DBRS Morningstar Assigns One Rating to and Downgrades Two Ratings of the Series 2016-5 Notes Issued by LStreet II, LLC

DBRS, Inc. (DBRS Morningstar) assigned a rating of A (low) (sf) to the Series 2016-5 Class A-3 Notes issued by LStreet II, LLC. DBRS Morningstar also downgraded the ratings of the Series 2016-5 Class A-1 Notes and Series 2016-5 Class A-2 Notes (collectively, with the Series 2016-5 Class A-3 Notes, the Class A Notes) to A (low) (sf) from AA (sf).

The rating assignment and downgrades with respect to the Class A Notes are being provided in relation to the execution of the Second Amended and Restated Series 2016-5 Supplement dated as of May 11, 2020, which was entered into between LStreet II, LLC as Issuer and Deutsche Bank Trust Company Americas (rated A (low) with a Negative trend by DBRS Morningstar) as Trustee.

Series 2016-5 consists of the Class A Notes and the unrated Series 2016-5 Class B Deferrable Notes.

The Class A Notes are collateralized by the Class A-1LT-a and the Class A-1LT-b Notes of Davis Square Funding III, Ltd., which is itself collateralized by a pool of subprime and Alt-A residential mortgage-backed securities (RMBS), commercial mortgage-backed securities, and asset-backed securities.

The ratings address (1) the likelihood of the Class A Noteholders receiving all principal distributions to which such Noteholders are entitled and (2) the likelihood of the Class A Noteholders receiving the amount of Series 2016-5 Class A Interest to which such Noteholders are entitled in each case, to the extent payable to the Class A Notes in accordance with the priorities of payment outlined in the Amended and Restated Series 2016-5 Supplement to the Base Indenture on or before the Final Maturity Date in November 2039.

For the avoidance of doubt, the ratings on the Class A Notes address the ultimate payment of Series 2016-5 Class A Principal and the timely payment of Series 2016-5 Class A Interest (one-month Libor plus 0.365% per annum). The DBRS Morningstar ratings do not address any other amounts that may be paid to the Class A Noteholders, including, but not limited to, the Series 2016-5 Class A Additional Amount.

The Coronavirus Disease (COVID-19) pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many RMBS asset classes, some meaningfully.

As a result of the coronavirus, DBRS Morningstar expects increased delinquencies and loans on forbearance plans, slower voluntary prepayment rates, and a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios: Implications for Credit Ratings,” published on April 16, 2020), for legacy RMBS, DBRS Morningstar assumes higher unemployment rates than what DBRS Morningstar previously used. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

For legacy RMBS, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans that were previously delinquent, recently modified, or have higher updated loan-to-value (LTV) ratios may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with previous delinquencies or recent modifications have exhibited difficulty in fulfilling payment obligations in the past and may revert back to spotty payment patterns in the near term. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and, therefore, slower prepayments.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar publications: “DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19),” dated March 12, 2020; “DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19),” dated March 20, 2020; and “Global Macroeconomic Scenarios: Implications for Credit Ratings,” dated April 16, 2020.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodology is Rating Structured Finance CDO Restructurings (September 27, 2018), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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.

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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