DBRS Morningstar Finalises Provisional Ratings on Berg Finance 2021 DAC

DBRS Ratings GMBH (DBRS Morningstar) finalised its provisional ratings on the following classes of commercial mortgage backed floating-rate notes issued by Berg Finance 2021 DAC (the Issuer):

-- 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 (high) (sf)

All trends are Stable.

The Issuer is a EUR 295.3 million securitisation (the Transaction) of two senior commercial real estate (CRE) loans: Big Mountain (EUR 148.3 million) and Sirocco (EUR 150.8 million). The two loans were advanced by Goldman Sachs Bank Europe SE (Goldman Sachs Europe) to unrelated independent borrowing entities. The loans in aggregate are secured against 29 predominantly office assets in the Netherlands, France, Austria, Finland, and Germany.

BIG MOUNTAIN
The Big Mountain loan relates to a term loan facility granted to the 14 Big Mountain borrowers on 17 March 2021. The purpose of the loan was for the sponsor, Fortress Investment Group LLC, to finance and partly refinance the acquisition of certain target companies in the Stena AB group, which owns 25 office assets in the Netherlands and in France. Furthermore, the loan refinanced the existing intragroup indebtedness.

The EUR 148.3 million loan is secured by 18 predominantly freehold office assets in the Randstad region of the Netherlands and by seven freehold office assets in France's Sophia Antipolis technology park, the largest office market on the French Riviera. On 30 November 2020, Cushman & Wakefield plc (C&W) carried out valuations on the Dutch properties and appraised their market value at EUR 145.5 million. On 3 December 2020, Savills plc (Savills) conducted valuations on the French properties and appraised their market value at EUR 102.9 million. In aggregate, the market value for the entire portfolio is EUR 248.4 million and the Big Mountain loan represents a loan-to-value (LTV) ratio of 59.7%. The valuers' net operating income (NOI) is EUR 17.5 million, implying a net initial yield (NIY) of 7.0% and a day-one debt yield (DY) of 11.8%. As of March 2021, the portfolio was 87% occupied by 238 unique tenants with the largest 10 tenants accounting for 40.5% of the EUR 19.0 million in-place gross rental income (GRI). DBRS Morningstar’s long-term stable net cash flow (NCF) assumption for the Big Mountain portfolio is EUR 12.6 million and DBRS Morningstar's long-term value for the portfolio is EUR 170.9 million.

The target acquisition included 16 employees, five of which are based in France and 11 of which are based in the Netherlands; however, a letter of credit (LOC) has been put in place to cover any costs associated with the employees. DBRS Morningstar believes that such LOC is sufficient to mitigate any employee ownership-related risk and, therefore, did not make any value adjustment.

The loan is interest only and bears interest equal to three-month Euribor plus a loan margin of 3.13%, which increases to a margin of 3.38% after the second anniversary of the date of the facility agreement. The interest rate risk is to be fully hedged by a prepaid cap with a maximum strike rate of 1.5% provided by Goldman Sachs Bank Europe SE, a hedge provider with a rating plus relevant triggers, as at the cut-off date, commensurate with that of DBRS Morningstar’s rating criteria.

The Big Mountain loan has LTV and DY covenants for cash trap and events of default (EODs). The LTV cash trap covenant is set at 77.5% in year one, 75.0% in year two, 65.0% in year three, and 40.0% in year four. The DY cash trap covenant is triggered if the DY falls below 7.2% within year one, below 8.5% in year two, or below 9.0% in years three and four. The LTV default covenants are set at 82.5% in year one, 80.0% in year two, 70.0% in year three, and 60.0% in year four. The DY default covenant is triggered if the DY falls below 6.2% within year one, below 7.5% within year two, or below 8.0% within years three and four.

The initial loan maturity date is in April 2023; however, two one-year extension options are available provided that (1) no loan EOD is continuing and (2) hedging agreements in respect of the relevant extended period have been entered into which comply with the terms of the facility agreement.

SIROCCO
The Sirocco loan relates to a term loan facility granted to four Sirocco borrowers. The purpose of the loan was for the sponsors, Ares European Real Estate Fund V SCSp and Ares European Real Estate Fund V (Dollar) SCSp, to refinance existing indebtedness and to finance or refinance permitted capital expenditure projects.

The EUR 150.8 million loan is secured against four freehold office assets in Vienna, Austria; Rotterdam, Netherlands; Helsinki, Finland; and Ratingen/Düsseldorf, Germany. In March 2021, Jones Lang Lasalle Incorporated (JLL) carried out valuations on all four properties and, in aggregate, appraised their market value at EUR 237.5 million. As a result, the Sirocco loan represents a LTV ratio of 63.5%. The valuers' NOI is EUR 11.6 million, implying a NIY of 4.9% and a day-one DY of 7.7%. As of February 2021, the portfolio was 83% occupied by 56 unique tenants with the largest 10 tenants accounting for 56.1% of the EUR 13.2 million in-place GRI. DBRS Morningstar’s long-term stable NCF assumption for the Sirocco portfolio is EUR 10.3 million and DBRS Morningstar's long-term valuation of the portfolio is EUR 171.1 million.

