DBRS Assigns Provisional Ratings to Libra (European Loan Conduit No.31) DAC

DBRS Ratings Limited (DBRS) assigned provisional ratings to the following classes of notes to be issued by Libra (European Loan Conduit No.31) DAC (the Issuer):

--Class A1 at AAA (sf)
--Class A2 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 (sf)

All trends are Stable.

Libra (European Loan Conduit No.31) DAC is the securitisation of a EUR 282.5 million (67.5% loan-to-value or LTV) floating-rate senior commercial real estate loan advanced by Morgan Stanley Bank N.A. (together with the arranger Morgan Stanley & Co. International PLC, Morgan Stanley) to refinance the existing indebtedness of Starwood Capital and M7 Real Estate (together, the Sponsor). In addition, there is a EUR 31.4 million (75% LTV) mezzanine loan, which is structurally and contractually subordinated to the senior facility and is not part of the contemplated transaction.

The part of the senior loan expected to be sold to the Issuer is equal to EUR 232.5 million or 82% of the senior loan. However, the Issuer will advance EUR 11.6 million (5% of the senior loan) back to Morgan Stanley in the form of a vertical risk retention (VRR) loan interest to comply with the risk retention requirements. Therefore, only EUR 220.9 million of the senior loan (79% of the total senior loan) will be securitised in the transaction. DBRS understands that the EUR 1,606 over issuance proceeds will be distributed to noteholders on the first interest payment date.

The senior loan carries a floating interest rate equal to the three-month Euribor (subject to a zero floor) plus a margin of 2.0%. The senior facility is fully hedged with interest rate caps that have a weighted-average strike rate of 1.0% in the first three years and 1.5% in the last two years (assuming the loan extension options have been exercised). The caps are provided by Wells Fargo Bank, NA (London branch).

The collateral securing the loan is composed of 49 light-industrial properties and one office property (the Portfolio) located in Germany and the Netherlands. As of January 2018, the Portfolio generated a net operating income of EUR 28.8 per annum (p.a.), which implies a net initial yield of 6.9% and a senior day-one debt yield of 10.2% (or 9.2% including the mezzanine loan). The properties located in Germany were valued at EUR 218.5 million (52.2% of the market value or MV) by Jones Lang LaSalle GmbH while the properties in the Netherlands were valued at EUR 200.1 million (47.8% of the MV) by Knight Frank.

The transaction will refinance a logistics portfolio originally acquired by the Sponsor in 2014 and 2015, which was financed at that time by Deutsche Bank and Bank of America Merrill Lynch through two loans securitised in Deco 2015-Charlemagne S.A. and Taurus 2015-3 EU DAC, respectively.

The initial expected loan maturity date is 20 January 2021. However, the borrower can exercise two one-year extension options provided that a predetermined list of conditions is met including that (1) there are no payment defaults, (2) the transaction is compliant with the required hedging conditions and (3) the mezzanine facility has been extended for at least the same time period. The senior loan benefits from limited scheduled amortisation: (1) 0.5% p.a. in the second and third year of the loan term and (2) 1.0% p.a. in the fourth and fifth year of the loan term (if extended).

The transaction will benefit from an EUR [10.5] million liquidity facility (LF) to be provided by Wells Fargo Bank, NA (London branch). The LF can be used to cover interest shortfalls on Classes A through D. According to DBRS’s analysis, the LF amount will be equivalent to approximately [20] months’ and [ten] months’ coverage on the covered notes, based on the interest rate cap strike rate of 1.5% per annum post initial loan maturity date and the Euribor cap after loan maturity of 4.25% per annum, respectively.

In addition to the liquidity facility, the transaction will feature a senior expenses reserve to cover senior expenses. DBRS notes that the senior expense reserve will be funded to EUR 200,000, which should cover the senior fees of one interest period in case the available LF has been reduced to zero upon full repayment of the Class A1, A2, B, C and D notes.

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

Morgan Stanley will retain 5% material interest in the transaction through the VRR loan. Moreover, Morgan Stanley will retain an additional EUR [50] million of the senior loan. All amounts payable to the VRR loan interest owners (the VRR loan interest amounts) in respect of the VRR loan interest will rank pari passu with corresponding amounts payable in respect of the notes.

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 rating 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 Morgan Stanley & Co. International plc and their 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 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”):

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 A1 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 (low) (sf)

Class A2 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 (high) (sf)

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

Class C Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class D Notes to BBB (low) (sf)
--20% decline in DBRS NCF, expected rating of Class D 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 D Notes to B (high) (sf)
--20% decline in DBRS NCF, expected rating of Class D 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, Head of European Structured Finance
Initial Rating Date: 14 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.