DBRS Assigns Provisional Ratings to Logicor 2019-1 UK PLC

DBRS Ratings Limited (DBRS) assigned the following provisional ratings to the notes to be issued by Logicor 2019-1 UK Public Limited Company (Logicor 2019-1 UK PLC or the Issuer):

--Class A (Fixed) Notes rated AA (sf)
--Class A (Floating) Notes rated AA (sf)

Logicor 2019-1 UK PLC is the secured corporate bond issuance of GBP 900 million of fixed- and/or floating-rate loans (the loans), secured by 64 logistics properties advanced to UK Logistics Holdco I S.a.r.l. (the Borrower). The loans, if split between fixed and floating, are going to be pari passu and cross-collateralised.

The borrower, UK Logistics Holdco I S.a.r.l., is controlled by Eurocor II S.à r.l. and Eurocor III S.à r.l. (the Sponsors), which, in turn, are ultimately owned by an investment group including China Investment Corporation (CIC) and Blackstone Group (Blackstone).

The senior loan (42.7% loan-to-value (LTV) ratio) is backed by a portfolio of 64 logistics units located throughout England and a single asset in Scotland. By market value (MV), the majority of the assets are in the East Midlands (33.6%), West Midlands (22.3%) and South East (16.8%). The asset quality is strong with a number of properties located in the Golden Triangle area of the East Midlands, which is considered to a prime logistics location because of its accessibility.

Logicor benefits from an investment-grade corporate rating by a global rating agency. As of December 2018, Logicor’s entire portfolio reported a net operating income of EUR 639 million and a high European Public Real Estate Association occupancy rate in excess of 94%, with over 2,000 customers. In DBRS’s opinion, the investment-grade status of the sponsor is credit positive for the issuance. As such, a downgrade of Logicor’s corporate rating may have a negative impact on DBRS’s rating of the transaction.

The transaction portfolio has a net lettable area of 19.32 million square feet (sf), in-place rent of GBP 102.3 million and a weighted-average-lease-to-break of 6.5 years. On day one, the portfolio is 95.5% occupied by total area. Three of the 64 units, representing 4.29% of the total area and 4.65% of the GBP 107.0 million estimated rental value, are vacant. The CBRE Group (CBRE) valued the portfolio at GBP 2,109.2 million with a net initial yield of 4.67% on 30 June 2019. CBRE’s vacant possession value for the portfolio is GBP 1,438.0 million. The top ten tenants contribute to 56.2% of the day one in-place rent, with the top two tenants contributing 20.0%. The two largest assets by value (7.7% of the total MV) are located in Andover and Doncaster.

In DBRS’s view, the senior facility represents moderate to low leverage financing with a 42.7% LTV based on CBRE’s valuation of GBP 2,109.2 million dated 30 June 2019. As at the 30 June 2019 cut-off date, the portfolio reported net operating income pre-rent frees of GBP 100.4 million and a debt yield (DY) of 11.2%. DBRS’s value assumption for the portfolio is GBP 1,362 million (35% haircut), resulting in a 66.1% stressed LTV. DBRS’s net cash flow (NCF) is GBP 85.7 million, which translates to a DBRS DY at cut-off date of 9.53%. The senior loans bear interest at a fixed rate of [ ] and a floating rate equal to three-month LIBOR (subject to zero floor) plus a margin. As such, there is no excess spread in the transaction and ongoing costs are ultimately borne directly by the borrower. The loans do not have any scheduled amortisation. The expected maturity date of the loans is 17 November [ ].

There is a 50.0% of MV limit on the portfolio substitution amount as long as, following the substitution, the DY is (1) not less than the signing-date DY and the DY on the loan interest payment date (IPD) falling immediately prior to completion of that acquisition and (2) the LTV ratio is not greater than the signing date LTV and the LTV ratio on the loan IPD falling immediately prior to completion of that acquisition.

