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Wells Fargo Commercial Mortgage Trust 2014-LC16 -- Moody's affirms four and downgrades three classes of WFCM 2014-LC16

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Rating Action: Moody's affirms four and downgrades three classes of WFCM 2014-LC16Global Credit Research - 31 Mar 2021Approximately $635 million of structured securities affectedNew York, March 31, 2021 -- Moody's Investors Service, ("Moody's") has affirmed the ratings on four classes and downgraded the rating on three classes in Wells Fargo Commercial Mortgage Trust 2014-LC16, Commercial Mortgage Pass-Through Certificates, Series 2014-LC16 as follows:Cl. A-4, Affirmed Aaa (sf); previously on Oct 20, 2020 Affirmed Aaa (sf)Cl. A-5, Affirmed Aaa (sf); previously on Oct 20, 2020 Affirmed Aaa (sf)Cl. A-SB, Affirmed Aaa (sf); previously on Oct 20, 2020 Affirmed Aaa (sf)Cl. A-S, Downgraded to Aa2 (sf); previously on Oct 20, 2020 Affirmed Aaa (sf)Cl. B, Downgraded to Ba1 (sf); previously on Oct 20, 2020 Downgraded to A1 (sf)Cl. C, Downgraded to Caa1 (sf); previously on Oct 20, 2020 Downgraded to Baa3 (sf)Cl. X-A*, Affirmed Aaa (sf); previously on Oct 20, 2020 Affirmed Aaa (sf)* Reflects interest-only classesRATINGS RATIONALEThe ratings on three P&I classes were affirmed due to the significant credit support and because the transaction's key metrics, including Moody's loan-to-value (LTV) ratio, Moody's stressed debt service coverage ratio (DSCR) and the transaction's Herfindahl Index (Herf), are within acceptable ranges.The ratings on three P&I classes were downgraded due to higher anticipated losses and increased interest shortfall risk driven by the significant exposure to delinquent loans secured by regional mall loans. Specially serviced loans represent 29.5% of the pool, of which three of the four largest, representing 23.7%, are secured by regional malls. The three delinquent mall loans include Woodbridge Center (14.8% of the pool), Montgomery Mall (7.1% of the pool) and Oak Court Mall (1.9% of the pool), all of which are more than 90 days delinquent and the properties were already experiencing declining performance prior to 2020. Furthermore, significant appraisal reductions have been recognized of between 49% to 67% of the respective loan balances on these regional mall loans. As a result of the appraisal reductions, interest shortfalls have significantly increased, and Moody's anticipates these shortfalls will continue and may increase from their current levels due the performance of these loans. Furthermore, the other specially serviced loans are also at least 90 days delinquent, two of which (1.3% of the pool) have also realized appraisal reductions of 25% or more of their loan balance.The rating on the IO class was affirmed based on the credit quality of the referenced classes.The coronavirus pandemic has had a significant impact on economic activity. Although global economies have shown a remarkable degree of resilience to date and are returning to growth, the uneven effects on individual businesses, sectors and regions will continue throughout 2021 and will endure as a challenge to the world's economies well beyond the end of the year. While persistent virus fears remain the main risk for a recovery in demand, the economy will recover faster if vaccines and further fiscal and monetary policy responses bring forward a normalization of activity. As a result, there is a heightened degree of uncertainty around our forecasts. Our analysis has considered the effect on the performance of commercial real estate from a gradual and unbalanced recovery in US economic activity. 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.Moody's rating action reflects a base expected loss of 17.8% of the current pooled balance, compared to 13.6% at Moody's last review. Moody's base expected loss plus realized losses is now 13.9% of the original pooled balance, compared to 10.7% at the last review. Moody's provides a current list of base expected losses for conduit and fusion CMBS transactions on moodys.com at http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF215255.FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range can indicate that the collateral's credit quality is stronger or weaker than Moody's had previously expected.Factors that could lead to an upgrade of the ratings include a significant amount of loan paydowns or amortization, an increase in the pool's share of defeasance or an improvement in pool performance.Factors that could lead to a downgrade of the ratings include a decline in the performance of the pool, loan concentration, an increase in realized and expected losses from specially serviced and troubled loans or interest shortfalls.METHODOLOGY UNDERLYING THE RATING ACTIONThe principal methodology used in rating all classes except interest-only classes was "Approach to Rating US and Canadian Conduit/Fusion CMBS" published in September 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1244778. The methodologies used in rating interest-only classes were "Approach to Rating US and Canadian Conduit/Fusion CMBS" published in September 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1244778 and "Moody's Approach to Rating Structured Finance Interest-Only (IO) Securities" published in February 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1111179. Please see the list of ratings at the top of this announcement to identify which classes are interest-only (indicated by the *). Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. DEAL PERFORMANCEAs of the March 15, 2021 distribution date, the transaction's aggregate certificate balance has decreased by 21.7% to $763 million from $974 million at securitization. The certificates are collateralized by 70 mortgage loans ranging in size from less than 1% to 14.8% of the pool, with the top ten loans (excluding defeasance) constituting 50.5% of the pool. Nine loans, constituting 5.4% of the pool, have defeased and are secured by US government securities.Moody's uses a variation of Herf to measure the diversity of loan sizes, where a higher number represents greater diversity. Loan concentration has an important bearing on potential rating volatility, including the risk of multiple notch downgrades under adverse circumstances. The credit neutral Herf score is 40. The pool has a Herf of 20, compared to 21 at Moody's last review.As of the March 2021 remittance report, loans representing 67% were current or within their grace period on their debt service payments, 2% were between 30 -- 59 days delinquent and the remainder were either more than 90 days delinquent or in the foreclosure process.Seven loans, constituting 8.6% of the pool, are on the master servicer's watchlist. The watchlist includes loans that meet certain portfolio review guidelines established as part of the CRE Finance Council (CREFC) monthly reporting package. As part of Moody's ongoing monitoring of a transaction, the agency reviews the watchlist to assess which loans have material issues that could affect performance.One loan has been liquidated from the pool, resulting in a minimal loss (for a loss severity of 0.1%). Eight loans, constituting 31% of the pool, are currently in special servicing. Six of the specially serviced loans, representing almost 30% of the pool, have transferred to special servicing since May 2020.The largest specially serviced loan is the Woodbridge Center Loan ($112.6 million -- 14.8% of the pool), which represents a pari-passu portion of a $234.9 million senior mortgage loan. The loan is secured by a 1.1 million square foot (SF) component of a two-story, regional mall in Woodbridge, New Jersey. The loan is sponsored and the property is managed by Brookfield Properties. The mall's anchors now include Macy's, Boscov's, JC Penney, and Dick's Sporting Goods. Two anchor spaces are currently vacant following the December 2019 closure of Lord and Taylor (120,000 SF) and the April 2020 closure of Sears (274,100 SF). Macy's, JC Penny and the former Lord & Taylor space are not included as collateral for the loan. Other major tenants include Boscov's, Dick's Sporting Goods and Dave & Busters. As of December 2020, the collateral was 69% leased, compared to overall 97% in December 2019 and 97% at securitization. The inline occupancy was 88% as of June 2020, compared to 85% in March 2019. Property performance had declined annually since 2015 and the 2019 net operating income (NOI) was nearly 17% lower than in 2014 with a 2019 NOI DSCR of 1.19X. Property performance further decline in 2020 with the 2020 NOI declining an additional 18% year over year and causing the NOI DSCR to decline below 1.00X. The property was closed temporarily during the coronavirus pandemic and re-opened in June. The loan transferred to special servicing in June 2020 for imminent monetary default stemming from the impacts of the pandemic and the property's decline in performance. Furthermore, the property also faces significant competition with seven competitive regional and super regional centers located within a 20 miles radius of the property. The loan is last paid through its April 2020 payment date and the special servicer indicated they are dual tracking ligation options while continuing discussions with the borrower. The loan has amortized 6.2% since securitization after an initial 3 year interest only period, however, the property was recently appraised at a value significantly below the outstanding loan balance and the master servicer subsequently recognized an appraisal reduction of nearly 63% of the outstanding loan amount. As a result of the appraisal