The loan bears interest equal to three-month Euribor plus a loan margin of 3.75%. The interest rate risk is to be fully hedged by a prepaid cap with a strike rate of no more than 1.75% provided Standard Chartered Bank, a hedge provider with a rating plus relevant triggers, as at the cut-off date, commensurate with that of DBRS Morningstar’s rating criteria. Starting 18 months after the loan utilisation date, the borrower is required to amortise the loan by 0.25% of the outstanding amount of the Sirocco loan per quarter until the second loan anniversary date, after which the repayment steps up to 0.50% of the outstanding amount of the loan at each quarterly payment date. After the third anniversary of the loan utilisation date and until the fourth anniversary date, the quarterly repayment steps up to 0.75% of the outstanding loan amount.

The Sirocco loan has LTV and DY covenants for cash trap and EODs. The LTV cash trap covenant is set at 70.99% and the DY cash trap covenant is triggered if the DY falls below 6.75%. The LTV default covenant is set at 80.99% and the DY default covenant is triggered if the DY falls below 5.81%.

The initial loan maturity date is in April 2024; however, two one-year extension options are available provided that (1) no loan EOD is continuing and (2) hedging agreements in respect of the relevant extended period have been entered into which comply with the terms of the facility agreement.

In aggregate, DBRS Morningstar's NCF and valuation for the Big Mountain portfolio and the Sirocco portfolio are EUR 22.91 million and EUR 343.97 million, respectively, implying a blended cap rate of 6.7%. This represents an DBRS Morningstar LTV of 91%, a haircut to the issuers’ day one NCF of 19.7% and a haircut to the combined market value of both loan portfolios of 29.6%. Also in its evaluation and in relation to the Big Mountain properties only, DBRS Morningstar made a qualitative adjustment to its rating hurdles to give benefit to the prescribed release price, ranging from the higher of (1) an amount equal to the 115% of the allocated loan amount for that property and (2) an amount equal to the 73% of the disposal proceeds for that property, and also to the LTV cash trap covenant pertaining to be no greater than 40% in year 4 which resulted in a one-notch enhancement to DBRS Morningstar's ratings on the Class B and Class C notes.

Based on the premise that the two loans will be fully extended, the Transaction is expected to repay in full by 22 April 2026. If the loans are not repaid by then, the Transaction will have seven years to allow the special servicer to work out the loan(s) by April 2033 at the latest, which is the legal final maturity date.

The Transaction features a Class X interest diversion structure. The diversion trigger is aligned with the financial covenants of the loans; once triggered, any interest and prepayment fees due (or, where such Class X diversion trigger event relates to one loan only, a portion thereof attributable to such loan) to the Class X certificate holders will instead be paid directly into the Issuer’s transaction account and credited to the Class X diversion ledger. The diverted amount will be released once the trigger is cured; only following the expected note maturity or the delivery of a note acceleration notice can such diverted funds be used to amortise the notes and the issuer loan.

On the closing date, the Issuer established a reserve that was credited with the initial issuer liquidity reserve required amount. Part of the noteholders’ subscription for the Class A notes was used to provide 95% of the liquidity support for the Transaction, which was set at EUR 11.8 million or 4.4% of the total outstanding balance of the notes. The remaining 5% was funded by the issuer loan. DBRS Morningstar understands that the liquidity reserve will cover the interest payments to Classes A to D. No liquidity withdrawal can be made to cover shortfalls in funds available to the Issuer to pay any amounts in respect of interest due on the Class E notes. The Class D and Class E notes are subjected to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes.

Based on a blended cap strike rate of 1.63% and a Euribor cap of 5.00% for the two loans, DBRS Morningstar estimated that the liquidity reserve will cover 18 months of interest payments and eight months of interest payments, respectively, assuming the Issuer does not receive any revenue.

To maintain compliance with applicable regulatory requirements, Goldman Sachs Europe retained an ongoing material economic interest of 5% of the securitisation via an issuer loan, which was advanced by Goldman Sachs Europe.

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, 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.

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. 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.

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).

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 Goldman Sachs Europe, various due-diligence reports prepared by the delegates of Goldman Sachs Europe, legal documents prepared by Paul Hastings LLP, and a valuation report prepared by Savills, Jones Lang Lasalle, 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 this rating 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. 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 rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

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

Class E Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class E Notes at B (high) (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 Limited for use in the United Kingdom.

Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 27 April 2021

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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 (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: 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].