DBRS Morningstar Assigns Provisional Ratings to A10 Bridge Asset Financing 2020-C, LLC

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by A10 Bridge Asset Financing 2020-C, LLC (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (high) (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (sf)
-- Class G Notes at B (sf)

All trends are Stable. Classes F and G will be privately placed.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis. For example, DBRS Morningstar may front-load default expectations and/or assess the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

DBRS Morningstar analyzed the pool to determine the provisional ratings, reflecting the long-term risk that the Issuer will default and fail to satisfy its financial obligations in accordance with the terms of the transaction. The $400.0 million transaction includes an initial trust balance of $398.2 million, comprising loan assets and $10.8 million held in a reserve account. The reserve account can be used to fund preapproved future funding companion participations. Preapproved future funding companion participations can be brought into the trust using funds available in the prefunded reserve account at closing or principal proceeds as a result of loan payoffs. As existing loans payoff, available principal proceeds will be distributed according to the priority of payments. Before distributing principal proceeds to noteholders, the Issuer has the option to divert principal proceeds toward preapproved future funding companion participations. This option remains with the Issuer throughout the term of the transaction. The transaction will have a sequential-pay structure. Interest can be deferred for Note C, Note D, Note E, Note F, and Note G and interest deferral will not result in an event of default.

The collateral consists of 58 loans secured by 69 commercial properties. A total of 32 underlying loans are crosscollateralized and crossdefaulted into seven separate portfolios or crossed groups. The DBRS Morningstar analysis of this transaction incorporates these crossed groups, resulting in a modified loan count of 33, and loan references within this report reflect this total. Twenty-seven loans, representing 88.2% of the trust balance, have fixed interest rates, whereas six loans, totaling 11.8% of the trust balance, have floating interest rates. DBRS Morningstar modeled the $10.8 million of additional capacity as part of the paydown analysis, which was conducted to bring future funded loan facilities into the trust.

The loans are generally secured by currently cash flowing assets, many of which are in a period of transition with plans to stabilized and improve asset value. Of these loans, 19 have remaining future funding participations totaling $35.7 million, which the Issuer may acquire in the future.

When measuring the cut-off date balances against the DBRS Morningstar As-Is Net Cash Flow, 20 loans, representing 53.9% of the cut-off date pool balance, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) of 1.00 times (x) or below, a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCR for seven loans, representing 24.7% of the initial pool balance, is 1.00x or below, which is indicative of elevated refinance risk. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if the other loan structural features are insufficient to support such treatment. Furthermore, even if the structure is acceptable, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

The transaction is governed by a trust indenture that will hold all of the commercial real estate (CRE) loans as collateral in addition to other accounts assigned to the Issuer. The Issuer’s collateral includes loans and various accounts established for and on behalf of the Issuer. The collateral does not include any membership interest.

A10 Capital, LLC (A10 Capital), the loan originator, provides a unique strategy in its lending platform by specializing in CRE bridge loans on value-add properties. A10 Capital’s loans typically have an initial three- to five-year term with extension options and are used to finance properties until they are fully stabilized. Most of the loans contain a future funding component that, subject to A10 Capital’s sole discretion, is to be disbursed for tenant improvement costs, leasing commissions, or other value-added propositions presented by the borrowers on the underlying CRE loans. The borrowers are typically equity sponsors of transitional assets in various markets across the U.S. A10 Capital’s initial advance is the senior debt component, typically for the purchase of properties in some form of distress.

The pool consists of relatively low-leverage financing based on the appraised as-is and stabilized values with most loans backed by a significant amount of sponsor cash equity that was contributed at origination. The weighted-average (WA) as-is and stabilized appraised loan-to-value (LTV) ratios, based on the most recent appraisal reports and including future funding participations, are 52.8% and 50.1%, respectively. These LTVs compare favorably with recent CRE collateralized loan obligation (CLO) transactions.

An affiliate of A10 Capital will hold the first-loss position (including Classes F and G notes and the membership interests) and, as part of the trust indenture, it or an affiliate must retain that position for as long as any senior note remains outstanding. Collectively, the retained notes and membership interests represent 18.9% of the trust balance.

The collateral for the underlying loans primarily consists of traditional property types including office, retail, industrial, and multifamily with moderate exposure to assets with very high expense ratios, such as hotels or property types where conventional takeout financing may not be as readily available.

Sixteen loans, making up 44.7% of the initial trust balance, represent acquisition financing wherein sponsors contributed significant cash equity as a source of funding in conjunction with the mortgage loan. The significant cash equity in the deal will incentivize the sponsor to perform on the loan and protect its equity.

The pool consists of transitional assets. Eighteen loans, representing 50.0% of the trust balance, are more than three years seasoned and, in some cases, the original business plans have not materialized as expected, significantly increasing the loans’ risk profile. Given the nature of the assets, DBRS Morningstar sampled a large portion of the pool at 76.7% of the cut-off date balance. This sample size is higher than the typical sample for traditional conduit commercial mortgage-based security (CMBS) transactions. DBRS Morningstar also performed physical site inspections on 35 of the 69 properties in the pool (72.0% of the pool by allocated loan balance), including management meetings for the largest loans in the pool. DBRS Morningstar applied a higher average business plan score to seasoned loans that were not part of the DBRS Morningstar sample, effectively stressing the respective loans’ probability of default (POD) to account for the elevated default risk during the term and at maturity.

