Fitch Ratings has affirmed 17 classes of Wells Fargo Commercial Mortgage Trust 2017-C42 commercial mortgage pass-through certificates.

The Rating Outlook on class E and X-E have been revised to Stable from Negative.

RATING ACTIONS

Entity / Debt

Rating

Prior

WFCM 2017-C42

A-2 95001GAB9

LT

AAAsf

Affirmed

AAAsf

A-3 95001GAD5

LT

AAAsf

Affirmed

AAAsf

A-4 95001GAE3

LT

AAAsf

Affirmed

AAAsf

A-BP 95001GAF0

LT

AAAsf

Affirmed

AAAsf

A-S 95001GAK9

LT

AAAsf

Affirmed

AAAsf

A-SB 95001GAC7

LT

AAAsf

Affirmed

AAAsf

B 95001GAL7

LT

AA-sf

Affirmed

AA-sf

C 95001GAM5

LT

A-sf

Affirmed

A-sf

D 95001GAU7

LT

BBB-sf

Affirmed

BBB-sf

Page

of 2

VIEW ADDITIONAL RATING DETAILS

KEY RATING DRIVERS

Improved Loss Expectations: Overall pool performance and loss expectations have improved since Fitch's last rating action. The Outlook revisions to Stable from Negative reflect performance stabilization for the majority of properties affected by the pandemic.

Fitch's current ratings incorporate a base case loss of 4.4%. Fitch has identified seven Fitch Loans of Concern (FLOCs; 16.3% of pool), including one loan in special servicing (1.0%).

Largest Contributors to Loss: The largest contributor to loss and largest increase in loss expecatations since Fitch's prior rating action is the 16 Court Street loan (9.2% of the pool), which is secured by a 36-story, 325,510 SF, office building located in Brooklyn, New York. The largest tenants are The City University of New York (14.5% NRA; lease expiration August 2024) and Michael Van Valkenburgh Associates (7.7% NRA; lease expiration October 2035). Occupancy has gradually declined since issuance, falling to 75% per the March 2022 rent roll, from 81% at YE 2021 and 93% at issuance. Upcoming rollover at the property includes 3.3% of the NRA in 2022, 3.4% NRA in 2023, 31.7% NRA in 2024 and 1.0% NRA in 2025.

The YE 2021 NOI reported 24% below the issuers NOI primarily due to increased expenses, driven by higher real estate taxes and utility costs, in addition to the increased vacancy. The servicer reported NOI DSCR reported at 1.59x as of YE 2021, compared with 2.10x at YE 2020 and 2.01x at issuance.

Fitch's base case loss of 6.2% reflects an 8.5% cap rate and a 5% stress to the YE 2021 NOI. Fitch's analysis gives credit for the property location and lower leverage of $341 per square foot.

The next largest contributor to loss is the Lennar Corporate Center loan (3.9%), which is secured by a 289,986-sf office property located in Miami, FL. The loan has been designated as a FLOC due to the largest tenant Lennar Corporation (50% NRA) vacating the property at their lease expiration in March 2022. The largest remaining tenants are Farelogix (6.4% NRA) and Alliance for Aging (4.3% NRA) both of which signed lease extensions. Fitch has an outstanding request to the servicer for leasing updates on the vacated Lennar Corporation space and has yet to receive a response.

Fitch's base case loss of 11.4% reflects a 10.25% cap rate and a 40% stress to the YE 2021 NOI to reflect the largest tenant's departure.

The next largest contributor to loss is the Lakeside Shopping Center loan (3.4%), which is a 1.2 million sf regional mall located in Metairie, LA, approximately 7.8 miles northwest of the New Orleans CBD. The loan is sponsored by the Fell Organization. The mall is anchored by Dillard's, which leases 25.7% net rentable area (NRA) through December 2029, Macy's, which has a ground lease for 19.0% NRA through February 2029 and JCPenney, which leases 16.8% NRA through July 2023.

The property has had relatively stable performance, with minimal impact from the pandemic. The YE 2021 NOI is relatively flat to YE 2020; however, it remains 12% below the issuer's underwritten NOI. This IO loan has remained current, with NOI DSCR reporting at 2.40x for YTD June 2022 and 2.61x for YE 2021, compared with 2.58x at YE 2020 and 2.96x at issuance.

Occupancy has remained relatively flat since issuance, most recently reporting at 97% as of June 2022. The property faces near term rollover risks, with leases for 26.5% of NRA scheduled to expire by YE 2023, including JCPenney (16.8% NRA) which executed a short-term lease extension through July 2023 from a prior November 2022 lease expiration. Recent tenant sales remain outstanding; however, at issuance, the mall reported in-line sales of $795 psf ($651 excluding Apple). According to Green Street, in-line tenant sales reported at $921psf/$795psf (excluding Apple) as of July 2022, exceeding pre-pandemic levels.

Fitch's analysis includes a 12% cap rate and 5% stress to the YE 2021 NOI, resulting in an 11% base case loss.

Minimal Change to Credit Enhancement (CE): As of the September 2022 distribution date, the pool's aggregate principal balance was reduced by 2.4% to $726.5 million from $744.8 million at issuance. There have been no realized losses to date to and interest shortfalls are currently affecting class G. There are are no defeased loans.

Eleven loans (46%) are full-term IO, and five loans (22.9%) remain in their partial IO periods.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Downgrades to classes A-2 through B are not likely due to their increasing CE, overall stable pool performance and expected continued paydown; however, downgrades to these classes may occur should interest shortfalls affect these classes;

Downgrades to classes C and D would occur if loss expectations increase significantly and/or if CE is eroded due to realized losses that exceed expectations on one or more larger FLOCs;

Downgrades to class E would occur if the performance of the FLOCs deteriorate further or fail to stabilize.

Further downgrades to the distressed class F would occur if losses are realized or become more certain.

Fitch has identified both a baseline and a worse-than-expected, adverse stagflation scenario based on fallout from the Russia-Ukraine war, whereby growth is sharply lower amid higher inflation and interest rates. Even if the adverse scenario should play out, Fitch expects virtually no impact on ratings performance, indicating very few rating or Outlook changes. However, for some transactions with concentrations in underperforming retail exposure, the ratings impact may be mild to modest, indicating some changes on sub-investment-grade notes.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Upgrades to the 'AA-sf' and 'A-sf' category would likely occur with significant improvement in CE and/or defeasance; however, adverse selection and increased concentrations or the underperformance of particular loan(s) could cause this trend to reverse. Classes would not be upgraded above 'Asf' if there is likelihood for interest shortfalls.

The 'BBB-sf', 'B-sf' and 'CCCsf' rated classes are unlikely to be upgraded absent significant performance improvement of the FLOCs and sufficient credit enhancement.

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.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

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