DBRS Assigns Ratings to Notes issued by Magni Finance Designated Activity Company

DBRS Ratings Limited (DBRS) has today assigned ratings to the following classes of Commercial Mortgage-Backed Floating-Rate Notes due January 2023 (collectively, the Notes) issued by Magni Finance Designated Activity Company (the Issuer):

-- Class A Notes rated A (sf)
-- Class B Notes rated BBB (low) (sf)
-- Class C Notes rated B (low) (sf)
-- Class D Notes rated CCC (sf)

All trends are Stable.

The Issuer is a securitisation of two floating-rate cross-defaulting and cross-collateralised commercial real estate loans with a combined balance of approximately £185 million. Both original loans have junior mezzanine loans totalling £18.5 million, which are fully subordinated to the securitised senior loans.

The borrowers are all ultimately owned by Varde Partners through shareholders Cronos Investments Limited and Eurynome LLC. The Pecan Loan served to fund the acquisition of 14 High Street retail properties within the United Kingdom (U.K.) and the Titan Loan served to refinance the original acquisition of 182 U.K. mixed-use properties. To date, the sponsor has liquidated 24 of the original assets reducing the property collateral for the loan to 172 remaining properties.

The collateral properties securing the loan are diversified by tenant base, property type and location within the United Kingdom. In total, there are 172 properties and 453 unique tenants. These properties are located throughout the United Kingdom, with the largest concentration (16.6% by allocated loan amount) in Yorkshire/Humberside. No tenant represents more than 4.2% of the in-place rent and the top ten tenants represent 24.8% of the in-place rent. Three of the properties that are included currently in the loan collateral were recently sold for £4.3 million (net disposal proceeds). On the first interest payment date the allocated loan amount and associated release premium will be allocated to the CMBS in accordance with the principal waterfall.

The sponsor’s intention is to liquidate the assets during the loan term. All properties within the portfolio are classified as either Tier 1 or Tier 2 assets, based on property quality and location. The liquidation of the properties will result in paydown of the loan subject to the greater of a release premium and pre-defined percentage of the net disposal price. If the sponsor underperforms its business plan and properties are not liquidated in the speed or amount as envisaged, a full cash flow sweep will commence when the outstanding principal balance of the loan is greater than the maximum target loan amount.

Non-cash trap loan principal receipts will be applied pro rata to the Notes and interest will be repaid sequentially through separate waterfalls until a loan failure event (loan event of default or loan remains outstanding after its maturity date). Cash trap principal and post-event of default principal receipts will be applied sequentially to the Notes. Interest may defer on all classes except the most senior class.

The loan is 100% hedged with an interest rate cap with an initial strike of 1.25%, which increases to 2.5% over time. As the targeted loan balance decreases amid anticipated property sales, the hedged amount decreases as well. However, there is an additional interest rate cap for the potential difference at a 5% strike rate if the sponsor does not execute their business plan. The caps are provided by the Royal Bank of Canada (rated AA by DBRS Limited).

The loan represents high leverage financing with a DBRS stressed loan-to-value ratio of 110.3%. Additionally, the DBRS Going-In and Exit Debt Yields are 8.1% and 9.3%, respectively. The DBRS Term debt service coverage ratio (DSCR) is 1.70 times (x) and the DBRS refinance DSCR is 1.02x. However, the DBRS stabilised value represents a significant 37.3% discount to the valuer’s market value. The loan sponsor, Varde Partners, is an experienced, international investment advisor with a substantial global real estate portfolio. The day-to-day asset management will be handled by APAM Limited, a joint venture asset management partner of Varde Partners. The total value of assets sold and under management since APAM Limited’s inception in 2011 has been £1.15 billion.

The aggregate DBRS net cash flow (NCF) for the loan was £14,688,726. DBRS applied a blended capitalisation rate of 8.9% to the aggregate NCF to arrive at a DBRS stressed value of £165,407,804, which represents a 37.3% discount to the market value provided by the valuations.

The final legal maturity of the Notes is in January 2023, approximately 3.25 years beyond the maturity of the fully extended loan term. If necessary, this is believed to be sufficient time, given the security structure and jurisdiction of the underlying loans, to enforce on the loan collateral and repay bondholders.

Eurynome LLC will retain an ongoing material economic interest of not less than 5% of the loans to maintain compliance with Article 405(1) of the European Union Capital Requirements Regulation and also with Article 51 of the Commission Delegated Regulation (EU). The transaction was arranged by Credit Suisse Securities (Europe) Limited.

The ratings assigned by DBRS to the Notes are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology is European CMBS Rating Methodology, which can be found on our website under Methodologies.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.
This may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” at: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include Magni Finance Designated Activity Company, Credit Suisse Europe, Cushman & Wakefield, Strutt & Parker, Jones Lang LaSalle, Delta Simmons and Clarke Bond.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; however, Agreed upon Procedures (AUP) are included in the requested documentation.

-- DBRS was supplied with AUP documents. However, this did not impact the rating analysis. Data checks were performed and DBRS did apply additional cash flow stresses in its scenarios.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

A decrease of 10% and 20% in the DBRS NCF, derived by looking at comparable properties, market rents and market occupancies in addition to expense ratios and capital expenditures, would lead to a downgrade in the transaction, as noted below for each class respectively.

Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A Notes to BBB (low) (sf).
-- 20% decline in DBRS NCF, expected rating of Class A Notes to B (high) (sf).

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B Notes to BB (low) (sf).
-- 20% decline in DBRS NCF, expected rating of Class B Notes to CCC (sf).

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C Notes to CCC (sf).
-- 20% decline in DBRS NCF, expected rating of Class C Notes to CC (low) (sf).

Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D Notes to C (sf).
-- 20% decline in DBRS NCF, expected rating of Class D Notes to C (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elizabeth Lovett, Assistant Vice President, EU CMBS
Initial Rating Date: 18 December 2015
Initial Rating Committee Chair: Mary Jane Potthoff, Managing Director, Global CMBS

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- European CMBS Rating Methodology

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375