Freddie Mac Structured Pass-Through Certificates (SPCs), Series K-137 — Moody’s assigns provisional ratings to four CMBS REMIC classes of FREMF 2022-K137 Mortgage Trust and three SPC classes of Freddie Mac SPCs, Series K-137 | #macos | #macsecurity


Rating Action: Moody’s assigns provisional ratings to four CMBS REMIC classes of FREMF 2022-K137 Mortgage Trust and three SPC classes of Freddie Mac SPCs, Series K-137Global Credit Research – 11 Jan 2022$978.1 million of structured securities affectedNew York, January 11, 2022 — Moody’s Investors Service (“Moody’s”) has assigned provisional ratings to four classes of CMBS securities (the “REMIC Classes”), issued by FREMF 2022-K137 Mortgage Trust, Multifamily Mortgage Pass-Through Certificates, Series 2022-K137 (the “REMIC Trust”): Cl. A-1, Assigned (P)Aaa (sf) Cl. A-2, Assigned (P)Aaa (sf) Cl. X1*, Assigned (P)Aaa (sf) Cl. X2-A*, Assigned (P)Aaa (sf)Moody’s Investors Service has also assigned provisional ratings, consisting of Guaranteed and Underlying Ratings, to three classes of Structured Pass-Through Certificates (the “SPC Classes”), issued by Freddie Mac Structured Pass-Through Certificates (SPCs), Series K-137 (the “SPC Trust”):Cl. A-1, Assigned Guaranteed Rating (P)Aaa (sf); Underlying Rating (P)Aaa (sf)Cl. A-2, Assigned Guaranteed Rating (P)Aaa (sf); Underlying Rating (P)Aaa (sf)Cl. X1*, Assigned Guaranteed Rating (P)Aaa (sf); Underlying Rating (P)Aaa (sf)*Reflects Interest-Only ClassesEach of the SPC Classes represents a pass-through interest in an associated REMIC Class issued by the REMIC Trust. SPC Class A-1 represents a pass-through interest in REMIC Class A-1, SPC Class A-2 represents a pass-through interest in REMIC Class A-2, and SPC Class X1 represents a pass-through interest in REMIC Class X1.As discussed below, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) provides guarantees for the benefit of the SPC Classes. The assigned Guaranteed Ratings consider the benefit, if any, of the guarantees that Freddie Mac provides for the benefit of the SPC Classes, while the Underlying Ratings represent Moody’s assessment of the SPC Classes’ credit quality absent these guarantees.The two stated trusts are interrelated given that the aggregate offered certificate amount of $1,224,345,991 comprised of $1,163,128,000 in offered SPC Classes and $61,217,991 in offered REMIC Classes, equal the underlying mortgage loan pool balance of $1,224,345,992.RATINGS RATIONALEThe four rated REMIC Classes are collateralized by a pool of 42 fixed rate loans secured by 42 multifamily properties, manufactured housing community properties and an assisted living, memory care living facility property. The ratings are based on the collateral and the structure of the transaction.Of the four classes, one REMIC Class (Class X2-A) will be offered to investors, while the remaining three classes (Class A-1, Class A-2, and Class X1, or the “Underlying Guaranteed Classes”) will be acquired and guaranteed by Freddie Mac and subsequently deposited into the SPC Trust to back the SPC Classes that will be offered to investors.In rating the four REMIC Classes, Moody’s applied its CMBS ratings methodology, which combines both commercial real estate and structured finance analysis. Based on commercial real estate analysis, Moody’s determines the credit quality of each mortgage loan and calculates an expected loss on a loan specific basis. Under structured finance, the credit enhancement for each certificate typically depends on the expected frequency, severity, and timing of future losses. Moody’s also considers a range of qualitative issues as well as the transaction’s structural and legal aspects.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.The Moody’s Actual DSCR of 1.41x is worse than 2021 conduit/fusion transaction average of 2.09x. The Moody’s Stressed DSCR (using an 8.75% constant) is 0.72x, which is also below the trailing four quarters ending Q1 2021 conduit/fusion transaction average of .90x.The pooled trust loan balance of $1,224,345,992 represents a Moody’s LTV ratio of 140.6%, which is higher than the conduit/fusion transactions rated during 2021, which showed an average MLTV ratio of 115.8%. The deal’s Adjusted MLTV ratio is 122.7% based on our Moody’s Value using a cap rate adjusted for the current interest rate environment.Moody’s also considers both loan level diversity and property level diversity when selecting a ratings approach. With respect to loan level diversity, the pool’s loan level Herfindahl score is 32.2. The transaction loan level diversity profile is better than Moody’s-rated conduit/fusion transactions during 2021, which averaged 25.5. With respect to property level diversity, the pool’s property level Herfindahl score is 32.2, which is higher than the conduit/fusion transaction average score of 30.9 for 2021.Moody’s also grades properties on a scale of 0 to 5 (best to worst) and considers those grades when assessing the likelihood of debt payment. The factors considered include property age, quality of construction, location, market, and tenancy. The pool’s weighted average property quality grade is 2.30, which is slightly worse than the average score of 2.19 calculated across Moody’s-rated conduit/fusion transactions during 2021.Notable strengths of the REMIC Trust transaction include: asset class composition, , loan-level diversity and market composition.Notable credit challenges of the REMIC Trust transaction include: the pool’s high Moody’s LTV, interest-only loan profile, acquisition financing profile and certain asset-level legal considerations.In rating the three SPC Classes, Moody’s considered the repack nature of the SPC Trust transaction structure, the credit quality of the underlying collateral, and, other than with respect to the Underlying Ratings, the guarantees that Freddie Mac provides for the benefit of the SPC Classes.Freddie Mac will acquire and guarantee (as described in the following paragraph) the Underlying Guaranteed Classes (A-1, A-2, and X1, issued by the REMIC Trust) and will subsequently deposit these into the SPC Trust to back the offered SPC Classes. Furthermore, Freddie Mac will also guarantee the SPC Classes themselves. Any guarantee payments made by Freddie Mac on the Underlying Guaranteed Classes will be passed through to the holders of the corresponding SPC Classes. Moody’s rates Freddie Mac’s senior unsecured debt Aaa.Under the transaction documents, Freddie Mac guarantees payments on the Underlying Guaranteed Classes and the SPC Classes including, but not limited to, (a) timely payment of interest, (b) payment of related principal on the distribution date following the maturity date of each balloon mortgage loan to the extent such principal