DBRS Morningstar Upgrades Ratings on Three Classes, Confirms Ratings on Remaining Three Classes of Angel Oak SB Commercial Mortgage Trust 2020-SBC1

DBRS Limited (DBRS Morningstar) upgraded its ratings on three classes of Mortgage-Backed Certificates, Series 2020-SBC1 issued by Angel Oak SB Commercial Mortgage Trust 2020-SBC1 as follows:

-- Class A-2 to AA (high) (sf) from AA (sf)
-- Class A-3 to A (high) (sf) from A (sf)
-- Class M-1 to BBB (high) (sf) from BBB (sf)

In addition, DBRS Morningstar confirmed its ratings on the following three classes:

-- Class A-1 at AAA (sf)
-- Class B-1 at BB (sf)
-- Class B-2 at B (sf)

All trends are Stable.

The rating upgrades and confirmations reflect the overall improved credit support for the transaction. According to the September 2022 remittance report, 162 of the original 236 loans secured by commercial, multifamily, and single-family rental home (SFR) properties remained in the transaction with an aggregate trust balance of $124.7 million (average loan size of $660,032), representing a collateral reduction of 16.3% since DBRS Morningstar’s last review, or 31.1% since issuance.

Most of the loans that have been repaid were paid in advance of their respective maturity dates, with most repayments including applicable prepayment penalties. As of the September 2022 reporting, five loans were prepaid, totalling $3.5 million in principal curtailments and $0.1 million in prepayment premiums. This figure reflects a voluntary constant prepayment rate (CPR) of 28.2%, well above the CPR rates of 16.1% and 17.6% for the trailing three months and trailing 12 months, respectively. All remaining loans are fully amortizing with scheduled maturities between 2030 and 2050. Nearly all loans have fixed interest rates for at least the first five years of their respective loan terms before converting to variable rate structures.

The remaining pool is relatively diverse by property type as the three largest property concentrations are industrial (27.6% of the trust balance), retail (21.1% of the trust balance), and multifamily (13.3% of the trust balance). Because the DBRS Morningstar CMBS methodologies do not currently contemplate ratings on SFR properties, DBRS Morningstar drastically increased the expected loss for the remaining loan (0.4% of the pool) relative to the non-SFR loan expected losses.

Per the September 2022 reporting, there were four loans (3.3% of the trust balance) that were in the foreclosure process and one loan (0.4% of the trust balance) with a borrower that had filed for bankruptcy. There are currently no loans with active or past forbearances and no loan modifications have been granted over the past 12 months. As part of this review, DBRS Morningstar increased the probability of default for all distressed loans.

There are 73 loans that were considered below-average quality, representing 36.4% of the trust balance. The probability of default was increased for loans with these property qualities. In addition, limited property-level information was available for DBRS Morningstar at issuance and for the subject review. Property condition reports and Phase I environmental reports were not provided and the loans do not require terrorism insurance or earthquake insurance. Consequently, DBRS Morningstar applied a penalty to the loss severity to mitigate any potential future environmental risk. Although each mortgage loan provides full recourse to the borrower, sponsors of small balance loans are generally less sophisticated operators of commercial real estate with limited real estate portfolios and experience. Therefore, DBRS Morningstar modelled loans with Weak borrower strength, which increases the stress on the default rate.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Class B-2, as the quantitative results suggested a higher rating on the class. The material deviation is warranted given the uncertain loan-level event risk associated with the underlying collateral because of the lack of periodic property financials and sponsor inexperience.

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

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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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