DBRS Assigns Provisional Ratings to Taurus 2016-1 DEU Designated Activity Company

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage-Backed Floating-Rate Notes due November 2026 (collectively, the Notes) to be issued by Taurus 2016-3 DEU (the Issuer):

-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA (high) (sf)
-- Class C Notes rated AA (low) (sf)
-- Class D Notes rated BBB (sf)
-- Class E Notes rated BB (sf)
-- Class F Notes rated BB (low) (sf)

All trends are Stable.

Taurus 2016-1 DEU Designated Activity Company is a securitisation of one floating-rate senior commercial real estate loan, which was advanced by Bank of America Merrill Lynch International Limited (BAML) to fund the acquisition of 56 retail properties in Germany by certain Blackstone funds. The sale was completed on 30 September 2015 for a nominal purchase price of €502.5 million. The acquisition funding provided by BAML consists of a €333.7 million senior facility (€317.0 million securitised balance) and a €37.1 million mezzanine facility, implying a substantial amount of cash investment in the acquisition of the properties by Blackstone. The senior loan is 95% hedged with an interest rate cap that has strike rate of 3.0%. The cap is provided by Bank of America, N.A.

The portfolio was 92.8% occupied by predominantly leading German retailers as of the 31 December 2015 rent roll. However, there is significant exposure to the DIY retail and hypermarket industries. 17 properties within the portfolio are occupied by DIY retail companies, including Baumarkt (Globus and Hela), toom BauMarkt and OBI, representing 38.6% of the in-place rent. The portfolio benefits from a relatively long remaining lease term of 6.9 years compared to the remaining, fully-extended loan term of approximately five years.

The senior loan represents moderate leverage financing with a DBRS-stressed loan-to-value (LTV) of 85%. Additionally, the DBRS Exit Debt Yield of 9.4% and the DBRS Refi DSCR of 1.24x are relatively strong.

Contingent tax liabilities related to the property portfolio and borrowers structure are estimated to total €106.1 million in the tax due diligence report. Of those, the tax due diligence report assesses €37.1 million as having a higher risk of crystallisation. DBRS understands that these potential tax liabilities would rank junior to the securitised loan if the loan security was enforced and based on the sponsor’s business plan, the portfolio will generate substantial excess net rental cash flow after debt service costs – in particular in earlier years when scheduled amortisation is relatively low. Various Blackstone funds have entered into a fund guarantee to cover tax liabilities totalling €32.9 million.

The DBRS NCF for the portfolio was €29.1 million, which represents a 14.2% discount to the average cash flow projects by the sponsor over the loan term. DBRS applied a blended capitalisation rate of 7.3% to the aggregate NCF to arrive at a DBRS stressed value of €396.3 million, which represents a 19.9% discount to the market value provided by the valuations.

The transaction is supported by a €17.5 million liquidity facility, which is provided by Bank of America Merrill Lynch N.A. The Liquidity Facility can be used by the Issuer to fund expense shortfalls (including any amounts owing to third-party creditors and service providers that rank senior to the Notes), property protection shortfalls and interest shortfalls (including with respect to Deferred Interest, but excluding default interest) in connection with interest due on the Class A, Class B and Class C Notes in accordance with the relevant waterfall. The Liquidity Facility cannot be used to fund shortfalls due to the Class X Notes. The commitment amount (as at closing) is equivalent to approximately 15 months of coverage on the covered notes based on the DBRS modelled inputs.

The final legal maturity of the Notes is in November 2026, six years beyond the maturity of the latest maturing loan. 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.

Bank of America Merrill Lynch International Limited will retain an ongoing material economic interest of not less than 5% of the loan 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 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 euros unless otherwise noted.

The principal methodology applicable 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’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for these ratings include Taurus 2016-1 DEU Designated Activity Company, Bank of America Merrill Lynch International Limited, Jones Lang Lasalle and Valteq.

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 not yet 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.

These ratings 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 are available on www.dbrs.com.

To assess the impact of 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, 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 AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A Notes to AA (sf)

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

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

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

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

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS’s outlooks and ratings are monitored.

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: Christian Aufsatz, Senior Vice President, EU CMBS
Initial Rating Date: 23 February 2016
Initial Rating Committee Chair: Erin Stafford, 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