DBRS Finalises Provisional Ratings on Taurus 2018-1 IT S.R.L.

DBRS Ratings Limited (DBRS) finalised its provisional ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes Due May 2030 (collectively, the Notes) issued by Taurus 2018-1 IT S.R.L. (the Issuer):

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

All trends are Stable.

Taurus 2018-1 IT S.r.l. is a securitisation of three Italian senior commercial real estate loans: the Camelot loan, the Bel Air loan and the Logo loan. The Camelot and Bel Air loans were advanced by Bank of America Merrill Lynch International Limited (BAML), Milan Branch, and the Logo loan was advanced by Bank of America Merrill Lynch International (BAML). The loans were sold to the Issuer at issuance. The loans were granted as acquisition financing to the newly established Camelot Fund and Bel Air Fund (the Camelot and Bel Air borrower) and as refinancing facility to Milano Mega S.r.l. (the Logo borrower).

The Camelot and Logo loans are backed by Italian logistic assets and the Bel Air loan is backed by Italian retail properties. The logistic assets are sponsored by the Blackstone Group L.P. (Blackstone) and managed by Logicor, while the retail assets are sponsored by the Partners Group L.P., which bought the properties from Blackstone in January 2018. They are managed by Kryalos Asset Management (together with Kryalos SGR S.p.A., Kryalos).

At the time of the provisional ratings the anticipated issuance amount was EUR 300 million, or 83.4% of the aggregated loan amount, which is EUR 359.6 million. However, BAML has since increased the securitisation portion to EUR 341,654,000, or 95.0% of the aggregated loan amount. As all classes of notes were increased proportionally.

The Camelot loan is the largest of the three senior loans, having an initial EUR 215 million loan balance, of which EUR 5.256 million was set aside for the acquisition of the Massalengo I extension project scheduled to be completed by the end of 2018. The extension project funds will not be released by the facility agent until then. Although the extension project is expected to add EUR 8.15 million in value to the Camelot portfolio, DBRS does not give credit to any property under construction. The resulting loan-to-value (LTV) for the Camelot loan is 70.9% based on the released loan amount or 72.7% based on the whole-loan amount. The Bel Air loan has a EUR 110 million loan balance and the lowest LTV of 51.0%. The Logo loan is the smallest loan in the portfolio, with a EUR 34.6 million loan balance and a moderate 61.7% LTV as at the cut-off date. Overall, the transaction had a day-one reported LTV of 62.4% when excluding the undrawn acquisition debt for the Massalengo I extension or 63.4% when including all loan amounts. The market value (MV) of the whole transaction was estimated to be EUR 567.6 million when excluding the Massalengo I extension or EUR 578.8 million when including the development project.

The logistic assets securing the Camelot and Logo loans are located in key logistics and commercial centres of Northern Italy. More specifically, EUR 179.5 million MV is concentrated in Milan while EUR 70.4 million MV is in Verona; these two locations make up 71.0% of the total logistics MV exposure. The retail assets securing the Bel Air loan, however, are more concentrated in the centre and south of Italy with Sicily, Puglia and Lazio provinces contributing 80.0% of the MV. In terms of net rental income (NRI), the logistics properties contribute 64.3% while the retail assets make up the remaining 35.8%. Based on a NRI of EUR 37.1 million, reported as of 31 December 2017, the overall debt yield (DY) of the transaction was 10.3% or 10.5% based on a netted loan amounts of EUR 354.3 million.

Each loan bears interest at a floating rate equal to three-month Euribor (subject to zero floor) plus a margin set at 3.15% for the Camelot loan, 2.5% for the Bel Air loan and 2.75% for the Logo loan. The expected maturity dates for the Camelot and Logo loans are 15 February 2020 and 15 May 2020, respectively, with three one-year extension options subject to certain conditions. The Bel Air loan is expected to repay by 15 May 2021; however, the borrower can also extend the loan on two occasions; each extension would last one year, subject to satisfaction of the extension conditions. There is a tail period of seven years starting from 2023, which is the expiration year of all the extension options.

A prepayment fee is payable by the borrowers in case of early repayment. For the Camelot and the Logo loan, the prepayment fee is equal to one-year make-whole interest, unless the prepayment is resulting from permitted property disposal of no less than 15% of the loan amount at cut-off. With regards to the Bel Air loan, a two-year interest make-whole prepayment fee will apply unless the total prepaid amount is less than EUR 35 million.

Similar to other Blackstone sponsored loans, there are no default covenants for the Camelot and the Logo loan, but only cash trap covenants based on LTV and DY tested every interest payment date. The Camelot loan has a fixed-LTV cash trap covenant at 80% and increasing DY covenant. The Logo loan has one LTV cash trap covenant set at 72% and DY covenant set at 9%. It should be noted that both Camelot loan and the Logo loan have a higher DY covenant post permitted change of control or permitted structural change. The Bel Air loan has a default covenant of 70% LTV and 9% DY in before year three and 10% DY after. This loan also has tightening-LTV cash trap covenants set at 65% for the first three years and 60% during the loan extension period; the same applies to the loan’s DY covenant, increasing from 10% during the initial loan term to 11% should the loan be extended.

All three loans are interest-only loans and any prepayment or repayment proceeds will form a part of principal receipts. The principal receipts from property disposals will always be allocated sequentially to the Notes. Other principal receipts coming from the Bel Air and/or Logo loans will be distributed to the noteholders sequentially. Whereas such principal receipt from the Camelot loan will be distributed 90% pro rata and 10% reverse sequential unless the Camelot loan is the only outstanding loan, in which case the principal receipts will be paid pro rata.

The transaction includes a mechanism to divert excess spread to revenue receipts, being the Class X interest diversion. During the life of the transaction, should the Camelot and Logo loans’ LTVs increase to more than 85% and 77% respectively, or should the DY decrease to less than 8.25% and 9% respectively, a class X interest diversion trigger event will happen. While the class X interest diversion trigger event is continuing, the class X noteholders will not receive any interest payments, and excess spread would be held by the Issuer or be diverted to form part of the revenue receipts if a loan failure event is continuing or the notes were enforced..

The class D and E notes are subjected to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes.

The transaction benefits from a liquidity facility, which amounts to EUR 17 million and is provided by Bank of America N.A., London Branch (the Liquidity Facility Provider). The liquidity facility can be used to cover interest shortfalls on the class A and class B notes, or the most senior class of notes other than classes A and B. According to DBRS’s analysis, the commitment amount, as at closing, will be equivalent to approximately 22 months of coverage on the covered notes.

To maintain compliance with applicable regulatory requirements, Bank of America Merrill Lynch International Ltd. Milan Branch and Bank of America Merrill Lynch International Ltd. each retained an ongoing material economic interest of not less than 5% of the relevant loan that they have advanced.

Notes:
All figures are in euros 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 this rating include Bank of America Merrill Lynch and its delegates.

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

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 this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first rating action since the Initial Rating Date.

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”):

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

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

Class E Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class E Notes to CCC (sf)
--20% decline in DBRS NCF, expected rating of Class E Notes to CC (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, Managing Director, Global Structured Finance
Initial Rating Date: 24 April 2018

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
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
-- Interest Rate Stresses for European Structured Finance Transactions
-- 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.