In some instances, DBRS Morningstar estimated stabilized cash flows that are above the in-place cash flow. It is possible that the sponsors will not successfully execute their business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing coronavirus pandemic and its impact on the overall economy. A sponsor’s failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be achievable and the future funding amounts to be sufficient to execute such plans. The average DBRS Morningstar business plan score is 2.31, which is in the middle of the range and indicates that DBRS Morningstar determined the business plans to be reasonable with adequate structure to achieve them. DBRS Morningstar assumes no cash flow or value upside when determining the loan-level loss given default (LGD). Furthermore, the credit metrics DBRS Morningstar used to determine the LGD assume that future funding facilities are fully funded and adds additional conservatism.

There is an inherent conflict of interest between the special servicer and the seller as they are related entities. Given that the special servicer is typically responsible for pursuing remedies from the seller for breaches of the representations and warranties, this conflict could be disadvantageous to the noteholders.

While the special servicer is classified as the enforcing transaction party, if a loan repurchase request is received, the trustee and originator shall be notified and the originator is required to correct the material breach or defect or repurchase the affected loan within a maximum period of 270 days. The repurchase price would amount to the outstanding principal balance and unpaid interest less relevant Issuer expenses and protective advances made by the servicer. The Issuer retains 18.9% equity in the transaction, holding the first-loss piece.

The pool is concentrated based on loan count as there are only 33 loans in the transaction and the largest 10 represent 55.6% of the pool. The pool is fairly diverse by CRE CLO standards with a Herfindahl score of 22.1. The modified loan count of 33 gives consideration to the 32 underlying loans that are crosscollateralized and crossdefaulted into seven separate portfolios or crossed groups. The loans in the transaction are secured by 69 commercial properties located across 20 states.

The transaction is highly concentrated by property type with retail and office accounting for 38.2% and 30.3% of the trust balance, respectively. In addition, retail properties have experienced considerable disruption as a result of coronavirus pandemic with mandatory closures, stay-at-home orders, retail bankruptcies, and consumer shifts to online purchasing. To account for the elevated risk, DBRS Morningstar typically analyzes retail (more specifically, unanchored retail) and office properties with higher PODs and LGDs compared with other property types. For certain retail properties, DBRS Morningstar did not include upside from the sponsor’s business plan or only accepted minimal upside.

Only four loans, representing 18.3% of the pool, are secured by properties in markets with a DBRS Morningstar Market Rank of 6, 7, or 8 (Robertson Lane; NW 14th Street Portfolio; E 135th Street Portfolio; 469 North Canon), which are considered more urban in nature and benefit from increased liquidity with consistently strong investor demand, even during times of economic stress. Furthermore, 22 loans, representing 64.8% of the trust balance, are secured by properties in markets with a DBRS Morningstar Market Rank of 3 or 4 which, although generally suburban in nature, have historically had higher PODs. The pool’s WA DBRS Morningstar Market Rank of 3.91 indicates a high concentration of properties in less densely populated suburban areas. DBRS Morningstar analyzed properties in less densely populated markets with higher PODs and LGDs than those in more urban markets.

DBRS Morningstar analyzed six of the sampled loans, representing 17.1% of the pool balance, with Weak and Bad (Litigious) sponsorship strengths. Four of the loans—City Center Retail, Avenue C, Craig Crossing, and Normandy Portfolio—are among the pool’s top 15 largest loans. DBRS Morningstar applied a POD penalty to loans analyzed with Weak or Bad (Litigious) sponsorship strength.

The loan collateral were built between 1895 and 2017 with an average year built of 1980. Two loans, including Stream Portfolio (#4) and Response Road (#32), representing a combined 8.2% of the initial trust balance, are secured by properties with Average (-) and Below Average quality. Lower-quality properties are less likely to retain existing tenants and may require additional capital expenditure, resulting in less-than-stable performance. Additionally, only one loan, Avenue C (representing 3.6% of the trust balance), is secured by a multifamily property that was deemed to be Above Average quality. DBRS Morningstar increased the POD for loans with Below Average quality to account for the elevated risk.

Nineteen loans have $35.7 million of remaining future funding participations, ranging from $159,609 to $9.0 million. The sponsors will use these funds to facilitate their respective capital improvement plans, which should help to enhance the quality of the properties and improve overall value.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#01 – Harbor Landing (9.5% of the pool)
-- Prospectus ID#02 – Robertson Lane (7.7% of the pool)
-- Prospectus ID#03 – Menlo Rite-Aid (7.7% of the pool)
-- Prospectus ID#04 – Stream Portfolio (7.4% of the pool)
-- Prospectus ID#05 – Oxford West (4.4% of the pool)
-- Prospectus ID#06 – NW 14th Street Portfolio (4.3% of the pool)
-- Prospectus ID#07 – City Center Retail (4.0% of the pool)
-- Prospectus ID#08 – E 135th Street Portfolio (4.0% of the pool)
-- Prospectus ID#09 – Avenue C (3.6% of the pool)
-- Prospectus ID#10 – Normandy Portfolio (3.2% of the pool)
-- Prospectus ID#11 – Cherokee South – Crossings Portfolio (3.0% of the pool)
-- Prospectus ID#12 – Wood Hollow (2.9% of the pool)
-- Prospectus ID#13 – Belle View Office Park (2.8% of the pool)
-- Prospectus ID#14 – Craig Crossing (2.7% of the pool)
-- Prospectus ID#15 – 1750 Forest (2.6% of the pool)
-- Prospectus ID#16 – St. Louis Holiday Inn (2.3% of the pool)
-- Prospectus ID#23 – 75th Street (2.0% of the pool)
-- Prospectus ID#26 – Snow Road (1.5% of the pool)
-- Prospectus ID#30 – Villa South (1.1% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Multi-Borrower Rating Methodology (August 7, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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