DBRS Finalises Provisional Ratings of Taurus 2017-2 UK Designated Activity Company

DBRS Ratings Limited (DBRS) finalised the provisional ratings of the following classes of the Commercial Mortgage-Backed Floating-Rate Notes due November 2027 (collectively, the Notes) issued by Taurus 2017-2 UK Designated Activity Company (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)
-- Class E Notes rated BB (low) (sf)

All trends are Stable.

Taurus 2017-2 UK 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 finance the acquisition of 127 urban logistic and multi-let industrial properties (the Portfolio) in United Kingdom by Blackstone Real Estate Partners (the Sponsor). Blackstone purchased the Portfolio from Brockton Capital (the Vendor) in an off-market deal for a purchase price of approximately GBP 560 million inclusive of transaction costs.

BAML initially provided a total of GBP 436.8 million (79.7% loan-to-value (LTV)) acquisition financing, consisting of a 66.4% LTV, GBP 364 million senior term loan (the Senior Facility) and a GBP 72.8 million mezzanine term loan (the Mezzanine Facility).

In addition, a GBP 3.9 million capex facility was funded at closing, which was split into a GBP 3.25 million (65.0% loan-to-cost (LTC)) senior capex facility (the Senior Capex Facility and, together with the Senior Term Facility, the Senior Facilities) and GBP 0.65 million (77.5% LTC) mezzanine capex facility (the Mezzanine Capex Facility and, together with the Mezzanine Facility, the Mezzanine Facilities).

The Mezzanine Facilities are structurally and contractually subordinated to the Senior Facilities and are not part of the commercial mortgage-backed securities (CMBS) transaction. BAML sold 95% of the senior facilities to the Issuer and retains an ongoing material economic interest of not less than 5% to maintain compliance with applicable regulatory requirements. The floating-rate senior loan is 95% hedged with an interest rate cap that has a strike rate of 2.0%. The cap was provided by Bank of America Merrill Lynch.

The Portfolio is 92% occupied and benefits from a granular source of income secured by over 1,000 tenants, predominantly composed of small- and medium-sized enterprises. No single tenant represents more than 2.0% of the gross rental income (GRI). The properties backing the loan are geographically well diversified across 101 towns and cities in the U.K., with a concentration in the economically stronger regions of East England and Greater London (34% of the lettable area and 40% of GRI).

In DBRS’s view, the Senior Facilities represent moderate leverage financing with a 67.13% LTV. The relatively high DBRS LTV is mitigated by the debt yield as the collateral currently generates a Net Operating Income (NOI) of approximately GBP 33 million, translating into a relatively conservative day-one senior debt yield of 9.0%. The loan is interest-only (IO) and has a two-year maturity with three one-year extension options subject to certain conditions including hedging.

The facility agreement provides the Sponsor with the opportunity to sell the entire Portfolio without repaying the loan in case of an initial public offering (IPO) or upon disposal to a company owning (directly or indirectly) commercial real estate assets with an aggregate market value (1) of not less than EUR 2 billion in Europe or (2) of not less than EUR 5 billion worldwide. Those conditions are not applied if at the time of the sale the LTV ratio is lower than 65% and the properties in the portfolio are going to be managed by an experienced asset manager, with at least 10 million square feet of logistics, industrial and warehouse assets under management. Such Sponsor disposals of the entire portfolio are permitted changes of control.

The loan structure does not include financial default covenants prior to a permitted change of control, but provides other standard events of default including: (1) any missing payment, including failure to repay the loan at maturity date; (2) borrower insolvency; (3) a loan default arising as a result of any creditors’ process or cross-default. In DBRS’s view, potential performance deteriorations would be captured and mitigated by the presence of cash trap covenants: (1) an LTV cash trap covenant set at 75% and (2) a debt yield cash trap covenant set at: (a) 8.0% in Year One to Three, (2) 8.5% in Year Four and (3) 9.1% in Year Five.

The DBRS net cash flow (NCF) for the portfolio is GBP 26.2 million, which represents a 20.7% discount to the sponsor’s NOI. DBRS applied a blended capitalisation rate of 6.5% to the aggregate NCF to arrive at a DBRS stressed value of GBP 400.5 million, which represents a 26.5% haircut to the market value provided by CBRE’s valuation completed in July 2017. The DBRS LTV of the Senior Facilities is 91%.

The transaction is supported by a GBP 8.0 million liquidity facility, which is provided by Bank of America N.A., London Branch. 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 and exit payment amounts) in connection with interest due on the Class A and Class B notes in accordance with the relevant waterfall. The liquidity facility cannot be used to fund shortfalls due to the Class X Notes. As of closing, DBRS estimated that the commitment amount was equivalent to approximately 12 months of coverage on the covered notes.

The final legal maturity of the Notes is in November 2027, five years after the third one-year maturity extension option negotiated under the loan agreement. If necessary, DBRS believes this provides sufficient time, given the security structure and jurisdiction of the underlying loan, to enforce on the loan collateral and repay the bondholders.

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

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology”.

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.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf

The sources of data and information used for these ratings include information provided by Bank of America Merrill Lynch International Limited and CBRE.

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

At the time of the initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality. DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

These ratings concern a newly issued financial instrument. These are the first DBRS ratings on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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 market rents, market occupancies in addition to expense ratios, and capital expenditure, 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 (sf)
--20% decline in DBRS NCF, expected rating of Class B Notes to BBB (low) (sf)

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

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

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

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 and US regulations only.

Lead Analyst: Mirco Iacobucci, Vice President, Global Structured Finance
Rating Committee Chair: Christian Aufsatz, Head of European Structured Finance, Global Structured Finance
Initial Rating Date: 9 November 2017

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

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 and Surveillance 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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.