DBRS Morningstar Finalises Provisional Ratings on Taurus 2020-2 UK DAC

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the notes issued by Taurus 2020-2 UK DAC (the Issuer) as follows:

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (low) (sf)

All trends are Stable.

Taurus 2020-2 UK DAC (the Issuer) is the partial securitisation of a GBP 518.3 million senior commercial real estate (CRE) loan backed by a large portfolio of light industrial and logistics assets spread across the UK. Bank of America Merrill Lynch International DAC (BofA, or the Arranger) arranged the transaction for the benefit of the funds managed by Blackstone Group Inc. (Blackstone, or the Sponsor). The Arranger holds a GBP 44.6 million Facility A, or 8.6% of the whole loan amount, and securitised Facility B with a balance of GBP 473.7 million. For the securitised portion, GBP 23.7 million will be an Issuer loan to satisfy the risk retention requirements. There will be a GBP 149.0 million mezzanine facility that is contractually and structurally subordinated to the securitised senior facility, and that could be upsized subject to certain conditions being met. The senior loan margin directly mirrors the weighted-average coupon on all issued notes; therefore, there is no excess spread, and no Class X notes have been issued. The borrower will pay all the Issuer costs as outlined in the ongoing financing costs letter.

The senior whole loan refinanced Blackstone's acquisition of three portfolios: Hansteen, Cara, and United (together, the portfolio) for a total purchase price of GBP 990 million, or GBP 935 million excluding all transaction costs. The portfolio will be integrated into Blackstone's logistics platform Mileway as part of its UK portfolio, which already covers three other DBRS Morningstar-rated CMBS transactions: BAMS CMBS 2018-1 DAC, Taurus 2019-2 UK DAC, and Scorpio (European Loan Conduit No.34) DAC. For a complete view of the securitised Mileway platform in Europe, please refer to the “Mileway (Blackstone)” public portfolio on Viewpoint.

The combined portfolio is very granular with 285 properties, of which 15 are land parcels, covering a total 16.2 million square feet leased to 2,551 tenants, with the largest 10 tenants representing only 13.0% of the gross rent. On the portfolio level, CBRE Limited (CBRE) has valued the portfolio for a total of GBP 914.2 million including a 5% portfolio premium. The sum of the market values (MV) of the individual properties amounted to GBP 871.4 million as of 19 May 2020, which represents a slight 2.4% value drop compared with the MV concluded on 28 February 2020. DBRS Morningstar underwrote the portfolio's CRE value at GBP 647.9 million and then subtracted GBP 4.0 million for potential stamp duty liability, which could arise when the legal titles of certain properties in the Hansteen subportfolio are transferred. The final DBRS Morningstar stressed value is GBP 643.9 million, which represents a 26.1% haircut to the CBRE aggregated MV or a 29.6% haircut to the portfolio MV. It should be noted, however, that DBRS Morningstar did not attribute any value to the 15 undeveloped land plots in the portfolio, which CBRE valued at a total of GBP 27.6 million. As such, the value haircut between DBRS Morningstar's stressed value and the commercial buildings' MV is 23.7%.

As of the 31 March 2020 cut-off date, the portfolio generated a total gross rental income (GRI) of GBP 64.1 million with a weighted-average unexpired lease term (WAULT) of 3.0 years to break and 4.1 years to expiry. However, DBRS Morningstar noted that the biggest tenant, XPO Supply Chain UK Ltd (XPO), has a relatively short WAULT of 1.3 years and the second-largest tenant, All Saints Retail (All Saints), has launched a company voluntary arrangement (CVA) to consolidate its stores in the UK and the U.S. Consequently, DBRS Morningstar treated most of XPO's leases and all All Saints' leases as vacant. The All Saints leases are on the logistics facility of the retailer, which recently renewed the leases for one year until June 2021 but then gave back half of the space post the cut-off date. Overall, DBRS Morningstar concluded a total stressed net cash flow (NCF) of GBP 45.4 million, which is 15.9% lower than the net rent reported in the valuation.

