DBRS Assigns Provisional Ratings to Taurus 2016-2 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 January 2027 (collectively, the Notes) to be issued by Taurus 2016-2 DEU (the Issuer):

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

All trends are Stable.

Taurus 2016-2 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 refinance 178 office properties in Germany by Dream Global Real Estate Investment Trust (Dream Global REIT). As part of the refinance, Dream Global REIT achieved an equity release of EUR 24.1 million, but still has significant cash equity remaining in the transaction. The properties were part of a larger portfolio, the Caroline Portfolio, which included 1,200 properties and was purchased through a sale-leaseback transaction by Lone Star Funds (Lone Star) in 2008. In 2011, Dream Global REIT purchased the sub-portfolio, securing the loan from Lone Star.

The properties are located in various parts of Germany and are primarily leased to Deutsche Post AG, which contributes 72.4% to the in-place rent. As of 31 March 2016, the portfolio was 80.9% occupied. Deutsche Post AG is the parent company of Deutsche Post and DHL Express, one of the leading logistics companies globally. Deutsche Post AG reported approximately EUR 59.2 million of revenue in 2015, of which EUR 16.1 million was derived from the post, ecommerce and parcel operations. According to the sponsor, the properties represent strategic locations for Deutsche Post AG as they are well connected and with quick transport links to most German areas.

The portfolio has significant rollover during the loan term, which is concentrated in 2018 when tenants accounting for approximately EUR 24.5 million of rent (66.8% of the DBRS underwritten rent) have lease expiries or break options. This is primarily derived from a large number of leases executed in 2008 with Deutsche Post AG. The loan is structured with a debt service reserve during the period with the most lease expiries and break options, which would trap up to 1.88% of the loan amount if the projected interest coverage ratio is below 2.35 times (x). As part of the original sale-and-leaseback transaction in 2008, Deutsche Post AG is required to extend EUR 8.0 million of rent for a minimum of two years upon lease expiry in June 2018, subject to 12 months’ notice. This required extension may be spread over the entire Caroline Portfolio, which includes properties leased by Deutsche Post AG that are not part of the loan collateral. For the property portfolio securing the loan, the minimum extension obligation is EUR 2.9 million of rental income.

The senior loan represents relatively low leverage financing with a DBRS-stressed loan-to-value of 67.6%. Additionally, the DBRS Exit Debt Yield of 9.2% and the DBRS refinance debt service coverage ratio of 1.42x are relatively strong.

The DBRS net cash flow (NCF) for the portfolio is EUR 22.4 million, which represents an 18.5% discount to the valuer’s net rent amount. DBRS applied a blended capitalisation rate of 6.25% (implied net initial yield of 7.7%) to the aggregate NCF to arrive at a DBRS stressed value of EUR 357.8 million, which represents a 27.4% discount to the CBRE Group Inc. (CBRE) market value of EUR 493.1 million and a 4.0% discount to the CBRE vacant possession value of EUR 372.6 million.

The loan matures on 31 December 2020 and carries a floating interest rate equal to the three-month Euribor (subject to a zero floor) plus a margin of 2.25%. The loan is 95.0% hedged with interest rate caps that have a weighted-average strike rate of 1.0%. The caps are provided by Bank of America, N.A. The transaction is supported by a EUR 17.5 million liquidity facility, which is provided by Bank of America Merrill Lynch N.A. The liquidity facility can be used to cover interest shortfalls on Classes A, B and C. The commitment amount (as at closing) is equivalent to approximately 21 months of coverage on the covered notes based on DBRS’s modelled inputs.

The final legal maturity of the Notes is in January 2027, 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.

BAML will retain an ongoing material economic interest of not less than 5.0% 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.

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 2016-2 DEU Designated Activity Company, Bank of America Merrill Lynch International Limited, CBRE 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 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 (high) (sf)

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

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

Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D Notes to BB (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class D Notes to B (low) (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: Elizabeth Lovett, Assistant Vice President, EU CMBS
Initial Rating Date: 27 April 2016
Initial Rating Committee Chair: Mary Jane Potthoff, Managing Director, Global CMBS

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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