would have been distributed to Class A-1 and Class A-2, (c) realized losses and other fees/expenses allocated to Class A-1 and Class A-2, and (d) ultimate payment of principal by the final distribution date for Class A-1 and Class A-2.Moody’s believes that the Freddie Mac guarantees that enhance SPC Class A-1 and SPC Class A-2 support complete credit substitution given the strong incentives for Freddie Mac to fulfill its guarantee obligations under this transaction. The failure to fulfill its guarantee obligations under this transaction would have negative credit implications for Freddie Mac. As a result, the assigned Guaranteed Ratings on the SPC Class A-1 and SPC Class A-2 are the higher of the support provider’s financial strength rating (Aaa, senior unsecured) and the Underlying Rating of the SPC Classes absent Freddie Mac’s guarantees.Moody’s notes that the Freddie Mac guarantees on the interest-only SPC Class X1 do not provide additional enhancement. Freddie Mac’s guarantee does not cover any loss of yield on these interest-only classes following a reduction of notional amount due to a reduction of the principal balance of the REMIC Underlying Classes. Therefore, SPC Class X1’s assigned Guaranteed and Underlying Ratings reflect the classes’ underlying credit risk without credit for the guarantees.Given the repack nature of the structure, SPC certificate holders are exposed to the credit risk of the underlying SPC assets, namely, the rated REMIC Underlying Guaranteed Classes. The SPC Trust will contain separate pass-through pools, each designated as Pass-Through Pool A-1, A-2, and, X1, and each will hold a corresponding rated REMIC Underlying Guaranteed Class, including REMIC Class A-1, REMIC Class A-2, and REMIC Class X1, respectively. All cash flows received by each of the Underlying Guaranteed Classes will be applied to make pass-through payments to the corresponding SPC. Repayment of the rated SPC Classes depends primarily on the performance of the rated REMIC Underlying Guaranteed Classes, as well as any payments made by Freddie Mac pursuant to its guarantees. The principal methodology used in rating all classes of FREMF 2022-K137 Mortgage Trust except interest-only classes was “US and Canadian Conduit/Fusion Commercial Mortgage-Backed Securitizations Methodology” published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1258254. The methodologies used in rating all guaranteed classes of Freddie Mac Structured Pass-Through Certificates (SPCs), Series K-137 except guaranteed interest-only classes were “Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts” published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1068154 and “Moody’s Approach to Rating Repackaged Securities” published in June 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1230078. The principal methodology used in rating all underlying classes of Freddie Mac Structured Pass-Through Certificates (SPCs), Series K-137 except underlying interest-only classes was “Moody’s Approach to Rating Repackaged Securities” published in June 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1230078. The methodologies used in rating interest-only classes of FREMF 2022-K137 Mortgage Trust were “US and Canadian Conduit/Fusion Commercial Mortgage-Backed Securitizations Methodology” published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1258254 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. The methodologies used in rating guaranteed interest-only classes of Freddie Mac Structured Pass-Through Certificates (SPCs), Series K-137 were “Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts” published in May 2017 available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1068154, “Moody’s Approach to Rating Repackaged Securities” published in June 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1230078, 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. The methodologies used in rating underlying interest-only classes of Freddie Mac Structured Pass-Through Certificates (SPCs), Series K-137 were “Moody’s Approach to Rating Repackaged Securities” published in June 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1230078 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. Moody’s analysis of credit enhancement levels for conduit deals is driven by property type, Moody’s actual and stressed DSCR, and Moody’s property quality grade (which reflects the capitalization rate Moody’s uses to estimate Moody’s value). Moody’s fuses the conduit results with the results of its analysis of investment-grade structured credit assessed loans and any conduit loan that represents 10% or greater of the current pool balance.Moody’s analysis considers the following inputs to calculate the proposed IO rating based on the published methodology: original and current bond ratings and credit estimates; original and current bond balances grossed up for losses for all bonds the IO(s) reference(s) within the transaction; and IO type corresponding to an IO type as defined in the published methodology.Factors that would lead to an Upgrade or Downgrade of the Ratings:The 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 may indicate that the collateral’s credit quality is stronger or weaker than Moody’s had previously anticipated. Factors that may cause an upgrade of the ratings include significant loan paydowns or amortization, an increase in the pool’s share of defeasance or overall improved pool performance. Factors that may cause a downgrade of the ratings include a decline in the overall performance of the pool, loan concentration, increased expected losses from specially serviced and troubled loans or interest shortfalls.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.Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1315716 for FREMF 2022-K137 Mortgage Trust and on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1315719 for Freddie Mac Structured Pass-Through Certificates (SPCs), Series K-137.The analysis for REMIC Trust 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.In rating SPC Trust Moody’s did not use any models, or loss or cash flow analysis, in its analysis.For REMIC Trust, 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 SPC Trust, 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. Neeraj Ahuja Vice President – Senior 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 Eun Choi Senior Vice President 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 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY’S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. 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(“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. 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