DBRS Morningstar Finalises Rating of Logicor 2019-1 UK PLC

DBRS Ratings Limited (DBRS Morningstar) finalised its AA (sf) provisional rating on the Notes (at the time of the provisional rating named the Class A (Fixed) Notes) issued by Logicor 2019-1 UK PLC (the Issuer or Logicor). The trend on the Notes is Stable. Additionally, DBRS Morningstar withdrew its AA (sf) provisional rating on the Class A (Floating) Notes.

Logicor 2019-1 UK PLC is the secured corporate bond issuance of GBP 900 million of a fixed-rate loan secured by 64 logistics properties advanced to UK Logistics Holdco I S.a.r.l. (the Borrower). The bonds were issued at 99.7% of par value.

The Borrower is controlled by Eurocor II S.à r.l. and Eurocor III S.à r.l. (together, the Sponsors), which, in turn, are ultimately owned by an investment group that includes 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 of the portfolio is strong with a number of properties located in the Golden Triangle area of the East Midlands, which is considered a prime logistics location because of its accessibility.

Logicor benefits from an investment-grade corporate rating by a global rating agency. As of June 2019, Logicor’s entire portfolio reported a high European Public Real Estate Association occupancy rate in excess of 94%, with over 2,000 customers totalling 13.7 million square metres of lettable space. In DBRS Morningstar’s opinion, the investment-grade status of Logicor is credit positive for the issuance. As such, a downgrade of Logicor’s corporate rating may have a negative impact on DBRS Morningstar’s rating of the transaction.

The transaction portfolio has a net lettable area of 19.32 million square feet (sf), an in-place rent of GBP 102.3 million and a weighted-average-lease-to-break (WALTB) of 6.5 years. On day one, the portfolio was 95.5% occupied by total area. Three of the 64 units, representing 4.5% of the total area and 4.65% of the GBP 107.0 million estimated rental value, were 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 Morningstar’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 on 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 Morningstar’s value assumption for the portfolio is GBP 1,362 million (35% haircut), resulting in a 66.1% stressed LTV. DBRS Morningstar’s net cash flow (NCF) is GBP 85.7 million, which translates to a DBRS Morningstar DY of 9.53% as at the cut-off date. The senior loan bears interest at a fixed rate of 1.875% per year. As such, there is no excess spread in the transaction and ongoing costs are ultimately borne directly by the Borrower. The loan does not have any scheduled amortisation. The expected maturity date of the loan is 17 November 2026.

There is a 25.0% 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 satisfy the following, 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 Morningstar 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. Additionally, the release price will be 110% of the allocated loan amount of the relative property if the permitted property disposal occurs at a time when the obligors (taken as a whole) own 25 or fewer properties.

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 GBP 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 GBP 2.0 billion in Europe or GBP 5.0 billion worldwide.

The cash trap covenants are set at an LTV of 60% 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.

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 early redemption fee on the fixed-rate notes is a make-whole payment discounted at gilts plus 0.25%.

A liquidity facility with an initial commitment of GBP 14,100,000 was 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 2031, five years after the fully extended loan term. Given the security structure and jurisdiction of the underlying loan, DBRS Morningstar 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 rating is: “European CMBS Rating and Surveillance Methodology”.

DBRS Morningstar 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 this rating include Morgan Stanley & Co. International PLC and Goldman Sachs International.

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

DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar rating on this financial instrument.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar 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 Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

The 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 Morningstar 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

DBRS Ratings Limited
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London EC3M 3BY United Kingdom

Registered and incorporated under the laws of England and Wales: Company 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 Morningstar 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 [email protected].

This PR was modified on 24 October 2019 to specify that the cash trap covenants are set at an LTV of 60% instead of 65%.