DBRS Morningstar Confirms Ratings of Kanaal CMBS Finance 2019 DAC, Changes Trend to Negative from Stable on Class C and D

DBRS Ratings GmbH (DBRS Morningstar) changed the trend on the Class C and Class D notes to Negative from Stable and confirmed its ratings on all classes of the Commercial Mortgage-Backed Floating-Rate Notes issued by Kanaal CMBS Finance 2019 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)

The trends on Classes A and B remain Stable.

The Issuer is the securitisation of two Dutch senior commercial real estate loans advanced by Goldman Sachs Bank U.S.A. (together with Goldman Sachs International, GS): the Maxima loan and the Big Six loan.

The trend change on the Class C and Class D notes is mainly driven by the weak performance of the Big Six loan, resulting from the declining rental income and the rising vacancy of the Dutch retail properties securing the facility. Based on the Q4 2019 investors report from February 2020, the adjusted net operating income (NOI) for the Bix Six portfolio dropped by approximately EUR 1 million, down to EUR 14.5 million, whereas the overall vacancy increased to 21.8% from 20.4% in Q1 2019. Moreover, DBRS Morningstar expects that the current outbreak of the Coronavirus Disease (COVID-19) will put further pressure on the performance of the Big Six loan, even though the Netherlands has less government-enforced public control measures and travel restrictions compared with most European countries.

The rating confirmations are based on the consistent performance of the Maxima loan, which accounts for 51% of the total issuance and is backed by 11 offices and mixed-use properties located across the Netherlands. In addition, DBRS Morningstar expects the increasing risk profile of the Big Six loan to be partially offset by (1) the relatively moderate loan-to-value ratio (LTV) of 59.1% (as of Q4 2019) and (2) the scheduled amortisation set at 2.0% per year in Years 2 to 4 and 3.0% per year in Years 4 to 5.

The Maxima loan refinanced an existing portfolio of 11 offices and mixed-use properties. The portfolio composition has not changed since issuance and no new valuation was conducted. The total loan amount of the portfolio was EUR 138.0 million at issuance but the sponsor has voluntarily paid down EUR 3.6 million in Q4 2019, bringing the outstanding balance to EUR 134.4 million. As a result, the LTV went down to 57.4% from 58.9% at issuance. The vacancy has also slightly decreased to 16.7% from 19.5% at issuance. The sponsor is expecting new leases to be executed in the coming quarter.

The office loan carries a floating interest rate equal to the three-month Euribor (subject to zero floor) plus a margin of 1.95% and is fully hedged with an interest rate cap strike of 2.5%.The loan is interest only and is expected to repay in February 2023.

The Big Six loan financed the acquisition of six properties located in the Netherlands. Five of the six assets are retail-only assets comprising galleries, shopping centres, and high-street retail units while the Deventer asset is a mixed-use asset with retail and office elements. GS initially provided the sponsor with a EUR 153.5 million facility, composed of the EUR 109.6 million Tranche A for the initial acquisition of five retail assets and the EUR 44.0 million Tranche B for the add-on acquisition of the Deventer asset. However, since the acquisition of the Deventer asset, the sponsor has sold the car park associated with it and paid down Tranche B to EUR 30.8 million. In Q2 2019, the sponsor sold the leisure units in Deventer and paid down the loan by a further EUR 9.6 million. Together with the amortisation, the outstanding balance of the Big Six loan is reduced to EUR 129.0 million. However, a new valuation of the portfolio conducted by Savills in October 2019 concluded a 17.7% market value reduction, resulting in the increase of the portfolio’s LTV to 59.17% from 56.5% at issuance, but still below the LTV cash trap and default covenants of 77.5% and 82.5%, respectively. The reported debt yield is stabilising above 11% since issuance.

DBRS Morningstar understood at issuance that the largest property in the portfolio, the Veenendaal asset, would benefit from a EUR 4 million capital expenditure (capex) project. While the planning of the capex project is making progress, the vacancy in the shopping centre keeps increasing despite the efforts of the asset manager. In addition, the current coronavirus outbreak in Europe is inevitably expected to have a negative effect on the retail portfolio with potential pick up of bad debt, rent reduction, and/or vacancy. As such, DBRS Morningstar revised its vacancy assumption to 21.8% from 14.0% at issuance to reflect a potential prolonged period of higher vacancy. The updated DBRS Morningstar net cash flow (NCF) and value is of EUR 12.6 million and EUR 157.2 million, respectively.

The retail loan bears interest at a floating interest rate equal to the three-month Euribor (subject to zero floor) plus a margin of 3.38%. The loan is fully hedged with an interest rate cap strike of 2.0% and matures in August 2021, with two one-year extension options subject to certain conditions being satisfied.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology” (13 December 2019).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at: http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports from CBRE Loan Servicing Ltd, cash manager reports from U.S. Bank Global Corporate Trust, valuation reports from Savills Valuations and asset management report from Arc Real Estate Partners.

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

At the time of the initial rating, 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 these ratings 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 is the first rating action since the Initial Rating Date.

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

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar 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 Morningstar NCF, expected rating of Class A at AA (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A at AA (high) (sf)

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

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

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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 GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 19 March 2019

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
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.dbrsmorningstar.com/about/methodologies.

-- European CMBS Rating and Surveillance Methodology (13 December 2019), https://www.dbrsmorningstar.com/research/354637/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019), https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].