DBRS Morningstar Downgrades LStreet II, LLC’s Series 2012-10 Notes to Default; Removes Ratings from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) downgraded its ratings 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) to D (sf) (Default) from A (low) (sf). With this rating action, DBRS Morningstar also removed the ratings from Under Review with Negative Implications.

DBRS Morningstar downgraded the Class A Notes to D (sf) because of an interest payment default on the Class A Notes as of the most recent payment date (the April 2021 Distribution Date) in accordance with the related transaction documents. DBRS Morningstar previously placed the Class A Notes Under Review with Negative Implications on May 7, 2021, pending clarification of whether the missed payment was because of an administrative error subsequent to the resignation of Davis Square Funding II, Ltd.’s (DSF2 CDO) Cayman Administrator. The Class A Notes are collateralized by the Class A-1A LT and Class A-1B LT Notes issued by DSF2 CDO, which is itself collateralized by a pool of subprime and Alt-A residential mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities, and collateralized loan obligations.

Based on the most recent Trustee report (April 2021), the DSF2 CDO collateral was generating sufficient cash flow to pay the DSF2 CDO Class A-1A LT and Class A-1B LT Notes (the DSF2 CDO Notes). However, the Controlling Class in DSF2 CDO elected to not replace the Cayman Administrator, the absence of which created an event of default under the DSF2 CDO documents. Consequently, the DSF2 CDO transaction was precluded from paying interest to its noteholders. The DSF2 CDO Notes generate the cash flows that are used to service the Class A Notes; therefore, an interest payment default on the DSF2 CDO Notes created a default with respect to the interest payments due under the Class A Notes. The current balance of the Class A Notes is $5,000,000 and has amortized from its original balance of $150,000,000. American International Group, Inc. (AIG) and its affiliates formed LStreet II, LLC and contributed the collateral (the DSF2 CDO Notes) that secures the Class A Notes. LStreet II, LLC, through its ownership of the DSF2 CDO Notes, is the Controlling Class of DSF2 CDO. Affiliates of AIG are also investors in the Class A Notes.

DBRS Morningstar’s ratings address (1) the timeliness of Series 2012-10 Class A Interest payments to the Class A Noteholders and (2) the likelihood of the Class A Noteholders receiving all principal distributions to which such Noteholders are entitled 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, DBRS Morningstar’s ratings described herein address 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) and 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).

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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