DBRS Morningstar Finalises Provisional Ratings on Bruegel 2021 DAC

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the notes issued by Bruegel 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 (sf)

All trends are Stable.

The transaction is a EUR 220.15 million securitisation of one Dutch senior commercial real estate loan whose main purpose is to refinance the PPF loan securitised in another DBRS Morningstar-rated commercial mortgage-backed security (CMBS) transaction, Kantoor Finance 2018 DAC. The senior loan was advanced by Goldman Sachs Bank Europe SE (Goldman Sachs Europe) and is secured against nine Dutch assets, eight of which are office buildings and one of which is a retail asset. PPF Group N.V. (PPF or the Sponsor) and NL Asset Management B.V. remain the owner and asset manager of the portfolio, respectively.

The PPF loan refinanced an existing portfolio of seven office properties, one office/leased hotel, and one retail property located across the Netherlands and owned by PPF since 2014. The refinancing loan amount of the portfolio is EUR 220.15 million, which results in a day-one loan-to-value ratio of 55.7% based on CBRE Valuation & Advisory Services B.V.'s (CBRE) valuation of EUR 395.18 million as of 31 March 2021. As at March 2021 (the cut-off date), the properties were 93.2% occupied by 108 different tenants. PPF has projected a 2021 net operating income of EUR 24.08 million, which implies a net initial yield of 6.1% and a conservative day-one debt yield of 10.9%. DBRS Morningstar’s net cash flow assumption is EUR 18.3 million.

As of the cut-off date, the portfolio had been relatively less affected by the Coronavirus Disease (COVID-19) pandemic. The overall 2020 collection rate on the invoiced amounts was 96.5% with most of the assets having fully paid the rent and costs invoiced. However, the Sponsor has negotiated separate relief packages with certain tenants (most importantly with the hotel tenant, B3 B.V., which also received a rent deduction) and with some retail tenants in the portfolio. Nevertheless, the majority of the tenants are paying rent in full on time.

The loan carries a floating interest rate equal to three-month Euribor (subject to zero floor) plus a margin of 2.3% and is fully hedged with an interest rate cap strike of 1.5% purchased from HSBC Continental Europe. The expected loan maturity is on 15 August 2024 but the borrowers have two one-year extension options. The loan amortises by 1.0% per annum (p.a.) in years 2 to 4 and 2.0% p.a. in year 5.

Instead of a standard liquidity facility, the transaction benefits from a liquidity reserve of EUR 9.75 million, or 4.4% of the total outstanding balance of the notes and Issuer loan. The liquidity reserve is funded by the issuance of the Class A notes and can be used to cover interest shortfalls on the Class A, Class B, Class C, and Class D notes. According to DBRS Morningstar’s analysis, the commitment amount as at closing is equivalent to approximately 17 months and seven months of coverage for the covered notes based on the interest rate cap strike rate of 1.5% p.a. and the Euribor cap after loan maturity of 5% p.a., respectively.

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

The legal final maturity of the notes is in May 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 noteholders, given the security structure and jurisdiction of the underlying loan.

The transaction includes a Class X diversion trigger event, meaning that if the loan's financial covenants are breached, any interest and prepayment fees due to the Class X noteholders will be paid directly in the Issuer transaction account and credited to the Class X diversion ledger. However, such funds can potentially be used to amortise the notes only following the expected note maturity or the delivery of a note acceleration notice.

To maintain compliance with applicable regulatory requirements, Goldman Sachs Europe has retained an ongoing material economic interest of not less than 5% of the securitisation via an Issuer loan that 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, affecting 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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-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).

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.

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

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, legal documents prepared by Clifford Chance LLP, valuation reports prepared by CBRE, and various due-diligence reports provided to DBRS Morningstar.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

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.

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.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the rating (the Base Case):

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

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

Class D 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 BB (low) (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: 4 June 2021

DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
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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].