DBRS Morningstar Confirms Ratings on All Classes of Arrow CMBS 2018 DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of the following classes of Commercial Mortgage Backed Floating Rate Notes due May 2030 issued by Arrow CMBS 2018 DAC (the Issuer):

-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (low) (sf)

All trends are Stable.

The rating confirmations reflect the stable performance of the transaction, with consistent growth of the portfolio rental income since closing.

Arrow CMBS 2018 DAC is the securitisation of an originally EUR 308.2 million (69.7% loan-to-value (LTV) ratio) floating-rate senior commercial real estate loan advanced jointly by Deutsche Bank AG, London Branch and Société Générale, London branch. The loan sellers jointly hold approximately 5.0% of the senior loan. The loan is secured by 82 commercial real estate assets (down from 89 at issuance) which are predominantly logistics assets and are located in France (73.3% of market value (MV)), Germany (21.1% of MV) and the Netherlands (5.6% of MV). As of the August 2020 interest payment date (IPD), the outstanding loan balance had been reduced to EUR 284.4 million (92.3% of the original whole loan balance) because of the disposal of seven assets. Because of the updated (higher) valuation for the remaining assets and the release premiums on the non-French disposed assets, the loan has deleveraged since issuance by more than five percentage points to an LTV of 62.4%.

The senior loan refinanced the existing indebtedness of the borrowers, which are located in France, Luxembourg, and the Netherlands and ultimately owned by a joint venture between Blackstone and M7. The assets are now under the management of Mileway. As mentioned in DBRS Morningstar’s rating report at issuance, the sponsor has planned to sell off 14 properties, which were identified as the portfolio’s noncore assets. As of August 2020, there have been seven property disposals, five in France, and two in the Netherlands. While the selling of the five French assets were part of the business plan at issuance, the two Dutch assets were not originally included in the disposal pool. Nevertheless, the two Dutch assets are mainly of office use; as such, their disposals are consistent with the overall business plan.

The three assets disposed since the previous review are Agora, Futuropolis, and Rosny-sous-Bois (aggregate MV of EUR 7.18 million, all located in France). As of the August 2020 IPD, the remaining portfolio reported an annualised rental income of EUR 32.9 million, up from EUR 32.0 million one year earlier (that also included the combined gross rental income of EUR 524,521 from the three sold properties). Therefore, the rental income from the remaining assets has grown by around 2.5% since issuance supported by the portfolio’s vacancy rate decreasing from 12.4% one year ago to 10.6% as of the August 2020 IPD.

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 continue to increase for many CMBS borrowers, some meaningfully. In addition, CRE values will be negatively affected, at least in the short term, affecting 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.

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/366542/global-macroeconomic-scenarios-september-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 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 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 investor reports provided by Situs Asset Management since issuance and valuation report provided by Savills dated on 1 November 2019.

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 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 21 November 2019, when DBRS Morningstar confirmed ratings of all rated notes in the transaction.

The lead analyst responsibilities for this transaction have been transferred to Rick Shi.

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):

A decrease of 10% and 20% in the DBRS Morningstar net cash flow (NCF), derived by looking at comparable market rents, market occupancies in addition to expense ratios, and capital expenditure, would lead to a downgrade in the transaction, as noted below for each class, respectively.

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

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

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

Class F Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class D Notes to B (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class D Notes to NR (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: 22 November 2018

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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies

-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-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
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020)
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions
-- European CMBS Rating and Surveillance Methodology (13 December 2019)
https://www.dbrsmorningstar.com/research/354637/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.dbrsmorningstar.com/research/278375

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