reduction interest shortfalls significantly increased as of the March 2021 remittance date.The second largest specially serviced loan is the Montgomery Mall Loan ($54.0 million -- 7.1% of the pool), which represents a pari-passu portion of a $100 million first mortgage loan. The loan is secured by an approximately 580,000 SF component of a 1.1 million SF regional mall in North Wales, Pennsylvania, a northern suburb of Philadelphia. The property is currently anchored by Macy's, JC Penney, Wegmans, and Dick's Sporting Goods. One anchor space (169,000 SF) is now vacant following the February 2020 closure of Sears. As of December 2019, the total mall and the inline space were 87% (reducing to 71% after Sears vacancy) and 72% occupied, respectively, compared to 92% and 67% as of December 2018. Property performance had deteriorated since 2016 and the year-end 2019 NOI was approximately 26% lower than in 2014. While the property benefits from an infill location 20 miles northwest of Philadelphia, competition exists from six competitive regional and super regional centers located within a 20 miles radius of the property. The property was temporarily closed from March 14th to June 26th as a result of the pandemic and the loan transferred to special servicing in June 2020 for imminent default. The loan is last paid through its December 2020 payment date and special servicer commentary indicates the sponsor, Simon Property Group, is unwilling to inject additional funds into loan but is continuing to manage property and a cash lockbox has been implemented. The property was appraised in August 2020 at a value below the outstanding loan balance and as of the March 2021 remittance report the master servicer has recognized an appraisal reduction of approximately 49% of the outstanding loan amount.The third largest specially serviced loan is the Weatherford Ridge loan ($29.1 million -- 3.8% of the pool), which is secured by a power center located in Weatherford, Texas, approximately 25 miles west of downtown Fort Worth and positioned at the intersection of I-20 and Main Street. The property was 94% leased as of June 2020. Tenants at the property consist of a mix of national retailers, including Belk, TJ Maxx, Bed Bath & Beyond, and Michaels. A non-collateral JC Penney serves as a shadow anchor at the property and this location has not appeared on any store closing lists. Bed, Bath & Beyond has a co-tenancy provision related to JC Penney going dark. The loan transferred to special servicing in July 2020 per the borrower's request and the loan was over 60 days delinquent. The special servicer indicated they are actively discussing a potential loan modification. The loan is last paid through its April 2020 payment date.The remaining five specially serviced loans are primarily secured by retail and hotel properties, including the Oak Court Mall (1.9% of the pool) which has also exhibited significant declines in performance and was appraised in July 2020 significantly below its loan balance. All of the remaining specially serviced loans were more than 90 days delinquent.As of the March 2021 remittance statement cumulative interest shortfalls were $2.6 million and impact up to Cl. C. Moody's anticipates interest shortfalls will continue because of the significant exposure to specially serviced loans. Interest shortfalls are caused by special servicing fees, including workout and liquidation fees, appraisal entitlement reductions (ASERs), loan modifications and extraordinary trust expenses.Moody's has also assumed a high default probability for two poorly performing loans secured by hotel properties, constituting 2.5% of the pool. The largest troubled loan is the Hampton Inn Hallandale (2.0% of the pool) which had already experienced declining revenue and NOI through year-end 2019. Moody's has estimated an aggregate loss of $124.2 million (a 51% expected loss on average) from these specially serviced and troubled loans.The credit risk of loans is determined primarily by two factors: 1) Moody's assessment of the probability of default, which is largely driven by each loan's DSCR, and 2) Moody's assessment of the severity of loss upon a default, which is largely driven by each loan's loan-to-value ratio, referred to as the Moody's LTV or MLTV. As described in the CMBS methodology used to rate this transaction, we make various adjustments to the MLTV. We adjust the MLTV for each loan using a value that reflects capitalization (cap) rates that are between our sustainable cap rates and market cap rates. We also use an adjusted loan balance that reflects each loan's amortization profile. The MLTV reported in this publication reflects the MLTV before the adjustments described in the methodology.Moody's received full year 2019 operating results for 89% of the pool, and full or partial