DBRS Morningstar Confirms All Ratings on Taurus 2019-1 FR DAC, Maintains Positive Trend on Class E Notes

DBRS Ratings GmbH (DBRS) confirmed its ratings on all classes of the Commercial Mortgage-Backed Floating-Rate Notes issued by Taurus 2019-1 FR DAC (the Issuer) and maintained the rating trend on the Class E Notes at Positive, 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 Stable.

-- Class E at BB (sf)

Trend maintained at Positive.

The rating confirmations are based on the slightly weakened performance of the portfolio since the last review. There were only two asset disposals in 2020 and the main tenant has vacated several assets resulting in a slightly higher vacancy rate. The maintenance of the Positive Trend is mainly driven by the deleveraging requirements of the senior loan. Although the sponsor has several ways to deleverage the loan, the exact timing and prepayment amount are hard to predict; nevertheless, partial prepayment of the senior loan will continue to benefit the most junior class’s noteholders hence the maintenance of the Positive Trend.

The issuer is the securitisation of 95% interest of an original EUR 249.6 million, 65% loan-to-value (LTV) five-year senior commercial real estate acquisition facility advanced by Bank of America Merrill Lynch International DAC (BofAML or the Loan Seller) to Colony Capital (Colony or the sponsor) in the context of a sale-and-lease-back operation between Colony and Électricité de France (EDF). The senior loan was advanced to three French borrowers, and BofAML also provided a co-terminus mezzanine term loan. As of the February 2021 interest payment date (IPD), the senior loan balance reduced to EUR 194.8 million with a LTV of 63.7%.

Since inception, 22 assets have been sold, of which two were disposed in 2020. As of the February 2021 IPD, the disposed assets were generally in line with the business plan provided at issuance: 16 out of 22 disposed assets were included in the liquidating pool at issuance. Currently, there are still 39 properties in the liquidating pool with a total market value (MV) of EUR 46.2 million, according to the valuation report at issuance.

The remaining portfolio reported an LTV of 63.7%, which is above the year-three cash trap covenant of 55.1%. Also, DBRS Morningstar noted a total EUR 2.6 million rent arrears have passed 90-day overdue as of the February 2021 IPD. Should such arrears be excluded from debt yield (DY) covenant calculation, as DBRS Morningstar understood from the loan document, the senior loan’s DY would reduce to below 11.0%, thus breaching the year-three DY cash trap covenant. As per the November 2020 servicer report, the long-term arrears are mainly related to ENEDIS 2019 service charge reconciliation, insurance recoveries, and disputed charges at the Marseille asset, and the sponsor was working with the anchor tenant to resolve the arrears. DBRS Morningstar views the term default risk of the senior loan as low given the current default covenants of 71.7% LTV and 9.6% DY.

Given the high 90-day or more rental arrears, DBRS Morningstar has lowered its net cash flow (NCF) assumption to EUR 21.1 million, which is equal to the latest reported EUR 23.7 million projected net operating income (NOI) excluding the EUR 2.6 million arrears. This is lower than the EUR 21.7 million NCF derived by removing disposed assets from DBRS Morningstar’s NCF from last review. The resulting DBRS Morningstar value assumption for the portfolio is now EUR 255.7 million, which represents a 16.4% haircut to the current reported MV.

DBRS Morningstar expects the sponsor to continue property disposals and vacancy lease up once the market recovers from the outbreak of Coronavirus Disease (COVID-19), but before then, the loan would likely be partially paid down using cash-trapped proceeds (if any).

The rating currently assigned to the Class E notes is lower than the rating stress the class can withstand as per the output of DBRS Morningstar’s direct sizing hurdles. In this transaction, the assigned rating was underpinned by a weakened performance of the portfolio and the persistence of the coronavirus outbreak. However, a Positive Trend was maintained to reflect the potential credit uplift in the coming year.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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).

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

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.

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 Situs Asset Management, valuation report for CBRE, and cash manager reports from U.S. Bank Global Corporate Trust.

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 9 April 2020, when DBRS Morningstar confirmed its ratings on all classes and changed the trend to Positive from Stable on the Class E Notes.

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 (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 (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class C at BB (high) (sf)

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

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class E at BB (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class E at BB (low) (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: 25 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 (6 April 2021), https://www.dbrsmorningstar.com/research/376314/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].