DBRS Morningstar Places Ratings on LStreet II, LLC’s Series 2012-10 Notes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) placed its ratings of A (low) (sf) on LStreet II, LLC’s Series 2012-10 Class A-1 Notes, Series 2012-10 Class A-2 Notes, Series 2012-10 Class A-3 Notes, Series 2012-10 Class A-4 Notes, Series 2012-10 Class A-5 Notes, and Series 2012-10 Class A-6 Notes (collectively, the Class A Notes) Under Review with Negative Implications.

DBRS Morningstar placed the Class A Notes Under Review with Negative Implications in relation to the missed interest payment on the Class A Notes for the most recent April 2021 Distribution Date. While this missed payment would be a default on the interest due on the Class A Notes, the transaction parties are considering whether this missed distribution was because of an error and whether they are able to remedy this error and pay the interest due. While the resolution is being determined by the transaction parties, DBRS Morningstar has placed the ratings Under Review with Negative Implications.

Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. If continued heightened market uncertainty and volatility persist, DBRS Morningstar may extend the Under Review status for a longer period of time.

The Class A Notes are collateralized by the Class A-1A LT and Class A-1B LT Notes of Davis Square Funding II, Ltd., which is itself collateralized by a pool of subprime and Alt-A residential mortgage-backed securities (RMBS), commercial mortgage-backed securities, asset-backed securities, and collateralized loan obligations.

The ratings address (1) the likelihood of the Class A Noteholders receiving all principal distributions to which such Noteholders are entitled and (2) the likelihood of the Class A Noteholders receiving the amount of Series 2012-10 Class A Interest to which such Noteholders are entitled in each case, to the extent payable to the Class A Notes in accordance with the priorities of payment outlined in the Amended and Restated Series 2012-10 Supplement to the Base Indenture on or before the Final Maturity Date in May 2039.

For the avoidance of doubt, the above DBRS Morningstar ratings address the ultimate payment of the Series 2012-10 Class A-1 Principal, Series 2012-10 Class A-2 Principal, Series 2012-10 Class A-3 Principal, Series 2012-10 Class A-4 Principal, Series 2012-10 Class A-5 Principal, and Series 2012-10 Class A-6 Principal (initial par of $150,000,000 as at November 27, 2012; $92,500,000 as at October 21, 2013; $45,000,000 as at November 20, 2014; $60,000,000 as at December 4, 2015; $68,000,000 as at April 26, 2017; and $20,200,000 as of April 29, 2020, respectively) and the timely payment of the Series 2012-10 Class A-1 Interest, the Series 2012-10 Class A-2 Interest, the Series 2012-10 Class A-3 Interest, the Series 2012-10 Class A-4 Interest, the Series 2012-10 Class A-5 Interest, and the Series 2012-10 Class A-6 Interest (one-month Libor plus 0.45% per annum for all the Class A Notes).

DBRS Morningstar’s ratings do not address any other amounts that may be paid to the Class A Noteholders, including, but not limited to, the Series 2012-10 Class A-1 Additional Amount, Series 2012-10 Class A-2 Additional Amount, Series 2012-10 Class A-3 Additional Amount, Series 2012-10 Class A-4 Additional Amount, Series 2012-10 Class A-5 Additional Amount, or Series 2012-10 Class A-6 Additional Amount.

The Coronavirus Disease (COVID-19) pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many RMBS asset classes, some meaningfully.

As a result of the coronavirus, DBRS Morningstar expects increased delinquencies and loans on forbearance plans, slower voluntary prepayment rates, and a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios: Implications for Credit Ratings,” published on April 16, 2020), for legacy RMBS, DBRS Morningstar assumes higher unemployment rates than what DBRS Morningstar previously used. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

For legacy RMBS, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans that were previously delinquent, recently modified, or have higher updated loan-to-value (LTV) ratios may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with previous delinquencies or recent modifications have exhibited difficulty in fulfilling payment obligations in the past and may revert back to spotty payment patterns in the near term. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and, therefore, slower prepayments.

For more information regarding DBRS Morningstar’s simplified set of macroeconomic scenarios for select economies related to the coronavirus, please see please see its April 16, 2020, commentary, “Global Macroeconomic Scenarios: Implications for Credit Ratings,” at https://www.dbrsmorningstar.com/research/359679; its April 22, 2020, commentary, “Global Macroeconomic Scenarios: Application to Credit Ratings,” at https://www.dbrsmorningstar.com/research/359903; and its March 17, 2021, updated commentary, “Global Macroeconomic Scenarios: March 2021 Update,” at https://www.dbrsmorningstar.com/research/375376.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Structured Finance CDO Restructurings (November 12, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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.

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.

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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