DBRS Finalises Provisional Ratings of Taurus 2019-1 FR DAC

DBRS Ratings GmbH (DBRS) finalised its provisional ratings of the Commercial Mortgage-Backed Floating-Rate Notes issued by Taurus 2019-1 FR DAC (the Issuer) as follows:

-- 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 (sf)

All trends are Stable.

Taurus 2019-1 FR DAC (the Issuer) is the securitisation of 95% interest of a EUR 249.6 million 65% loan-to-value (LTV) five-year senior commercial real estate acquisition facility advanced by Bank of America Merrill Lynch International DAC (BofAML or the Loan Seller) to Colony Capital (Colony or the sponsor) in the context of a sale-and-lease-back operation between Colony and Électricité de France (EDF). The 206 assets securing the senior loan are held by three French borrowers: ColPower SCI, ColPowerSister SAS and ColMDB SAS. There are 53 assets held under ColMDB SAS that form a liquidation pool and are expected to be fully disposed of within five years. BofAML also provided a co-terminus EUR 53.3 million mezzanine term loan, which is structurally and contractually subordinated to the senior loan. The mezzanine loan LTV is 78.9%. However, the mezzanine facility is not part of the transaction.

The portfolio is part of a larger sale-and-lease back operation undertaken by EDF to reorganise its real estate assets. EDF had two other portfolios transacted in one public and one private deal in 2017 and 2018, respectively. The portfolio for this transaction, which is the third portfolio from EDF, mainly comprises office properties (69.1% of gross lettable area or GLA) and light-industrial assets (30.0% of GLA). EDF and its subsidiaries have historically occupied the assets and currently 93.5% of the GLA is occupied by EDF and its ENEDIS subsidiary. The remaining 1.9% GLA is let to other public-sector tenants including Gaz Réseau Distribution France SA (GrDF), GNVert, Orange and TDF. The assets are located across France with the highest market value (MV) concentrations in Southeastern France as a result of the high MVs of assets located in Lyon and Marseille.

The office portfolio was valued by CBRE (the appraiser) on 31 August 2018 for a total MV of EUR 384.1 million. The appraiser also assessed that the portfolio had a vacant possession value (VPV) of EUR 269.9 million. The sponsor plans to establish a long-term EDF core asset platform and intends to invest EUR 16.3 million in capex and maintenance in the portfolio. If the investment programme is successfully carried out, the renovations are expected to increase the portfolio MV. DBRS understands that some of the capex investment will be used on disposal assets to facilitate the sales process. Moreover, the sponsor has budgeted EUR 16.9 million to incentivise the main tenant, EDF, for a lease re-gearing in the future. In DBRS’s view, a ten- to 12-year lease with a strong tenant would improve the underlying credit quality of the portfolio.

Another feature of the senior loan is its target loan amount (TLA) settings. Based on the sponsor’s disposal plan, the senior loan needs to be partially paid down in the first three years of its term. Specifically, the TLA is set at EUR 234.8 million at the fourth interest payment date (IPD), at EUR 222.5 million at the eighth IPD and at EUR 205.1 million at the 12th IPD. Should the TLA not be met, a full cash sweep will take effect thus trapping all excess cash flow (after senior and mezzanine interests are paid) to pay down the senior loan, with the exception of principal disposal receipts, which will be used to pay down senior and mezzanine facility on a pro rata basis. As the TLA contractually amortises the senior loan significantly by 17.8% and the high DBRS net cash flow (NCF) of EUR 25.9 million per annum, DBRS considered the TLA feature by sizing the loan based on the TLA at the end of year three, from when a further 1% annual amortisation will be due. DBRS also notes that, assuming all liquidation assets were sold at MV and ALA is paid to amortise the senior loan, the sponsor would still need an additional EUR 3.4 million to meet the EUR 205.1 million TLA by the 12th IPD. As such, the sponsor is incentivised to dispose more assets or achieve higher sale prices.

Another notable feature of the transaction includes tightening financial covenants based on LTV and/or debt yield (DY), a cash-trap-covenanted capex spending of EUR 10 million, of which EUR 5 million will be spent in the first two years. In case of property disposal, the higher of 70% of net disposal proceed and the release price (100% of the ALA for disposal properties or 120% to 125% of the ALA for holding properties) is payable by the borrower. Notwithstanding the above, if a single buyer disposal (defined as property sale to one single buyer, in a single portfolio sale or multiple sales) occurred before 30 June 2020, the release premium will be 119.3% of the disposed ALA, subject to such single buyer disposal not exceeding EUR 42.82 million ALA. The issuer lender will also benefit, among other things, from first-ranking mortgages over the properties, Dailly assignment on main receivables of the Borrowers, pledges over bank accounts, pledges over inter-company and shareholder loans, pledge over shares and a double Lux-Co structure. The loan documents also envisaged an adverse corporate decision mechanism, which renders the facility to be mandatorily repayable upon any aggressive management actions.

As of 20 December 2018 (the cut-off date), the portfolio generated a total of EUR 31.3 million gross rental income (GRI) from over 200 assets. This is due to a high physical occupancy of 95.4%, mostly from EDF and its ENEDIS subsidiary. The net rent of the portfolio is reported to be EUR 30.0 million, translating into a day-1 DY of 11.2%. The senior loan LTV as of cut-off is 65%. However, to avoid triggering a cash trap, the sponsor will need to deleverage and maintain an LTV no higher than 55.1% by the third year of the loan.

The senior loan carries a floating interest rate equal to three-month Euribor (subject to zero floor) plus a margin of 2.0%. The interest rate risk will be hedged by a prepaid cap with a strike rate of 1.5% and to be provided by Bank of America, N.A. However, the hedging covers only 95% of the loan amount.

A liquidity facility will be provided by Bank of America, N.A. for a total amount of EUR 12.0 million, which equals 6.0% of the total outstanding balance of the covered notes. The liquidity facility can be used to cover interest shortfalls on the Class A, Class B and Class C notes and will amortise in line with the covered amount. According to DBRS’s analysis, the commitment amount, as at closing, could provide interest payment on the covered notes up to approximately 23 months and 11 months based on the blended interest hedge rate of 1.7% and the Euribor cap of 5% after loan maturity, respectively.

The transaction is expected to repay on or before 2 February 2024, two days after the senior loan matures. Should the loan fail to be repaid by its maturity, this will constitute a special servicing transfer event. The transaction will be structured with a seven-year tail period to allow the special servicer to work out the loan by February 2031 at the latest, which is the legal final maturity of the notes.

To maintain compliance with the applicable regulatory requirements, BofAML will hold approximately 5% of the senior loan.

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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for these ratings include Bank of America Merrill Lynch Internal DAC and its delegates.

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

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 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 concerns 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 ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

Class A Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A at AA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A at A (sf)

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

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

Class D Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D at BB (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class D at BB (low) (sf)

Class E Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class E at BB (sf)
-- 20% decline in DBRS NCF, expected rating of Class E at B (high) (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 GmbH are subject to EU and US regulations only.

Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 March 2019

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Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- European CMBS Rating and Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions

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.