DBRS Morningstar Finalizes Provisional Ratings on BDS 2021-FL7 Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by BDS 2021-FL7 Ltd. (the Issuer):

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

All trends are Stable.

CORONAVIRUS OVERVIEW
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.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases: https://www.dbrsmorningstar.com/research/357883 and https://www.dbrsmorningstar.com/research/358308.

The initial collateral consists of 22 floating-rate mortgages secured by 22 mostly transitional properties with a cut-off balance of $536.5 million, excluding approximately $59.3 million of future funding commitments. In addition, the transaction has a Ramp-Up Acquisition Period from the sixth payment date during which the Issuer may use $63.5 million of funds deposited into the unused proceeds account to acquire additional eligible multifamily loans, subject to the Eligibility Criteria, resulting in a target pool balance of $600.0 million. As of May 11, 2021, there are two unclosed or delayed-close loans, representing 14.4% of the trust balance: Retreat at Waterside (Prospectus ID#2), representing 7.9% of the trust balance, and Nottingham Village (Prospectus ID#6), representing 6.4% of the trust balance. If a delayed-close loan is not expected to close or fund prior to the purchase termination date, the expected purchase price will be credited to the unused proceeds amount to be used by the Issuer to acquire ramp-up mortgage assets during the Ramp-Up Acquisition Period. The Eligibility Criteria indicates that all loans acquired within the Ramp-Up Acquisition Period must be secured by multifamily properties. Most loans are in a period of transition, with plans to stabilize and improve the asset value. During the Reinvestment Period, the Issuer may acquire future funding commitments and additional eligible loans subject to the Eligibility Criteria. The transaction stipulates a $1.0 million threshold on companion participation interest acquisitions before a rating agency confirmation is required if there is already a participation or note of the underlying loan in the trust.

The loans are mostly secured by currently cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, 19 loans, representing 86.6% of the pool, have remaining future funding participation totaling $59.3 million, which the Issuer may acquire in the future.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 15 loans, comprising 63.1% of the initial pool, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. However, the DBRS Morningstar Stabilized DSCRs for only three loans, representing 9.6% of the initial pool balance, are below 1.00x. 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 other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets will stabilize above market levels. The transaction will have a sequential-pay structure.

The pool consists almost entirely of multifamily assets (95.4% of the mortgage asset cut-off date balance consists of apartments and 3.5% consists of one manufactured housing community property). Historically, multifamily properties have defaulted at much lower rates than the overall commercial mortgage-backed securities universe. The one industrial asset in the pool represents 1.1% of the mortgage asset cut-off date balance.

As no loans in the pool were originated prior to the onset of the coronavirus pandemic, the weighted-average (WA) remaining fully extended term is 57 months, which gives the sponsor enough time to execute its business plans without risk of imminent maturity.

Based on the initial pool balances, the overall WA DBRS Morningstar As-Is DSCR of 0.90x and WA As-Is Loan-to-Value (LTV) of 84.8% generally reflect high-leverage financing. When measured against the DBRS Morningstar Stabilized NCF, the WA DBRS Morningstar DSCR is estimated to improve to 1.22x, suggesting that the properties are likely to have improved NCFs once the sponsor’s business plan has been implemented.

The transaction is managed and includes a ramp-up component and reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The risk of negative migration is partially offset by Eligibility Criteria (detailed in transaction documents) that outline minimum DSCR, LTV, Herfindahl score, and multifamily property type requirements for 80% of the pool and loan size limitations for ramp and reinvestment assets. Furthermore, multifamily assets are the only property type allowed to be acquired during the ramp-up period. DBRS Morningstar accounted for the uncertainty introduced by the six-month ramp-up period by running a ramp scenario that simulates the potential negative credit migration in the transaction, based on the eligibility criteria. As a result, the ramp component has a higher expected loss than the WA pre-ramp pool expected loss. Furthermore, the ramp loans may be collateralized only by multifamily properties, which is a more favorable property type.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the in-place cash flow. It is possible that the sponsor will not successfully execute its 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 sampled a large portion of the loans, representing 81.1% of the pool cut-off date balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the loan structure to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes loss given default based on the as-is credit metrics, assuming the loan is fully funded with no NCF or value upside.

One of the sampled loans, comprising 6.3% of the pool balance, was analyzed with Weak sponsorship strengths. The Nottingham Village loan is among the pool’s 10 largest loans. DBRS Morningstar applied a probability of default penalty to the loan analyzed with Weak sponsorship strength.

All 22 loans have floating interest rates, are interest only during the original term and through all extension options, and have original terms of 36 months to 60 months, creating interest rate risk. All loans are short term and, even with extension options, they have a fully extended maximum loan term of five years. For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term.

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.

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.

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.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-Borrower Rating 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 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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