Markets Realty Corp.
Fitch reviewed a comprehensive sample of the transaction's collateral, including site inspections on 91.1% of the properties by balance and cash flow analysis of 92.4% of the pool.
The transaction has a Fitch stressed debt service coverage ratio (DSCR) of 1.19x, a Fitch stressed loan-to-value (LTV) of 105.8%, and a Fitch debt yield of 8.49%. Fitch's aggregate net cash flow represents a variance of 12.4% to issuer cash flows.
KEY RATING DRIVERS
Fitch Leverage: The pool has leverage statistics in-line with recent Fitch-rated multiborrower transactions. The pool's Fitch DSCR and LTV for the trust are 1.19x and 105.8%, respectively, while the 2016 YTD averages are 1.20x and 105.7%. Excluding credit-opinion loans, the pool's Fitch DSCR and LTV are 1.17x and 110.7%, respectively.
Concentrated by Loan Size: The top 10 loans compose 66.9% of the pool, which is worse than the 2015 and 2016 YTD averages of 49.3% and 54.5%, respectively. The pool's loan concentration index (LCI) is 563, which is above the 2016 YTD average of 418. For this transaction, the losses estimated by Fitch's deterministic test at 'AAAsf' exceeded Fitch's base model loss estimate. Due to the exceptionally high property quality (84.7% of the top 10 loans received a property quality grade of 'B+' or higher) and strong location (65.5% of the top 10 are located within the New York Metro market), Fitch's concluded loss estimate at 'AAAsf' is 100 basis points lower than indicated by Fitch's deterministic test.
Investment-Grade Credit-Opinion Loans: Two loans representing 11% of the pool have investment-grade credit opinions, above the 2016 YTD average of 7.3%. 10 Hudson Yards (6.9% of the pool) received an investment-grade credit opinion of 'BBBsf*' on a stand-alone basis. 667 Madison Avenue (4.1% of the pool) received an investment-grade credit opinion of 'BBB-sf*' on a stand-alone basis.
Weak Amortization: Eleven loans (58.2%) are full-term interest-only and seven loans (25.9%) are partial interest-only. Fitch-rated transactions in 2016 YTD had an average full-term interest-only percentage of 32.4% and a partial interest-only percentage of 36%. Based on the scheduled balance at maturity, the pool will pay down by only 5.5%, which is significantly below the 2016 YTD average of 10.4%.
For this transaction, Fitch's net cash flow (NCF) was 8.5% 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 CD 2016-CD2 certificates and found that the transaction displays average sensitivities 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 'AAsf' 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 'Asf' could result. The presale report includes a detailed explanation of additional stresses and sensitivities on page 12.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Fitch was provided with due diligence information from Ernst & Young LLP. The due diligence focused on a comparison and re-computation of certain characteristics with respect to each of the mortgage loans. Fitch considered this information in its analysis and the findings did not have an impact on our analysis.
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.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Criteria for Analyzing Large Loans in U.S. Commercial Mortgage Transactions (pub. 18 Aug 2016)
Criteria for Analyzing Multiborrower U.S. and Canadian Commercial Mortgage Transactions (pub. 01 Jul 2016)
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Rating Criteria for Structured Finance Servicers (pub. 01 Jul 2016)
Rating Criteria for U.S. Commercial Mortgage Servicers (pub. 14 Feb 2014)
U.S. and Canadian Multiborrower CMBS Surveillance Criteria (pub. 11 Nov 2016)
Dodd-Frank Rating Information Disclosure Form
ABS Due Diligence Form 15E 1
ABS Due Diligence Form 15E 2
ABS Due Diligence Form 15E 3
ABS Due Diligence Form 15E 4
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