DBRS Assigns Provisional Ratings to Kantoor Finance 2018 DAC

DBRS Ratings Limited (DBRS) assigned provisional ratings to the following classes of notes to be issued by Kantoor Finance 2018 DAC (the Issuer):

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

All trends are Stable.

Kantor Finance 2018 DAC is a EUR 247.8 million securitisation (the Transaction) of two Dutch senior commercial real estate loans (the PPF loan and the Iron loan) including the pari passu capital expenditure (capex) facility associated with the Iron loan, all advanced by the Goldman Sachs Bank U.S.A. (together with Goldman Sachs International, GS). The loans are secured against 18 predominantly office assets located in the Netherlands (the Portfolio) owned by PPF Group and Aventicum Capital Management (the Sponsors).

The PPF Loan served to refinance an existing portfolio of seven office properties, one office/leased hotel and one retail property across the Netherlands and owned by PPF since 2014. The allocated loan amount of the portfolio is EUR 184.97 million, which results in a day-one loan-to-value (LTV) of 61.0% based on CB Richard Ellis’s (CBRE) valuation of EUR 302.99 million and dated 27 February 2018. As at 1 June 2018 (the PPF cut-off date), the properties were 77.3% occupied (or 84.1% when excluding the vacant property located at Hofplein 19, Rotterdam, which is currently under refurbishment) by 91 different tenants and PPF has projected a 2018 net operating income (NOI) of EUR 20.08 million, which implies a net initial yield (NIY) of 6.6% and a conservative day-one debt yield (DY) of 10.9%. DBRS’s net cash flow assumption is EUR 16.2 million. The loan carries a floating interest rate equal to the three-month Euribor (subject to zero floor) plus a margin of 2.4% and is fully hedged with an interest rate cap strike of 1.5% to be purchased from HSBC Bank Plc. The expected loan maturity is in May 2023, and the loan amortises by 1.0% p.a. in Years 2 to 4 and 2.0% p.a. in Year 5.

The Iron loan served to fund the acquisition of nine office properties also located in the Netherlands. The properties were acquired through a couple of transactions: the first six-office portfolio (Iron I) was purchased in October 2017 from Kildare Partners (the Graafsebaan 67 was sold after acquisition), and the second four-office portfolio (Iron II) was acquired in March and April 2018 from Angelo Gordon and ASR Real Estate. GS provided the Sponsor with EUR 36.4 million of acquisition financing and a EUR 4.5 million pari passu–ranking capex facility through two different tranches for the Iron I and Iron II portfolios. The LTV of the loan is 71.1% based on total loan amount and EUR 88.4 million current market value (MV) or 66.0% based on term loan only. As at 1 June 2018 (the Iron loan cut-off date, together with the PPF loan cut-off date, the cut-off date), the portfolio is 85.7% occupied by 70 tenants, with the largest five tenants accounting for 41.9% of the EUR 8.5 million gross rental income (GRI). Based on a sponsor-projected 12-month NOI of EUR 5.9 million, the loan benefits from a moderate day-one DY of 10.2%, the NIY is 6.7%. DBRS’s net cash flow assumption is EUR 4.8 million. The loan bears interest at a floating interest rate equal to the three-month Euribor (subject to zero floor) plus a margin of 3.40% and 3.50% for the Iron I and Iron II tranches, respectively. The transaction is also fully hedged with an interest rate cap strike of 0.5% to be provided by Natixis, London Branch. The expected loan maturity is five years from the first utilisation date, in October 2022, and the loan structure includes amortisation of 1.0% p.a. in Years 2 to 4 and 2.0% p.a. in Year 5.

The transaction benefits from a liquidity facility, which will total EUR 14.3 million, or 6.1% of the total outstanding balance of the notes, and will be provided by [*] (the Liquidity Facility Provider). The liquidity facility can be used to cover interest shortfalls on the class A, class B, class C and class D notes. According to DBRS’s analysis, the commitment amount, as at closing, will be equivalent to approximately [29] months and [19] months’ coverage for the covered notes, based on the weighted-average interest rate cap strike rate of 1.25% p.a. and the Euribor cap after loan maturity of [5%] p.a., respectively.

Iron loan will mature on 15 November 2022 while PPF loan will mature six months later on 15 May 2023. Neither loan has an extension option. Meanwhile, the Transaction is expected to repay by 22 May 2023, one week after the maturity of PPF loan. Should the notes fail to be repaid by then, this will constitute, among others, a special servicing transfer event and the Transaction has envisaged a [five] year tail period to allow the special servicer to work out the loan(s) by [May 2028] the latest.

Class E is subjected to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes.

The Transaction includes a class X diversion trigger event, meaning that if the loans’ financial covenants are breached, any interest and prepayment fees due the class X noteholders will be, instead, paid directly in the Issuer transaction account and credited to the class X diversion ledger. However, only following the expected note maturity or the delivery of a note acceleration notice, such funds can potentially be used to amortise the notes.

To maintain compliance with applicable regulatory requirements, GS will retain an ongoing material economic interest of not less than 5% of the securitisation via an issuer loan that is to be advanced by Goldman Sachs Bank USA.

The ratings will be finalised upon receipt of execution version of the governing transaction documents. To the extent that the documents and information provided to DBRS as of this date differ from the executed version of the governing transaction documents, DBRS may assign a different final rating to the rated notes.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings are: “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 the ratings include Goldman Sachs International and its delegates.

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

At the time of the initial rating, DBRS was not 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 rating 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, 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 AA (low) (sf)
--20% decline in DBRS NCF, expected rating of Class A Notes to A (low) (sf)

Class B Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class B Notes to A (low) (sf)
--20% decline in DBRS NCF, expected rating of Class B Notes to BBB (high) (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 (high) (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 B (high) (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 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: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director, Global Structured Finance
Initial Rating Date: 13 June 2018

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
-- 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.