DBRS Morningstar Finalises Provisional Ratings on Taurus 2021-1 UK DAC

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the notes issued by Taurus 2021-1 UK DAC (the Issuer) as follows:

-- 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 purchased 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 at 5% of the senior loan amount in order to satisfy risk retention requirements. In conjunction with the senior loan, AustralianSuper Pty Ltd advanced a GBP 85.0 million mezzanine facility, which is subordinated to the securitised senior facility. The senior loan margin will directly mirror the weighted-average coupon, which is 1.59% at issuance on all the issued notes; therefore, there will be no excess spread and no excess spread notes were issued. The senior loan's margin, however, is capped at 2.29%. The Sponsor will pay Issuer costs in accordance with the ongoing financing costs letter.

The senior loan refinanced Blackstone's acquisitions since Q1 2020, specifically, 38 assets (the original portfolio or United IV subportfolio) that were acquired before October 2020 and seven assets that were acquired between November and December 2020 (the 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 this date was used to calculate weighted-average unexpired loan terms. The entire 45-asset portfolio (the original portfolio plus the add-on portfolio) has been renamed United V and was integrated into Blackstone's logistics platform Mileway, which includes 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 with 27 of its assets located in London, the South East, and East of England, 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 (MVs) of the individual properties amounted to GBP 422.0 million as of 30 September 2020. Similarly, Cushman & Wakefield (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 was 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. Based on the final arrears table dated on 19 January 2021, there were GBP 5.0 million arrears (19.0% of GRI); however, the 30 days and over arrears were at GBP 2.2 million (8.9% of GRI). DBRS Morningstar believes that the location of the assets helped 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 2.0 times (x) 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, provided the Issuer with a liquidity facility of GBP 11.4 million. The liquidity facility covers 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 20 months of coverage based on the hedging terms mentioned above or approximately 11 months of coverage based on the 4% Sonia cap. The liquidity facility if there is a portfolio MV decline or based on the amortisation, if any.

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 advanced a GBP 11.4 million loan to the Issuer, representing 5% of the total securitised balance.

DBRS Morningstar note that there are a couple of caveats in the Irish legal opinions relating to the accuracy and completeness of information disclosed in the searches (namely legal searches against the Issuer/loan seller, as applicable, for mortgages, debentures, notices, the appointment of any examiner or liquidator, proceedings, petitions, orders, or decrees etc.). The legal opinions of the transaction and the senior loan assume that there is a higher risk that the searches are not fully up-to-date while emergency coronavirus measures introduced by the Irish government remain in place and due to the Irish Companies Registration Office (CRO) not having confirmed when it will clear the backlog in filings arising from the temporary suspension of the CRO service. However, DBRS Morningstar understood that the loan seller is providing standard representations and warranties to the Issuer.

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.

DBRS Morningstar notes that the above press release was amended on 6 April 2021 to include a missing disclosure.

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” (26 February 2021).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 BofA, various due diligence reports prepared by the delegates of BofA, legal documents prepared by Clifford Chance LLP, and valuation reports prepared by CBRE and C&W.

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.

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 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.

This rating is 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 (26 February 2021), https://www.dbrsmorningstar.com/research/374399/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].