DBRS Confirms Ratings on Six Classes of Taurus 2015-3 EU Designated Activity Company

DBRS Ratings Limited (DBRS) has today confirmed its ratings on the Commercial Mortgage-Backed Floating-Rate Notes Due April 2028 issued by Taurus 2015-3 EU Designated Activity Company, as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (sf)
-- Class F at BB (sf)

All trends are Stable.

The rating confirmation reflects the overall stable performance of the transaction since issuance.

Taurus 2015-3 Designated Activity Company is a securitisation of two floating-rate commercial real estate loans originated by Bank of America Merrill Lynch. Both loans, TEIF and BiLux, are sponsored by Starwood Capital Group L.P. (Starwood Capital). M7 Real Estate Limited serves as the asset manager for both loans. As of July 2016, the two loans have a combined securitised loan balance of €142.9 million, which represents a 1.9% collateral reduction since issuance and an aggregate whole loan balance of €191.1 million.

The TEIF Loan served to finance the acquisition of 31 light industrial properties that are located in France, Germany and the Netherlands in December 2014. The loan’s original whole balance was €90.9 million, of which the senior loan portion was €82.2 million. A €8.8 million B-note is not part of the securitisation. Approximately 78.0% of the senior loan amount was securitised in Taurus 2015-3. Since issuance, two units in the Torcy Nord property (France) and the loan’s only two properties in the Netherlands have been sold. The disposal of these assets resulted in total prepayments of €3.4 million, or 4.3% of the total whole loan balance. The current senior loan balance is €87.3 million, of which €61.5 million is securitised.

The TEIF loan benefits from tenant diversity. According to the most recent investor’s report as of July 2016, the loan’s top five tenants represent nearly 27.0% of the total income rent. The most recent reported portfolio vacancy rate decreased to 11.5% from 13.7% at issuance. Three of the top five largest tenants, Daimler A.G., Gutenberg On Line and The Logistic’s Box, which contribute 15.9% to the loan’s total gross rental income (GRI), have lease expiries or break options within the next six months The portfolio’s GRI decreased to €11.6 million, representing a 1.7% decline since the first reported GRI of €11.7 million in January 2016. This was due to the aforementioned property disposals, partially offset by the increase in overall occupancy. DBRS net cash flow (NCF) decreased to €8.2 million from €8.9 million at issuance amid collateral reduction after the property disposals and higher-than-expected expenses. At issuance, the sponsor and asset manager detailed a business plan that included investing €4.4 million in capex and €3.0 million of voluntary improvements works during the loan term. As of July 2016, a total capital expenditure amount of €1.1 million has been already invested into the properties. The portfolio was last revalued in December 2015, showing a valuation uplift to €127.6 million, which is a 1.0% increase compared with the previous valuation. DBRS value assumption represents a 19.5% haircut.

The BiLux Loan was originated in May 2015 and served to fund the acquisition of 31 light industrial properties located in Germany and the Netherlands. As per the most recent investor’s report of July 2016, no collateral reduction has occurred since issuance. The original and current whole loan balance is €103.8 million, and 78.0% of the senior loan is securitised. The initial and current securitised loan balance is €81.3 million.

Even though the BiLux Loan showed increasing vacancy rates in each quarter after issuance, as of July 2016 the most recent overall vacancy rate dropped to 14.2%, which is slightly lower than the 15.1% rate at issuance. Following the decline of the vacancy rate, the GRI increased to €16.8 million, or by 1.0%, since issuance. Expense increased quarter-over-quarter after issuance up to an expected annual expense amount of €3.5 million, which led to a net rental income of €10.5 million as of July 2016. DBRS estimated at issuance a stabilised NCF of €8.3 million, which represents a 21.1% haircut compared with most recent reported cash flow. A total of €1.7 million in capital expenditures (capex) has been already invested at the properties, in line with the sponsor’s business plan, which anticipated that a total of €13.0 million would be invested during the loan term, in order to improve the properties and to increase the occupancy rate. During Q2 2016, the portfolio was re-valued at €163.2 million, reflecting a 10.1% increase compared with the initial valuation at issuance. The value increase is mainly a result of lower capitalisation rate assumptions for industrial properties across the Netherlands and Germany. As a result, the DBRS stabilised value assumption of €105.6 million now represents a 35.5% haircut to the most recent valuation. As a result of the revaluation, the reported whole loan-to-value (LTV) ratio has decreased to 63.5% from 70.0% at cut-off, while the DBRS securitised LTV remains unchanged at 98.3%.

As per the trustee report of July 2016, the transaction is supported by a €8.08 million liquidity facility 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 deferred interest, but excluding default interest) in connection with interest due on the Class A, Class B and Class C Notes. The Liquidity Facility cannot be used to fund shortfalls due to the Class X Notes.

The final legal maturity of the Notes is in April 2028, eight years beyond the maturity of the latest maturing loan, BiLux, in April 2020. 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.

Notes:
All figures are in euros unless otherwise noted. The principal methodology applicable is European CMBS Surveillance.

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

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. These 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” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include the Servicer, Situs Asset Management Limited.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating to be 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 is the first rating action since the Initial Rating Date.

The last rating action on this transaction took place on 29 September 2015 when DBRS finalised its ratings for this transaction.

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 net cash flow (NCF), derived by looking at comparable properties, market rents, market occupancies in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to the following ratings 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 to AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A to AAA (sf)

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

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

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

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

Class F Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class F to B (sf)
-- 20% decline in DBRS NCF, expected rating of Class F 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 historical default rates published by the European Securities and Markets Authority (“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.

Initial Lead Analyst: Elizabeth Lovett, Assistant Vice President, European CMBS
Initial Rating Date: 3 September 2015
Initial Rating Committee Chair: Erin Stafford, Managing Director, Global CMBS

Lead Surveillance Analyst: Jorge Lopez Herguido, Financial Analyst, European CMBS
Rating Committee Chair: Christian Aufsatz, Senior Vice President, European 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.

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

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