DBRS Morningstar Confirms Ratings on All Classes of Notes Issued by Kanaal CMBS Finance 2019 DAC and Changes Trends on Senior Notes

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage-Backed Floating-Rate Notes issued by Kanaal CMBS Finance 2019 DAC (the Issuer) but changed the trends on the Class A and Class B notes to Negative from Stable as follows:

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

All trends are now Negative.

The trend changes for the Class A and Class B notes together with the maintained Negative Trends on the Class C and Class D notes are mainly driven by the Big Six loan’s relatively weak performance, especially declining rental income, rising vacancy of the Dutch retail properties securing the loan, and the low rent collection rate as of January 2021. However, DBRS Morningstar noted that Big Six’s market value (MV) drop between the 2019 valuation and the 2021 revaluation was limited to 5.2%, which is still 23.9% higher than DBRS Morningstar’s value assumption of EUR 157.2 million. In addition the loan has benefited from approximately 10.3% amortisation since issuance, while the limited lockdown agreed by the Dutch government for most of the past year allowed to the majority of the retail units to remain opened, providing the loan with a high rent collection rate in 2020. Also, considering the positive performance registered by the Maxima loan, DBRS Morningstar confirmed the ratings of all classes of notes.

The Issuer is the securitisation of two Dutch senior commercial real estate loans advanced by Goldman Sachs Bank U.S.A.: The Maxima loan and the Big Six loan.

For the Big Six loan, the performance has weakened since the last review in Q1 2020 with gross rental income (GRI) decreasing to EUR 16.8 million from EUR 18.4 million. Meanwhile, the portfolio vacancy increased to 22.4% from 21.8% during this period. Also, although most of the tenants appeared to have paid rents last year despite the Coronavirus Disease (COVID-19) pandemic, the January 2021 collection rate was only 57%, which is mostly due to the recently implemented full lockdown in the Netherlands. The upcoming first loan maturity is in August 2021. The deteriorating performance may put the compliance of the loan with its default covenants under pressure, a breach of which could jeopardise the sponsor’s ability to exercise one of the two one-year extension options available. Based on the figures provided in the latest investor reporting dated in February 2021, the current loan-to-value (LTV) 60.9%, debt yield (DY) 11.0% and projected interest cover ratio (ICR) 3.25X are still in compliance and are expected to remain in compliance within the default levels set in the facility agreement of 82.5%, 9.6% and 1.78X, respectively. This would allow the sponsor to extend the loan maturity to August 2022. In DBRS Morningstar’s opinion, the extension of the loan maturity would provide the sponsor with the opportunity to complete the business plan and to benefit from a likely value recovery following the expected easement of the lockdown measures as the vaccination plan is implemented across the European continent.

The Maxima loan refinanced an existing portfolio of 11 offices and mixed-use properties. The portfolio composition has not changed since issuance, but a new valuation conducted by JLL on 1 March 2020 saw a slight MV increase of EUR 4.3 million to EUR 238.6 million. Meanwhile, the total loan amount of Maxima has reduced to EUR 134.4 million following a voluntary prepayment and a disposal during 2020. As a result, the LTV went down to 55.1% from 58.9% at issuance. The vacancy has continued to decrease – declining to 12.2% on the Q4 2020 interest payment date (IPD) from 14.2% at the Q1 2020 IPD. This is also evidenced by a higher GRI of EUR 17.4 million in Q4 2020 compared with EUR 16.4 million in Q1 2020. The final maturity of the office loan is on 15 February 2023.
DBRS Morningstar maintained its underwriting assumptions for the loan since the last review. However, as the loan had an updated valuation, the DBRS Morningstar value haircut on the Maxima loan has now changed to 31.0% from 29.7%.

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. The ratings are based on additional analysis to expected performance 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 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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 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 euros 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 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/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports from CBRE Loan Servicing Ltd, cash manager reports from U.S. Bank Global Corporate Trust, and valuation reports from Savills Valuations and JLL Valuation Advisory.

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 17 April 2020 when DBRS Morningstar confirmed its ratings on all classes of Kanaal CMBS Finance 2019 DAC and changed the trend on the Class C and Class D notes to Negative from Stable.

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

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

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

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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. 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 Limited for use in the United Kingdom.

Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 19 March 2019

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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 (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: 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].