Fitch to Rate Wells Fargo Commercial Mortgage Trust 2016-LC24 P-T Certificates; Presale Issued
Fitch expects to rate the transaction and assign Rating Outlooks as follows:
--$41,394,000 class A-1 'AAAsf'; Outlook Stable;
--$55,655,000 class A-2 'AAAsf'; Outlook Stable;
--$275,000,000 class A-3 'AAAsf'; Outlook Stable;
--$290,568,000 class A-4 'AAAsf'; Outlook Stable;
--$69,133,000 class A-SB 'AAAsf'; Outlook Stable;
--$94,083,000 class A-S 'AAAsf'; Outlook Stable;
--$731,750,000b class X-A 'AAAsf'; Outlook Stable;
--$186,858,000b class X-B 'A-sf'; Outlook Stable;
--$48,347,000 class B 'AA-sf'; Outlook Stable;
--$44,428,000 class C 'A-sf'; Outlook Stable;
--$49,655,000ab class X-D 'BBB-sf'; Outlook Stable;
--$23,520,000ab class X-EF 'BB-sf'; Outlook Stable;
--$49,655,000a class D 'BBB-sf'; Outlook Stable;
--$13,067,000a class E 'BB+sf'; Outlook Stable;
--$10,453,000a class F 'BB-sf'; Outlook Stable.
(a) Privately placed and pursuant to Rule 144A.
(b) Notional amount and interest-only.
These expected ratings are based on information provided by the issuer as of Sept. 6, 2016. Fitch does not expect to rate the $10,454,000 class X-G, $10,453,000 class X-H, $32,668,263 class X-I, $10,454,000 class G, $10,453,000 class H and $32,668,263 class I certificates.
The certificates represent the beneficial ownership interest in the trust, primary assets of which are 91 loans secured by 128 commercial properties having an aggregate principal balance of approximately $1.05 billion as of the cut-off date. The loans were contributed to the trust by Wells Fargo Bank, National Association, Ladder Capital Finance LLC, Rialto Mortgage Finance, LLC and National Cooperative Bank, N. A.
Fitch reviewed a comprehensive sample of the transaction's collateral including site inspections on 72.4% of the properties by balance, cash flow analysis of 77.5%, and asset summary reviews on 77.5% of the pool.
KEY RATING DRIVERS
Better Than Average Fitch Leverage: The transaction has overall lower leverage than other recent Fitch-rated transactions. The pool's weighted average (WA) Fitch debt service coverage ratio (DSCR) of 1.33x is better than both the YTD 2016 average of 1.16x and the 2015 average of 1.18x. The pool's WA Fitch loan-to-value (LTV) of 103.9% is better than both the YTD 2016 average of 106.5% and the 2015 average of 109.3%. However, excluding the credit opinion loan and the co-op collateral, the Fitch DSCR falls to 1.13x and the Fitch LTV increases to 110.3%.
Co-Op Collateral: The pool contains 14 loans (6.2%) secured by multifamily co-ops. All but one of the co-ops in this transaction are located within the greater New York City metro area with one in Washington D. C. The average Fitch DSCR and Fitch LTV of the co-op loans in this transaction are 4.20x and 33.96%, respectively.
Investment-Grade Credit Opinion Loan: The sixth largest loan, The Shops at Crystals (3.3% of the pool) has an investment-grade credit opinion of 'BBB+sf*' on a stand-alone basis. Excluding this loan, the conduit has a Fitch DSCR of 1.33x and Fitch LTV of 105.4%.
For this transaction, Fitch's net cash flow (NCF) was 16.7% below the most recent year's net operating income (NOI; for properties for which a full-year NOI was provided, excluding properties that were stabilizing during this period). Unanticipated further declines in property-level NCF could result in higher defaults and loss severities on defaulted loans and in potential rating actions on the certificates.
Fitch evaluated the sensitivity of the ratings assigned to WFCM 2016-LC24 certificates and found that the transaction displays average sensitivity to further declines in NCF. In a scenario in which NCF declined a further 20% from Fitch's NCF, a downgrade of the junior 'AAAsf' certificates to 'BBB+sf' could result. In a more severe scenario, in which NCF declined a further 30% from Fitch's NCF, a downgrade of the junior 'AAAsf' certificates to 'BBB-sf' could result. The presale report includes a detailed explanation of additional stresses and sensitivities on page 13.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Fitch was provided with third-party due diligence information from Deloitte & Touche LLP. The third-party due diligence information was provided on Form ABS Due Diligence-15E and focused on a comparison and re-computation of certain characteristics with respect to each of the 91 mortgage loans. Fitch considered this information in its analysis and the findings did not have an impact on the analysis. A copy of the ABS Due Diligence Form-15E received by Fitch in connection with this transaction may be obtained through the link contained on the bottom of the related rating action commentary.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated May 31, 2016.