DBRS Morningstar Confirms All Classes of Salus European Loan Conduit No. 33 DAC

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of the following classes of notes due May 2030 issued by Salus European Loan Conduit No. 33 DAC (the Issuer):

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

All trends are Stable.

Salus (European Loan Conduit No. 33) DAC is a securitisation of GBP 367.5 million floating-rate senior commercial real estate loan advanced by Morgan Stanley & Co. International plc (Morgan Stanley) which was originated in November 2018. The loan is secured by a single asset located in the city of London known as the CityPoint office building. The asset is a 35-storey office tower with a total 709,236 square foot (sf) of lettable area. The senior loan is split between two facilities: Facility A, which totals GBP 354.0 million and Facility B (the capex facility), which totals GBP 13.5 million, equating to a loan to value (LTV) of 57.9%, based on the GBP 635 million January 2020 valuation by Jones Lang Lasalle (JLL). Additionally, there is also a nonsecuritised mezzanine facility which is contractually and structurally subordinated to the senior facilities totalling GBP 91.9 million (72.34% LTV). The January 2020 revaluation of GBP 635 million represents a 6% increase on the GBP 600 million valuation provided at issuance; subsequently, the LTV decreased to 57.9% from 61.3% at issuance and is still comfortably below the 75% cash trap covenant.

The initial loan maturity is in January 2022. Considering the two one-year extension options that are conditional upon the loan being fully hedged, the latest loan maturity date is January 2024. The legal final maturity of the notes is in January 2029, five years after the latest possible loan maturity. 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 CityPoint building is located on 1 Ropemaker Street by Finsbury Circus and Moorgate tube station. The 35-storey office tower has four basement floors and ground floor retail space with shops and restaurants. However, the majority of the 709,236 sf lettable area in the building is office space, which totals 627,887 sf. The building is owned and operated by Brookfield Asset Management Inc. (Brookfield), which is a large and experienced commercial real estate operator. The sponsor’s business plan at issuance was to use the capex facility to refurbish three floors, from the sixth to the eighth floors, previously occupied by tenants (Ebiquity Associates Ltd., Morrison & Foerster Ltd. and Mimecast) which all vacated on 1 December 2019. Following drawings throughout the year, the capex facility became fully drawn in October 2020; as such, the refurbishment works are scheduled to be completed in January 2021. It is understood that the marketing of these floors has already commenced and it is anticipated that interest will pick up once prospective tenants can be shown the renovated floor space. The reported debt yield for the transaction was 7.1% as of the October interest payment date, which is above the cash trap debt yield covenant of 5.75%. There are no financial covenants in place until a permitted change of control.

During the Coronavirus Disease (COVID-19) lockdown and the ongoing effect the pandemic is having on London’s office space, rent concessions were provisionally agreed with nine tenants, mostly retail and catering businesses which would normally cater for the office workers in the area. Total passing rent for these tenants amounts to GBP 729,000 p.a., 2.5% of the total.

Additionally, vacancy (inclusive of those tenants leaving on 1 December 2019) was 19.4%, which is slightly lower than the 21.0% vacancy in the previous quarter. During the year, Simmons & Simmons LLP, the largest tenant in the building, regeared its lease until March 2035 with a break option in 2030 extending the overall property’s weighted-average unexpired lease to break to 6.5 years. (5.3 years at issuance). The overall rent paid by the tenant increased to GBP 6.9 million from GBP 6.7 million.

Overall, the property is performing in line with DBRS Morningstar’s expectations and subsequently the initial underwriting assumptions remain unchanged with DBRS Morningstar’s Net Cash Flow (NCF) at GBP 25.3 million and DBRS Morningstar’s stabilised cap rate at 5.2%. This results in a DBRS Morningstar value of GBP 486.5 million, which represents a 23.4% discount to the most recent valuation.

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 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.

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 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-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 transactions in accordance with the principal methodology.

A review of the transactions 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 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 investors reports provided by Mountstreet Mortgage Servicing 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 these transactions took place on 20 December 2019 when DBRS Morningstar confirmed its ratings on all tranches from Class A to Class D.

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

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

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

For further information on DBRS Morningstar 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: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 18 December 2017

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 (28 September 2020), https://www.dbrsmorningstar.com/research/367292/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 these credits or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

This press release was modified soon after it was published to fix the legal entity, which was incorrectly stated as DBRS Ratings GmbH.