DBRS Morningstar Downgrades Ratings on 11 Classes of Citigroup Commercial Mortgage Trust, Series 2016-C2

DBRS Limited (DBRS Morningstar) downgraded its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C2 issued by Citigroup Commercial Mortgage Trust 2016-C2 (CGCMT 2016-C2) as follows:

-- Class E-1 to CCC (sf) from BB (high) (sf)
-- Class E-2 to CCC (sf) from BB (sf)
-- Class F-1 to CCC (sf) from BB (low) (sf)
-- Class F-2 to CCC (sf) from B (high) (sf)
-- Class G-1 to CCC (sf) from B (sf)
-- Class G-2 to CCC (sf) from B (low) (sf)
-- Class E to CCC (sf) from BB (sf)
-- Class EF to CCC (sf) from B (high) (sf)
-- Class F to CCC (sf) from B (high) (sf)
-- Class EFG to CCC (sf) from B (low) (sf)
-- Class G to CCC (sf) from B (low) (sf)

All of the classes that were downgraded have ratings that do not carry trends. DBRS Morningstar maintained the Interest in Arrears designation for all of the downgraded classes.

In addition, DBRS Morningstar confirmed the following ratings:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class X-A at AAA (sf)
-- Class X-B at A (high) (sf)
-- Class X-D at BBB (sf)

All trends for the confirmed classes are Stable.

The rating downgrades reflect the extended period of time during which the interest shortfalls will remain outstanding to the classes in question. The shorted interest is a result of the decision by the master servicer, Midland Loan Services (Midland), to limit advancing for one of the underlying loans, Crocker Park Phase I and II (Prospectus ID#3; 10.2% of the pool) (Crocker Park), which was modified in 2020. The loan modification, which closed in July 2020, allowed for a 12-month forbearance of debt service payments, which would be deferred until loan maturity in August 2026. The loan modification was granted in response to the borrower’s request to use available cash flow to fund the $7.0 million of estimated leasing costs necessary to back-fill current and projected future vacancy across the collateral property. Initially, Midland declined to advance any of the forborne debt service amount for the subject loan, but with the February 2021 remittance, the servicer switched to advancing only partial payments, containing the interest shortfalls to the below-investment-grade rated classes. Based on the estimates provided by Midland, the interest shortfalls will remain outstanding for at least 12 months, beyond DBRS Morningstar’s interest shortfall tolerance of six months for the below-investment-grade classes, prompting the downgrades to the ratings of 11 classes, as previously detailed.

DBRS Morningstar reached out the servicer regarding the provisions in the Pooling and Servicing Agreement (PSA) that Midland relied upon when deciding to recover the advances that were made on the Crocker Park loan. According to the servicer, it was determined that the advances issued on the Crocker Park loan no longer technically qualified as an advance under the PSA based on the structure of the loan modification agreement structured by Greystone, as the special servicer. Furthermore, Midland noted that deferring recovery of the deferred amounts (and therefore the advances) to the maturity date as allowed for under the terms of the loan modification would risk the accumulation of substantial interest on advances. It is unclear why Midland agreed to the terms of the loan modification if there were reservations about the accumulation of interest on advances. DBRS Morningstar will continue to monitor the interest shortfall mechanics of the pool and will track the recovery of advances and any updates on the Crocker Park loan, as information is made available.

As of the April 2021 remittance, all 44 of the original loans remain in the pool, with a total collateral reduction of 3.3% since issuance as a result of loan amortization. There are 10 loans, representing 23.0% of the current trust balance, on the servicer’s watchlist, and five loans, representing 14.2% of the current pool balance, in special servicing. The loans on the watchlist are being monitored for a variety of reasons, including low debt service coverage ratios and occupancy issues. Four of the five loans in special servicing are secured by either hotel or retail properties, including Hyatt Regency Huntington Beach Resort & Spa (Prospectus ID#7; 4.4% of the pool) and Welcome Hospitality Portfolio (Prospectus ID#8; 4.0% of the pool). Additionally, three loans, representing 6.2% of the pool, have defeased.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating on the Vertex Pharmaceuticals HQ loan (Prospectus ID#1; 10.2% of the pool). With this review, DBRS Morningstar confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

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.

Classes X-A, X-B, and X-D are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

DBRS Morningstar provides issuance metrics and all historical surveillance commentary on the DBRS Viewpoint platform.

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 Surveillance Methodology (March 26, 2021), 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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