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Rating Action: Moody's assigns a provisional rating to one class of notes to be issued by ACRE Commercial Mortgage 2021-FL4 Ltd
Global Credit Research - 19 Jan 2021
New York, January 19, 2021 -- Moody's Investors Service ("Moody's") has assigned a provisional rating to one class of notes to be issued by ACRE Commercial Mortgage 2021-FL4 LTD. (the "Issuer" or "ACRE 2021-FL4"):
Cl. A, Assigned (P)Aaa (sf)
The Cl. A notes are referred to herein as the "Rated Notes."
The rationale for the ratings is based on our methodology and considers all relevant risks, particularly those associated with the CRE CLO's portfolio and structure.
ACRE 2021-FL4 is a cash flow commercial real estate CLO ("CRE CLO") that does not have a reinvestment option; and 100% of the assets are expected to be identified and closed by the transaction closing date. The target pool is expected to be collateralized by 23 commercial real estate senior loan interests; in the form of whole loans and pari-passu participations on 35 properties. The total par amount at closing is expected to be $667,248,892. The portfolio of assets consists of 100% floating rate obligations with a 3.52% weighted average spread (WAS). Additionally, 100% of the assets have Libor floors with a weighted average floor of 1.54%.
The transaction provides for a companion loan acquisition period of 3 years, whereby principal pre-payments, subject to collateral and transaction performance metrics, may be used to purchase up to $208 million of companion participations with respect to certain eligible pari-passu participations associated with the closing date collateral pool. After the companion participation acquisition period expires, all principal pre-payments will be used to pay down the notes in order of seniority.
The transaction is expected to close on or about January 28, 2021.
The expected closing date pool has a Moody's weighted average loan-to-value (LTV) ratio of 135.3%. Approximately 17.2% of the pool were acquisition financing loans and 85.6% were refinancing loans (including recapitalization). The top property type exposures are office at 34.9%, and multifamily at 33.9%. The top ten assets (70.7% of the initial loan pool) and their respective property type and Moody's LTV are as follows: 1) 311 West Monroe -- Office -- 123.0%; 2) RealOp Southeast Portfolio -- Office -- 124.8%; 3) Exchange -- Office -- 127.5%; 4) Promenade on the Peninsula -- Mixed-Use -- 133.5%; 5) BELA Apartments -- Multifamily -- 148.8%; 6) Homewood Suites Redondo Beach -- Hotel -- 157.6%; 7) Retreat at College State -- Student Housing -- 131.5%; 8) Glen at University Park -- Student Housing -- 143.4%; 9) Mansions at Canyon Creek -- Multifamily -- 139.1%; and 10) The Landing -- Office -- 139.1%.
ACRC Lender LLC a wholly owned subsidiary of Ares Commercial Real Estate Corporation ("ACRC") is the seller and originated all of the collateral loans. Ares Commercial Real Estate Management LLC will be administering the CRE CLO. Wells Fargo Bank, National Association will act as servicer, and Ares Commercial Real Estate Servicer LLC will act as special servicer. They will provide servicing to the collateral interests during the lifecycle of the transaction. ACRC Lender will act as advancing agent. Wilmington Trust, National Association will serve as trustee and Wells Fargo Bank, National Association will serve as note administrator and backup advancing agent on the underlying portfolio.
In addition to the Rated Notes, the Issuer will issue seven classes of subordinated notes; and one class of preferred shares.
The transaction incorporates par coverage tests which, if triggered, divert interest proceeds to pay down the notes in order of seniority.
Moody's has identified the following parameters as key indicators of the expected loss within CRE CLO transactions: weighted average rating factor (WARF), a primary measure of credit quality with credit assessments completed for all of the collateral, weighted average life (WAL), weighted average recovery rate (WARR), number of asset obligors; and pair-wise asset correlation. These parameters are typically modeled as actual parameters for static deals and as covenants for managed deals.
For modeling purposes, Moody's used the following base-case assumptions:
Par amount: $667,248,892
Number of obligors: 23
Weighted Average Rating Factor (WARF): 5260
Weighted Average Recovery Rate (WARR): 56.2%
Weighted Average Life (WAL): 5.3 years
Weighted Average Spread (WAS): 3.5%
Weighted Average Coupon (WAC): n/a
Pair-wise asset correlation: 35.0%
Methodology Underlying the Rating Action:
The principal methodology used in this rating was "Moody's Approach to Rating SF CDOs" published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1231934. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors That Would Lead to an Upgrade or Downgrade of the Rating:
The performance of the Rated Notes is subject to uncertainty. The performance of the Rated Notes is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The administrator's investment decisions and management of the transaction will also affect the performance of the Rated Notes.
Together with the set of modeling assumptions above, Moody's conducted an additional sensitivity analysis, which was a component in determining the ratings assigned to the Rated Notes. This sensitivity analysis includes increased default probability relative to the base-case.
Primary sources of assumption uncertainty are the extent of growth in the current macroeconomic environment.
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of commercial real estate from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Stress on commercial real estate properties will be most directly stemming from declines in hotel occupancies (particularly related to conference or other group attendance) and declines in foot traffic and sales for non-essential items at retail properties.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Further details regarding Moody's analysis of this transaction may be found in a related pre-sale report, soon to be available on Moodys.com.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1261298
The analysis relies on a Monte Carlo simulation that generates a large number of collateral loss or cash flow scenarios, which on average meet key metrics Moody's determines based on its assessment of the collateral characteristics. Moody's then evaluates each simulated scenario using model that replicates the relevant structural features and payment allocation rules of the transaction, to derive losses or payments for each rated instrument. The average loss a rated instrument incurs in all of the simulated collateral loss or cash flow scenarios, which Moody's weights based on its assumptions about the likelihood of events in such scenarios actually occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Francis Teo Asst Vice President - Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Deryk Meherik Senior Vice President/Manager Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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