DBRS Morningstar Confirms Ratings of Taurus 2019-2 UK DAC; Maintains Stable Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating Rate Notes due November 2029 issued by Taurus 2019-2 UK DAC (the Issuer):

-- Class A 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 (low) (sf)

DBRS Morningstar maintained the Stable trends.

The Issuer is the securitisation of a 92.1% interest in a GBP 418.1 million (63.9% loan-to-value or LTV at issuance) floating-rate senior commercial real estate loan advanced by Bank of America Merrill Lynch International DAC to borrowers sponsored by Blackstone Group L.P. (Blackstone or the sponsor). The acquisition financing was also accompanied by a GBP 65.0 million (73.9% LTV) mezzanine loan, coterminous with the senior facility. The mezzanine loan is structurally and contractually subordinated to the senior facility and is not part of the securitisation transaction.

There is no scheduled amortisation before the completion of a permitted change of control, at which time the borrower must repay the aggregate outstanding principal amount of the senior loan in quarterly instalments equal to 0.25% of the outstanding principal amount as at the date of the permitted change of control.

The loan carries a floating interest rate with a Libor benchmark providing an interest rate coverage in the range of >2.0 times (x) at the hedged rate and >2.5x at the current Libor rate. The loan is 95.0% hedged with a Libor interest cap with a strike rate of 1.75%. Bank of America N.A., London branch provides the cap.

The legal final maturity of the notes is in November 2029, five years after the latest possible loan maturity. Considering the three one-year extension options that are conditional upon the loan being fully hedged, the latest loan maturity date is 17 November 2024. Given the security structure and jurisdiction of the underlying loan, DBRS Morningstar believes that this provides sufficient time to enforce on the loan collateral, if necessary, and repay the bondholders.

The senior loan is backed by 126 urban logistics and industrial assets, which are well diversified throughout the UK with strategic locations in and around major UK logistics hubs. Since issuance, the overall performance of the portfolio has been stable. As of August 2020, the portfolio remained well occupied at 90.2% compared with 91.5% at closing, with a weighted-average lease-to-break (WALTB) of 2.46 years compared with 3.1 years at origination. The relatively short WALTB is primarily because the majority of tenants are small and medium-size enterprises that are typically not used to signing lease terms longer than three or five years. DBRS Morningstar underwrote a vacancy of 11.6% at issuance and as such will carefully monitor the occupancy rate of the assets in the next available investors reporting.

During the Coronavirus Disease (COVID-19) lockdown period, the borrower advised that 141 requests from tenants for some sort of rent relief were received, amounting to GBP 1.5 million or 4.7% of the annual net operating income (NOI). This resulted in GBP 767,097, or 2.3% of the total portfolio NOI, either receiving rental deferrals or switching to monthly payments. However, given the nature of this portfolio, being largely last mile, the borrower is optimistic that the logistics sector will weather the storm better than other asset classes because of the increased demand for e-commerce. DBRS Morningstar also believes that last mile industrial assets will be relatively less affected.

The initial valuation from Cushman & Wakefield (C&W) valued the assets individually at GBP 622.7 million but applied a portfolio premium of 7.5% for a total value of GBP 669.5 million, assuming the properties were sold as a single lot. However, the LTV is calculated based on the adjusted portfolio value, which caps the portfolio premium associated with any portfolio valuation at 5% of the aggregate property valuation. As a result, the transaction LTV is 63.95% based on a value of GBP 653.8 million. The servicer confirmed that, in accordance with the facility agreement, C&W has been instructed to complete a revaluation of the portfolio.

The loan structure does not include financial default covenants unless there is a permitted change of control, after which the default covenants are based on the LTV and debt yield (DY). The LTV ratio is set at a level that is not greater than the sum of the LTV ratio on the change of control date and an additional 15.0%. Additionally, the new obligors must ensure that after the change of control date, the DY is not less than the higher of both 85.0% of the DY as of the change of control date or 6.75%.

The transaction benefits from a liquidity facility of GBP 8.0 million (or 4.1% of the total outstanding balance of the covered notes), which is provided by Bank of America N.A., London Branch. The liquidity facility can be used by the Issuer to fund expense shortfalls (including any amounts owed to third-party creditors and service providers that rank senior to the notes), property protection shortfalls, and interest shortfalls (including with respect to deferred interest, but excluding default interest and exit payment amounts) in connection with interest due on the Class A and Class B notes. According to DBRS Morningstar’s analysis, the commitment amount as at closing provides 12.6 months and 6.4 months of coverage on the covered notes based on the cap rate of 1.75% and the Libor notes cap of 5.0% after loan maturity, respectively.

COVID-19 CONSIDERATIONS
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. The ratings are based on additional analysis as a result of the global efforts to contain the spread of the coronavirus. For this transaction DBRS Morningstar did not adjust its net-cash flow and cap rate assumptions because of the current performance of the portfolio and nature of the assets.

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 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366543/dbrs-morningstar-global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar’s 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 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 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: 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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include servicer reports provided by CBRE Loan Services Ltd and U.S. Bank Global Corporate Trust Limited since issuance.

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 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.

The last rating action on this transaction took place on 24 September 2019 when DBRS Morningstar finalised its provisional ratings on the notes.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at 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 A Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar net cash flow (NCF), expected rating of the Class A notes at AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class A notes at AA (high) (sf)

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

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

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

Class E Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class E notes at B (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class E notes at CCC (low) (sf)

For further information on DBRS Morningstar’s historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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: Gareth Levington, Managing Director
Initial Rating Date: 28 August 2019

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
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 (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/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].