Fitch Downgrades Three Classes of IMSCI 2012-2; Revises One Outlook

(The following statement was released by the rating agency) Fitch Ratings-Chicago-18 March 2021: Fitch Ratings has downgraded three class and affirmed six classes of Institutional Mortgage Capital, commercial mortgage pass-through certificates series 2012-2 (IMSCI 2012-2). All currencies are denominated in Canadian dollars (CAD). Institutional Mortgage Securities Canada Inc., series 2012-2 ----A-1 45779BAJ8; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A-2 45779BAK5; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B 45779BAL3; Long Term Rating; Affirmed; AAsf; Rating Outlook Stable ----C 45779BAM1; Long Term Rating; Affirmed; Asf; Rating Outlook Negative ----D 45779BAN9; Long Term Rating; Downgrade; BBsf; Rating Outlook Negative ----E 45779BAP4; Long Term Rating; Downgrade; BB-sf; Rating Outlook Negative ----F 45779BAS8; Long Term Rating; Downgrade; Bsf; Rating Outlook Negative ----G 45779BAT6; Long Term Rating; Affirmed; CCCsf ----XP 45779BAQ2; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable KEY RATING DRIVERS Increased Loss Expectations: The downgrades of classes D, E and F reflect increased loss expectations from continued underperformance of the Fitch Loans of Concern (FLOCs) and exposure to the energy sector. Despite the recourse provisions low historical loss rates associated with Canadian CMBS loans, Fitch has concerns with the recoverability of the three FLOCs. The downgrades of classes D, E and F and Negative Outlook for class C reflect the reliance on the repayment of these three loans. The largest FLOC is the Lakewood Apartments loan (10%), which is secured by a 111-unit apartment building in Fort McMurray, AB. The loan was in special servicing in February 2016 due to the downturn in the energy markets but returned to the master servicer in early 2017 and remains current. In May 2016, the Fort McMurray area was evacuated due to wildfires, but the collateral did not sustain structural damage. Demand at the property increased in 2016 due to local residents that were displaced by the fires and workers brought in for restoration efforts. However, that demand has since dissipated. According to the servicer, occupancy improved in 2019 and was reported to be 75% as of November 2019 compared with 63% as of YE 2018 and 73% at YE 2017. The YE 2019 debt service coverage ratio (DSCR) was reported to be 0.48x. The loan maturity has been extended for a second time to November 2022 and an additional forbearance was granted in 2020, which allowed principal deferrals from April through August. The loan has full recourse to the sponsor, Lanesborough Real Estate Investment Trust (LREIT). Despite the recourse provision, Fitch remains concerned with the loan given the low DSCR, multiple maturity extensions and demand tied to the energy sector. The second largest FLOC is the Centre 100 loan (9%), which transferred to special servicing in December 2019 as a result of the borrower's bankruptcy. The loan is secured by a 55,536sf, class B office building located in Calgary, Alberta. At issuance, Rogers Insurance occupied 85% of the net rentable area (NRA) but vacated upon the February 2018 lease expiration. The borrower was able to backfill a portion of the former Rogers Insurance space and the current occupancy is approximately 74% as of February 2021. A receiver has been appointed due to the borrower's bankruptcy and the servicer is formulating plans for a receiver sale. The timing and recoverability on the Centre 1000 loan remains uncertain given the reliance of the Calgary office market on the energy sector and lack of investor and tenant demand. Pool Concentration and Energy Exposure: The pool is concentrated with only 12 loans remaining and the top five loans account for 65.7% of the pool, respectively. Due to the concentrated nature of the pool, Fitch performed a sensitivity analysis that grouped the remaining loans based on the likelihood/timing of repayment. The ratings reflect this analysis. There is also sponsor concentration with three loans in the top five (37.2%) having the same sponsor group, LREIT, and related entities. Two of those loans and the specially serviced loan are backed by properties in Alberta, which has experienced volatility from the energy sector in the past several years. Changes in Credit Enhancement: As of the February 2021 distribution date, the pool's aggregate principal balance has been reduced by 56.1% to $105.3 million from $240.2 million at issuance. Credit enhancement continues to increase with transaction paydown. Two loans (28.5%) have been defeased. Maturities: One of the defeased loans (15.3%) is scheduled to mature in December 2021. The remainder of the non-specially serviced loans mature in 2022 (75.7%). Canadian Loan Attributes: The ratings reflect strong Canadian commercial real estate loan performance, including a low delinquency rate and low historical losses of less than 0.1%, as well as positive loan attributes such as short amortization schedules, additional guarantors and recourse to the borrowers. Of the remaining non-defeased loans, all feature full or partial recourse to the borrowers and/or sponsors. Coronavirus Exposure: No loans in the pool are secured by hotel properties and there is no immediate impact to the ratings from the coronavirus pandemic. There are six non-defeased loans (25.3%) secured by retail properties. However, three of the loans (8.5%) are secured by single-tenant pharmacies, which remain open and have been deemed essential during the pandemic. Fitch will continue to monitor any declines in loan performance and will adjust ratings and outlooks accordingly. RATING SENSITIVITIES The Stable Outlooks for classes A-1, A-2 and B reflect the defeased collateral, continued amortization and expected paydown from the non-FLOCs at their respective maturities. The Negative Outlooks for classes C, D, E and F reflect the reliance on the FLOCs and the potential for rating changes should performance deteriorate or if loans fail to repay at maturity. Factors that could, individually or collectively, lead to positive rating action/upgrade: Factors that could lead to upgrades of would include stable to improved asset performance coupled with paydown and/or defeasance. While not likely in the near term, upgrades of classes B through E may occur with significant improvement in credit enhancement and/or defeasance, but would be limited based on pool concentration. Classes would not be upgraded above 'Asf' if there is a likelihood for interest shortfalls. Upgrades to the below-investment-grade-rated classes are not likely, given the concerns surrounding the FLOCs, but may occur should credit enhancement increase and performance of the FLOCs improve. Factors that could, individually or collectively, lead to negative rating action/downgrade: Factors that lead to downgrades include an increase in pool level losses from underperforming loans. Downgrades to the super-senior classes, A-1 and A-2, are not likely due to the position in the capital structure and the high credit enhancement, but could occur if interest shortfalls occur or if a high proportion of the pool defaults and expected losses increase significantly. Downgrades to classes B, C, D and E may occur and be one category or more should overall pool losses increase, loans fail to repay at maturity, and/or the Lakewood Apartments loan transfers to special servicing. A downgrade to class F would occur should loss expectations increase due to an increase in specially serviced loans and/or the disposition of the Centre 1000 loan at a higher than expected loss. Further downgrades to the distressed classes G will occur as losses are realized. The Negative Outlooks on classes C, D, E and F may be revised back to Stable if performance of the Lakewood Apartments loan improves and/or the recovery on the Centre 1000 loan is better than expected. In addition to its baseline scenario, Fitch also envisions a downside scenario where the health crisis is prolonged beyond 2021; should this scenario play out, Fitch expects that a greater percentage of classes may be assigned a Negative Outlook or those with Negative Outlooks will be downgraded one or more categories. For more information on Fitch's original rating sensitivity on the transaction, please refer to the new issuance report. Best/Worst Case Rating Scenario International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. 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