In addition to the satisfaction of DY and LTV tests, additional properties should, among other conditions: (1) be a logistics property located in or within 20 miles of a key logistics hub, (2) have a gross lettable area of at least 150,000 sf with a yard depth of at least 35 metres and an eaves height of at least nine metres and (3) where such property has a WALTB or weighted-average-lease to-expiry (WALTE) of five years or more, a WALTE of no fewer than five years and a WALTB of no less than three years or (where such property has a WALTB or WALTE of less than five years) a WALTB of the lower of (a) three years and (b) the WALTB of that substituted property.

Property disposal is only allowed provided that (1) the release price for such a property is repaid in full on or prior to completion of such disposal unless the Company has made a permitted substitution election and (2) at the time at which the disposal is contracted, no event of default (EOD) is continuing or would result from such disposal. The release price is set at 110.0% of the allocated loan amount for the respective property or an amount that would ensure that the DY of the remaining portfolio is not less than the signing date DY and the LTV ratio of the remaining portfolio is not greater than the signing-date LTV ratio. DBRS considers the release price mechanism to limit potential upside to the underlying collateral, as it allows for properties to be sold below the allocated loan amount in the case of strong portfolio performance.

The loan structure does not include any default financial covenants prior to a permitted change of control, after which the default covenants are based on the LTV and DY. The LTV covenant is set at the lower of 70.0% LTV and LTV at the date of the permitted control plus 25.0%. The DY covenant is set at the higher of 75% of the DY on the permitted change of control date and 7.5%. Other standard EODs include (1) any missing payment, including failure to repay the loan at the maturity date; (2) borrower insolvency; and (3) a loan default arising as a result of any creditor’s process or cross-default. The permitted change of control is defined as a property/platform sale to a transferee without repaying the loan/transaction, provided that the transferee has a total market capitalisation of or no less than EUR 5.0 billion of assets owned or under management or, controls and/or manages or is advised and/or managed by a person that owns, controls or manages commercial real estate assets with an aggregate MV of no less than EUR 2.0 billion in Europe or EUR 5.0 billion worldwide.

The cash trap covenants are set at an LTV of 65% while the DY cash trap covenants are at 8.5%. Prior to permitted change of control, certain corporate expenses and management fees, capped at GBP 8.5 million, can be drawn from the cash trap account.

The terms and conditions of the notes and the provisions of the senior facilities agreement permit further issues of notes and advances of additional facilities, respectively, on the satisfaction of certain conditions, such as (1) no EOD is outstanding, (2) the newly issued notes rank pari passu with existing notes, (3) the aggregate notes do not exceed GBP 900.0 million and (4) the available undrawn amount under the liquidity facility together with any funds available after a stand-by drawing will not be less than the required liquidity commitment.

Subject to certain conditions, a prepayment fee may be payable (unless the Company has made a substitution election) where any borrower makes a voluntary prepayment, a mandatory prepayment resulting from a change of control or prepayment following the disposal of any asset. The permitted property disposal proceeds that are free from prepayment fee under the floating rate loan are up to an aggregate amount over the life of the Term (Floating) Facility of 15% of the aggregate principal amount of the total commitments under the Term (Floating) Facility.

The early redemption fee on fixed rate notes is a make-whole payment discounted at gilts plus 15% of the margin. The early redemption fee on the floating-rate notes is calculated as the margin that would have accrued on the amount of the Term (Floating) Facility Loan prepaid (had no prepayment taken place) from the date of such prepayment until the date falling 12 months after the closing date.

A liquidity facility with an initial commitment of no less than GBP [20,000,000] will be entered into by the Issuer at closing with BNP Paribas. The size of the liquidity facility will decrease based on the principal amount outstanding of the notes.

The final legal maturity of the notes is expected to be on 17 November [ ], five years after the fully extended loan term. Given the security structure and jurisdiction of the underlying loan, DBRS believes this provides sufficient time to enforce on the loan collateral, if necessary, and repay the bondholders.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is the “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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include Morgan Stanley & Co. International PLC and Goldman Sachs International.

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

Class A (Floating) Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A at A (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class A at BBB (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, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 October 2019

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

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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.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.