Although the outbreak of the Coronavirus Disease (COVID-19) has negatively affected all CRE sectors, the portfolio has experienced a relatively less severe impact compared with other asset types. Based on the collection data as of 6 July 2020, 81% of Q2 2020 rent due has been collected. The collection rate increased to 87% for the rents due for more than 90 days. Mileway also reported that the majority of tenants requested a rent deferral instead of a deduction. Moreover, Blackstone has provided an interest payment guarantee to the loan facility agent. The guarantee is provided by four Blackstone funds (BREP V, VI, VIII, and IX), which jointly own the portfolio, and covers interest payments up to the February 2021 interest payment date (IPD). DBRS Morningstar considers this guarantee would help mitigate any short-term debt servicing disruptions caused by the coronavirus.

DBRS Morningstar noted that 51 assets are marked as noncore assets, which mostly include land parcels, office properties, and other nonindustrial properties. Pursuant the senior loan facility agreement, the Sponsor can dispose these assets without paying a release premium but instead pay a release price that is proportional to the portfolio loan-to-value ratio (LTV). Moreover, the aggregated MV of these assets is GBP 79.2 million and represents less than 10% of the portfolio MV. DBRS Morningstar considers this feature to be credit neutral.

Similar to other Blackstone loans, there are only cash trap covenants applicable prior to a permitted change of control (CoC). The cash trap covenants are 64.2% LTV during the entire loan term but the debt yield (DY) covenant will tighten from 9.2% in the initial two-year term to 10% during the three-year extended term. After a permitted CoC, the financial default covenants on the LTV and the DY will be applicable; they are set, respectively, at the lower of 68% or 15 percentage points higher than the LTV at the time of the permitted CoC, or at the higher of 8.5% or 90% of the DY at the time of the permitted CoC. The senior loan also needs to have an LTV no higher than 57% and a DY no lower than 9.0% in order to have a permitted CoC.

In the context of the discontinuation of Libor at the end of 2021, the loan document has made provisions that the Facility B will use the Sterling Overnight Index Average (Sonia) as the base interest rate and Facility A will use Libor. However, the Facility A lender agrees to use reasonable endeavours to switch to Sonia after six months following the signing date of the senior facility agreement.

The two-year senior loan has three one-year extension options, which can be exercised if certain conditions are met. During the loan term, the borrower will purchase an interest cap agreement to hedge against increases in the interest payable under the loan. The cap agreement to be provided by Merrill Lynch International will cover 95% of the outstanding balance (a portion is hedged against Sonia and the other against Libor) with a strike rate of 1.5%. After the expected note maturity, the Sonia rate will be capped at 4%.

To cover any potential interest payment shortfalls, Bank of America Merrill Lynch International DAC will provide the Issuer with a liquidity facility of GBP 12.0 million. The liquidity facility will cover the Class A and Class B notes as well as the relevant portion of the Issuer loan. DBRS Morningstar estimates that the commitment amount at closing will be equivalent to approximately 12 months of coverage based on the hedging terms mentioned above or approximately seven months of coverage based on the 4% Sonia cap. The liquidity facility will be reduced based on the amortisation, if any, and the market value decline of the property. The interest of the drawn or stand-by drawing liquidity facility will be calculated based on note Sonia plus an interest rate of 2.5%.

The Class D Notes are subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes. However, as the loan margin is mirroring the weighted-average note margin and issuer senior costs be covered by the borrowers, an available funds cap is unlikely to occur.

The final legal maturity of the notes is in August 2030, five years after the fully extended loan maturity date. DBRS Morningstar believes that this provides sufficient time to enforce the loan collateral and repay the bondholders, given the security structure and jurisdiction of the underlying loan.

To comply with the applicable regulatory requirements, Bank of America Merrill Lynch DAC will advance GBP 20.7 million, representing 5% of the total securitised balance, to the Issuer as an Issuer loan.

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, CRE 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 last updated on 22 July 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-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 British pound sterling 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 principal methodology.

Other methodologies referenced in this transaction 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 the data tape provided by BofA, various due diligence reports prepared by the delegates of BofA, legal documents prepared by Clifford Chance LLP, and a valuation report prepared by CBRE.

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

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.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings 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.dbrsmorningstar.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):

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

Class B Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class B Notes to A (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class B Notes to BBB (high) (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 (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class D Notes to B (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 U.S. regulations only.

Lead Analyst: Mirco Iacobucci, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 23 July 2020

DBRS Ratings Limited
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Tel. +44 (0) 20 7855 6600
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: 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].