DBRS Morningstar Confirms Ratings of Libra (European Loan Conduit No. 31) DAC; Maintains Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings on all classes of the Commercial Mortgage-Backed Floating Rate Notes issued by Libra (European Loan Conduit No. 31) DAC (the Issuer) as follows:

-- Class A1 at AAA (sf)
-- Class A2 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)

DBRS Morningstar maintained the Stable trend.

The rating confirmations are based on slightly improving loan metrics and a relatively good collection rate of 79% in spite of the current Coronavirus Disease (COVID-19) outbreak.

The Issuer is the 78.2% securitisation of a senior commercial real estate loan advanced by Morgan Stanley Bank N.A. in 2018. The original sponsors were Starwood Capital and M7 Real Estate, who sold the portfolio to Blackstone Group (the Sponsor) shortly after the issuance via a permitted change of control. The Sponsor purchased the portfolio to add it on its Mileway pan-European logistics platform.

As of the Q2 2020 interest payment date (IPD), the outstanding whole loan balance has been reduced to EUR 223.9 million because of scheduled amortisation, which has come into effect in the second year of the loan term. The underlying properties remain the same and the servicer did not undertake any further valuation since the previous review. As such, the senior loan’s loan-to-value (LTV) ratio has reduced slightly to 63.2% from 63.5% at the last review and is comfortably above the cash trap and default LTV covenant of 74.25% and 80%, respectively. The vacancy has slightly reduced to 11.0% from 12.5% since the last review with the gross annual rent increasing to EUR 33.4 million from EUR 31.5 million during the same period. The debt yield (DY) at Q2 2020 was 10.7%, 1.8% above the stepped-up DY cash covenant of 8.9%.

In the context of the current coronavirus pandemic, the servicer has provided some updates on the portfolio’s collection data. As of the April 2020 IPD, 79% of the rent has been collected and 21 out of 44 relief requests have been agreed, representing a total EUR 0.2 million rent loss. A similar amount of rental income has been postponed or switched to monthly payment. DBRS Morningstar maintained its cash flow of EUR 22.2 million and stressed value of EUR 305.6 million at last review. The value haircut on the March 2019 valuation is 28.9%.

As the current haircut on the property values largely exceed DBRS Morningstar’s coronavirus-linked light industrial/logistics sector medium-term value decline assumption, which is based on DBRS Morningstar’s moderate scenario, DBRS Morningstar did not make any coronavirus-related value adjustment in its analysis.

The senior loan will mature on 26 January 2021 but can be extended subject to certain conditions. The first extension will prolong the loan maturity to 15 August 2022 and the second extension option will push the maturity date further to 15 August 2023. The notes’ final maturity is on 26 October 2028.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many tenants and borrowers. DBRS Morningstar anticipates that vacancy rate increases and cash flow reductions may arise for many CMBS borrowers, some meaningfully. In addition, commercial real estate values will be negatively affected, at least in the short term, impacting refinancing prospects for maturing loans and expected recoveries for defaulted loans.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 1 June 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/361867/global-macroeconomic-scenarios-june-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 16 June 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated CMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/362693/european-cmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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.

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.

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 these transactions are listed at the end of this press release.

These may be found at: https://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 servicer reports from Mountstreet Global Ltd and cash manager reports from U.S. Bank Global Corporate Trust Limited.

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

At the time of the initial ratings, DBRS Morningstar was 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.

The last rating action on this transaction took place on 16 July 2019, when DBRS Morningstar confirmed its ratings on all classes of Libra (European Loan Conduit No. 31) DAC.

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 ratings (the Base Case):

Class A1 Notes Risk Sensitivity:
--10% decline in DBRS Morningstar net cash flow (NCF), expected rating of Class A Notes to AAA (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class A Notes to AA (low) (sf)

Class A2 Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class A2 Notes to A (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class A2 Notes to BBB (high) (sf)

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

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

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

Class E Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class E Notes to B (high) (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class E Notes to CCC (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 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: 16 July 2018

DBRS Ratings GmbH
Neue Mainzer Straße 75
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: https://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: https://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].