DBRS Assigns Provisional Ratings to BAMS CMBS 2018-1 DAC

DBRS Ratings Limited (DBRS) assigned provisional ratings to the following classes of notes to be issued by BAMS CMBS 2018-1 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.

BAMS CMBS 2018-1 DAC (the Issuer) is the securitisation of a GBP 315.3 million (67.5% loan-to-value (LTV)) floating-rate senior commercial real estate loan (the senior loan) advanced by Morgan Stanley Principal Funding, Inc (novated from Morgan Stanley Bank N.A.) and Bank of America Merrill Lynch International Limited (together, the Loan Sellers) to borrowers sponsored by Blackstone Group L.P. (Blackstone or the Sponsor). The acquisition financing was also accompanied by a GBP 58.4 million (80% LTV) mezzanine loan granted by LaSalle Investment Management and Blackstone Real Estate Debt Strategies (BREDS), each holding 51% and 49% interest of the mezzanine loan, respectively. BREDS, however, would be disenfranchised and thus cannot exercise any voting rights so long as Blackstone Group LP holds equity interest in the portfolio. The mezzanine loan is structurally and contractually subordinated to the senior facility and is not part of the transaction.

The senior loan is backed by 59 urban logistic and multi-let industrial properties (the portfolio). Blackstone purchased the portfolio from Infrared Capital Partners (Infrared) and Helical Plc (Helical) in two off-market deals. Infrared has provided a GBP 4.7 million rental guarantee for the vacant spaces of six assets until 28 February 2020. The guarantee can be drawn quarterly by the Sponsor and will cover specific vacant unit’s rental loss, service charge loss, empty rates and market-level tenant incentives. The data tape provided to DBRS shows a current rental guarantee income of GBP 1.8 million per annum. Nevertheless, DBRS did not consider such rental guarantee as part of long-term stabilised cash flow and thus did not reflect this in its quantitative analysis (all the numbers quoted in this report are net of the rental guarantee unless otherwise noted).

As of the cut-off date on 6 April 2018, 92.2% of the portfolio’s net lettable area was occupied by approximately 300 tenants with some long-term leasehold interests in some estates. The top ten tenants contribute 28.4% of the gross rental income (GRI) and the largest tenant, Sainsbury’s, is paying rent but not occupying the space. DBRS underwrote a higher vacancy to reflect such vacancy risk.

The majority of the assets are located along the M6 motorway between Birmingham and Manchester, just outside of the “Golden Triangle” of the U.K. logistics market. The assets’ locations are a good addition to those of Taurus 2017-2 UK Designated Activity Company, which was securitised in 2017 and were also part of the pan-European logistics platform envisaged by Blackstone, given that the latter has a weak presence in this area. Two assets, Simonside and Coniston, were not able to perfect the acquisition process as of 6 April 2018 (the utilisation date); therefore, the allocated loan amount (ALA) of Simonside asset has been held back in the prepayment account whereas the Coniston asset’s ALA has been released to the borrowers with an obligation to repay if the relevant conditions are not met by 18 October 2018. Similarly, the Simonside held back amount will be used to repay the loan by the same date if certain conditions were not satisfied.

In DBRS’s view, the senior facilities represent moderate leverage financing with a 67.5% LTV. The relatively high DBRS LTV is mitigated by the increasing cash trap covenants set at 8.0% for the initial loan term and 8.5% for year three to four and 9.0% for year five. The debt yield (DY) at the cut-off date excluding the rental guarantees is 8.21% (or 8.8% including rental guarantee), which means the Sponsor has to improve the net operating income (NOI) of the portfolio after the expiration of rental guarantees to avoid breaching the cash trap covenant on year three if extended. Meanwhile, the portfolio is 7.3% under-rented vis-à-vis the market rent provided by Jones Lang LaSalle Incorporated (the Valuer), thus providing room for the Sponsor to increase the rent. The loan is interest-only and has a two-year maturity with three one-year extension options subject to certain conditions including hedging.

The loan structure does not include financial default covenants prior to a permitted change of control, but provides other standard events of default including the following: (1) any missing payment, including failure to repay the loan at maturity date; (2) borrower insolvency; and (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% applicable from second year and (2) a DY cash trap covenant as detailed above.

The transaction is supported by a GBP 6.5 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 based on a weighted-average stressed LIBOR rate of 2.32% or seven months based on a LIBOR margin cap of 5.0%.

The final legal maturity of the notes is in May 2028, five years after the fully extended loan term. The latest expected note maturity date is 17 May 2023, two days after the fully extended senior loan term. Given the security structure and jurisdiction of the underlying loan, DBRS believes this provides sufficient time to enforce, if necessary, on the loan collateral and repay the bondholders.

The Class E notes are subject 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 Class X diversion triggers, set at [7.4]% for DY and [77.5]% for LTV, were breached, any interest and prepayment fees due to the Class X noteholders will instead be paid directly to the Issuer transaction account and credited to the Class X diversion ledger. However, any amount retained in the Class X diversion ledger shall be available to be paid to the Class X noteholders in accordance with the relevant priority of payments if (i) no Class X interest diversion trigger event is continuing or (ii) following a loan failure event or the acceleration of the notes, be used to potentially amortise the notes.

To maintain compliance with applicable regulatory requirements, the Loan Sellers will retain an ongoing material economic interest of no less than 5% of the securitisation via an issuer loan that is to be advanced by the Loan Sellers to the Issuer at closing. Thereafter, Morgan Stanley Bank N.A., as Issuer lender, will transfer, by way of novation, its share of GBP 7,903,000 to Bank of America Merrill Lynch International Limited.

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 British pound sterling 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 this rating include Morgan Stanley & Co. International plc, Bank of America Merrill Lynch and their 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 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 net cash flow (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 B Notes to AA (sf)
--20% decline in DBRS NCF, expected rating of Class B Notes to A (sf)

Class B Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class C Notes to BBB (high) (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 (high) (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 CCC (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: Mirco Iacobucci, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 27 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.