DBRS Morningstar Assigns Provisional Ratings to Notes to be Issued by Taurus 2021-1 UK DAC

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the following notes expected to be issued by Taurus 2021-1 UK DAC (the Issuer or the Transaction):

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

All trends are Stable.

Taurus 2021-1 UK DAC is the securitisation of a GBP [340.1] million senior commercial real estate (CRE) loan secured by 45 light-industrial and logistics assets in the United Kingdom with a large concentration in London and the South East. The Transaction is arranged by Merrill Lynch International and jointly managed by Barclays Bank Plc for the benefit of funds managed by Blackstone Group Inc. (Blackstone or the Sponsor).

At issuance, the Issuer will purchase the senior loan from the loan seller, Bank of America Europe DAC, using the proceeds from the note issuance and the issuer loan provided by the loan seller. The issuer loan is sized to be 5% of the senior loan amount in order to satisfy risk retention requirements. In conjunction with the senior loan, a GBP [85.0] million mezzanine facility will be subordinated to the securitised senior facility. The senior loan margin will directly mirror the weighted-average coupon on all the issued notes; therefore, there will be no excess spread and no excess spread notes will be issued. The Sponsor will pay Issuer costs in accordance with the ongoing financing costs letter.

The senior loan aims to refinance Blackstone's acquisitions since Q1 2020. More specifically, 38 assets (original portfolio or United IV subportfolio) were acquired before October 2020 and seven assets were acquired between November and December 2020 (add-on portfolio). As such, the data tape was produced based on various cut-off dates ranging from 31 August 2020 to 23 December 2020. However, the official cut-off date of the portfolio was set at 23 December 2020 and 31 December 2020 was used to calculate weighted average unexpired loan terms. The entire portfolio has now been renamed United V and will be integrated into Blackstone's logistics platform Mileway, which already covers four other DBRS Morningstar-rated CMBS transactions: Taurus 2020-2 UK DAC, BAMS CMBS 2018-1 DAC, Taurus 2019-2 UK DAC, and Scorpio (European Loan Conduit No.34) DAC.

The United V portfolio is characterised by its strong presence of light-industrial assets in and surrounding the Greater London area including London, the South East, and East of England with a total 27 assets covering a 46.9% lettable area and 59.8% gross rent. CBRE Limited (CBRE) valued the United IV subportfolio at GBP 442.8 million including a 4.9% portfolio premium. The sum of the market values (MV) of the individual properties amounted to GBP 422.0 million as of 30 September 2020. Similarly, C&W (U.K.) LLP (C&W) valued the add-on assets and concluded an aggregated MV of GBP 103.9 million and a portfolio value of GBP 114.3 million. For the purpose of covenants calculations, the portfolio premium will be capped at 5%, bringing the Transaction's portfolio value to GBP 551.8 million. DBRS Morningstar underwrote the portfolio's value at GBP 361.5 million, which represents a 31.0% haircut to the aggregated MV or a 34.3% haircut to the portfolio MV.

As of the Cut-Off Dates, the portfolio generated a total gross rental income (GRI) of GBP 26.6 million with a weighted-average unexpired lease term (WAULT) of 4.6 years to break and 6.5 years to expiry. DBRS Morningstar noted that one of the largest 10 tenants, Commodore Kitchens Limited, will be switched from holding over to a lease expiring in August 2021 upon the completion of the acquisition. The Sponsor will then engage with the tenant to move to a long term lease. Overall, DBRS Morningstar concluded a total stressed net cash flow (NCF) of GBP 22.7 million, which is 10.4% lower than the net operating income (NOI) pre-rent free.

Although the economic fallout from the Coronavirus Disease (COVID-19) has negatively affected all CRE sectors, the portfolio’s light-industrial and logistics properties have experienced a less severe impact compared with other asset types. As of the relevant acquisition date, the United IV portfolio registered a 90% rent collection rate (between April and August 2020) while the add-on portfolio recorded a 78% collection rate. The lower collection rate of the add-on portfolio is mainly related to M.S. International Investment Ltd. in the Summit Centre asset. DBRS Morningstar considers the location of the assets to have helped to protect the portfolio from being hit hard by the pandemic, the impact of which is expected to reduce as the mass vaccination campaign by the government continues to be rolled out.

Similar to other Blackstone loans, only cash trap (rather than financial default) covenants are applicable prior to a permitted change of control (CoC). The cash trap covenants are [71.6%] loan-to-value (LTV) during the loan term but the debt yield (DY) covenant will tighten from [6.1]% in the first year to [6.7%] in year two and then to [7.4]% 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 at 15 percentage points higher than the LTV at the time of the permitted CoC for LTV covenant and at the higher of [6.1]% or 85% of the DY at the time of the permitted CoC for DY covenant. The senior loan must have, among other requirements, a LTV no higher than [61.6]% in order for the CoC to qualify as permitted CoC.

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. [BNP Paribas] will provide a cap agreement that will cover 100% of the outstanding balance with a cap strike rate that ensures a hedged interest coverage ratio of no less than 2X but should be no more than 1.5%. After the loan maturity, the Sterling Overnight Index Average (Sonia) rate on the notes will be capped at [4]%.

To cover any potential interest payment shortfalls, Bank of America N.A. London Branch will provide the Issuer with a liquidity facility of GBP [11.4] million. The liquidity facility will cover the Class A, Class B, and Class C notes as well as the corresponding portion of the Issuer loan. DBRS Morningstar estimates that the commitment amount at closing will be equivalent to approximately [16] months of coverage based on the hedging terms mentioned above or approximately [nine] months of coverage based on the [4%] Sonia cap. The liquidity facility will be reduced based on the amortisation, if any, and the MV decline of the property.

The Class E Notes are subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes.

The final legal maturity of the notes is in [2031], [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 Europe DAC] will advance a GBP [*] million representing 5% of the total securitised balance to the Issuer as an Issuer loan.

The ratings will be finalised upon receipt of execution version of the governing transaction documents. To the extent that the documents and information provided to DBRS Morningstar as of this date differ from the executed version of the governing transaction documents, DBRS Morningstar may assign different final ratings to the notes.

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 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 28 January 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-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 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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: 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 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 and C&W.

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.

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

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

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

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

Class E Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class E Notes at CCC (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class E Notes at 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 10 February 2021

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].