year 2020 operating results for 94% of the pool (excluding specially serviced and defeased loans). Moody's weighted average conduit LTV is 92%, compared to 94% at Moody's last review. Moody's conduit component excludes loans with structured credit assessments, defeased and CTL loans, and specially serviced and troubled loans. Moody's net cash flow (NCF) reflects a weighted average haircut of 14% to the most recently available net operating income (NOI). Moody's value reflects a weighted average capitalization rate of 9.8%.Moody's actual and stressed conduit DSCRs are 1.65X and 1.23X, respectively, compared to 1.64X and 1.21X at the last review. Moody's actual DSCR is based on Moody's NCF and the loan's actual debt service. Moody's stressed DSCR is based on Moody's NCF and a 9.25% stress rate the agency applied to the loan balance.The top three conduit loans represent 14.1% of the pool balance. The largest loan is the Pacific Design Center Loan ($48.6 million -- 6.4% of the pool), which represents a pari-passu portion of a $140.9 million first mortgage loan. The property is also encumbered with $20 million of mezzanine debt. The loan is secured by a 1.0 million SF component of a 1.4 million SF mixed-use facility containing design and office space located in West Hollywood, California. The property is comprised of three buildings known as the Blue Building, the Green Building and the Red Building, due to their respectively colored glass exteriors. The Blue Building, almost fully comprised of design showroom space, consists of a 717,914 SF, 6-story structure constructed in 1976. The Green Building consists of a 385,088 SF, 9-story office (278,813 SF) and showroom facility (106,275 SF) constructed in 1988. The Red Building consists of a 420,000 SF office building constructed in 2012. Only the Blue Building and Green Building are contributed as collateral for the loan. In addition to the showroom and office space, the property also features a private branch of the Los Angeles Museum of Contemporary Art, a fitness center, a 388-seat theater, a 1,900 space sub-grade parking garage, as well as several public spaces, atriums and courtyards. As of September 2020, the collateral was 68% leased, compared to 66% leased in March 2019 and 55% in March 2018. Occupancy fell in 2017 following various affiliates of the Interpublic Group of Companies vacating their space. Property performance rebounded since 2018 and the year to date September 2020 NOI DSCR was 1.55X. The loan remained current as of the March 2021 remittance date and has amortized almost 3% since securitization after an initial interest only period. The Moody's LTV and stressed DSCR are 116% and 0.93X, respectively, compared to 117% and 0.92X at the last review.The second largest loan is the Purgatory Creek Apartments Loan ($30.8 million -- 4.0% of the pool), which is secured by a multifamily property located in San Marcos, Texas, approximately 28 miles south of the Austin CBD and two miles from Texas State University. Common area amenities include a two-tier resort style pool with spa and steam room/sauna, 24-hour fitness center, clubhouse with full kitchen and bar area, business center, and a laundry room in every building. As of December 2020, the property was 91% leased, compared to 90% leased as of December 2019. The year-end 2020 NOI increased slightly from 2019 as a result of increased revenue. The loan has amortized almost 3% since securitization and Moody's LTV and stressed DSCR are 113% and 0.81X, respectively, compared to 118% and 0.78X at the last review.The third largest loan is the Harlequin Plaza Loan ($28.0 million -- 3.7% of the pool), which is secured by two adjacent Class-B office buildings located in Greenwood Village, Colorado, approximately 14 miles southeast of the Denver CBD. The buildings, built in 1980 and renovated in 2013, are three and four stories tall. Property performance declined in 2019 as a result of lower revenue and occupancy, but rebounded in 2020. The property was 93% occupied as of September 2020, up from 83% in December 2018. The property's three largest tenants represent an aggregate 52% of the property's square footage and do not have lease expirations prior to December 2022. The loan is interest only for its entire term and Moody's LTV and stressed DSCR are 97% and 1.08X, respectively, compared to 98% and 1.07X at the last review.REGULATORY DISCLOSURESFor 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.The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.Moody's did not use any stress scenario simulations in its analysis.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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are 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. Rhett Terrell Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​