Fitch Assigns Final Ratings to FREMF 2016-K59 Multifamily Mtge PT Ctfs & Freddie Mac SPC, Ser K-059

CHICAGO--()--Fitch Ratings has assigned the following ratings to FREMF 2016-K59 Multifamily Mortgage Pass-Through Certificates and Freddie Mac Structured Pass-Through Certificates, Series K-059:

FREMF 2016-K59 Multifamily Mortgage Pass-Through Certificates

--$184,517,000b class A-1 'AAAsf'; Outlook Stable;

--$880,954,000b class A-2 'AAAsf'; Outlook Stable;

--$65,769,000bc class A-M 'Asf'; Outlook Stable;

--$1,065,471,000ab class X1 'AAAsf'; Outlook Stable;

--$65,769,000abc class XAM 'Asf'; Outlook Stable;

--$1,065,471,000a class X2-A 'AAAsf'; Outlook Stable;

--$52,616,000 class B 'BBBsf'; Outlook Stable;

--$32,885,000 class C 'BBB-sf'; Outlook Stable.

Freddie Mac Structured Pass-Through Certificates, Series K-059

--$184,517,000b class A-1 'AAAsf'; Outlook Stable;

--$880,954,000b class A-2 'AAAsf'; Outlook Stable;

--$65,769,000bc class A-M 'Asf'; Outlook Stable;

--$1,065,471,000ab class X1 'AAAsf'; Outlook Stable;

--$65,769,000abc class XAM 'Asf'; 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 would be accounted for.

These ratings are based on information provided by the issuer as of Nov. 7, 2016. Fitch did not rate the following classes of FREMF 2016-K59: the $184,156,476 interest-only class X3, the $249,925,476 interest-only class X2-B, or the $98,655,476 class D.

Additionally, Fitch did not rate the following class of Freddie Mac Structured Pass-Through Certificates, Series K-059: the $184,156,476 interest-only class X3.

The certificates represent the beneficial ownership interest in the trust, primary assets of which are 67 loans secured by 67 commercial properties having an aggregate principal balance of approximately $1.32 billion as of the cut-off date. The Freddie Mac Structured Pass-Through Certificates, Series K-059 (Freddie Mac SPC K-059) represents a pass-through interest in the corresponding class of securities issued by FREMF 2016-K59. Each Freddie Mac SPC K-059 security has the same designation as its underlying FREMF 2016-K59 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 69.5% of the properties by balance and cash flow analysis of 74.1% 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 119.6%, and a Fitch debt yield of 7.02%. Fitch's aggregate net cash flow represents a variance of 9.97% to issuer cash flows.

KEY RATING DRIVERS

Higher Leverage Consistent with Recent Transactions: The pool's Fitch DSCR and LTV are 1.04x and 119.6%, respectively. The transaction's DSCR is in-line with Fitch-rated 2016 year-to-date (YTD) DSCR for 10-year, K-series Freddie Mac deals of 1.03x, and slightly worse than the 2015 average of 1.08x. The transaction's LTV is higher than the 2016 YTD and 2015 averages of 116.7% and 115.0%, respectively. In addition, 58.7% of the loans in the pool have a Fitch DSCR lower than 1.00x, slightly better than the average 2016 YTD percentage of 60.4%.

Limited Amortization: The pool is scheduled to amortize by 10.4% of the initial pool balance prior to maturity, in-line with the Fitch-rated Freddie Mac 10-year 2016 YTD and 2015 averages of 10.4% and 10.2%, respectively. Eleven loans (22.8%) are full-term interest-only, and 42 loans (64.6%) are partial interest-only. The remaining 14 loans (12.6%) are amortizing balloon loans with a term of 10 years.

Collateral Quality: Fitch performed property inspections on 35 assets, representing 69.5% of the pool balance. Fitch assigned 12 properties, totaling 39.1% of the pool balance, property quality grades of 'B+' or better, including four properties in the top 10 that received grades of 'A-'. Only three assets (2.3%) received a property quality grade below 'B-'. In addition, eight loans (31.6%) are collateralized by newly constructed properties built between 2014 and 2016.

RATING SENSITIVITIES

For this transaction, Fitch's net cash flow (NCF) was 11.8% 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-K59 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 'AAAsf' certificates to 'A+sf' could result. In a more severe scenario, in which NCF declined a further 30% from Fitch's NCF, a downgrade of the 'AAAsf' certificates to 'BBB+sf' 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 KPMG 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 74 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 Large Loans in U.S. Commercial Mortgage Transactions (pub. 18 Aug 2016)

https://www.fitchratings.com/site/re/885802

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 Multiborrower CMBS Surveillance Criteria (pub. 11 Nov 2016)

https://www.fitchratings.com/site/re/889634

Related Research

FREMF 2016-K59 Multifamily Mortgage Pass-Through Certificates and Freddie Mac Structured Pass-Through Certificates, Series K-059 -- Appendix

https://www.fitchratings.com/site/re/890500

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015496

ABS Due Diligence Form 15E 1

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1015496&flm_nm=15e_1015496_1.pdf

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015496

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
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Eric Kraushaar
Associate Director
+1-312-606-2323
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Rachel Chung
Analyst
+1-646-582-4905
or
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+1-212-908-0761
or
Media Relations
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sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eric Kraushaar
Associate Director
+1-312-606-2323
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Rachel Chung
Analyst
+1-646-582-4905
or
Committee Chairperson
Eric Rothfeld
Managing Director
+1-212-908-0761
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com