DBRS Morningstar Confirms Ratings of Notes Issued by Cold Finance Plc

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings of the following classes of notes of the Commercial Mortgage-Backed Floating Rate Notes due August 2029 issued by Cold Finance Plc:

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

All trends remain Stable.

Cold Finance PLC is the securitisation of a GBP 282.8 million floating-rate senior commercial real estate loan (the senior loan) advanced by Cold Finance PLC (the Issuer) to four borrowers: Wisbech Propco Ltd, Real Estate Gloucester Limited, Harley International Properties Limited, and Yearsley Group Limited (Yearsley Group). All four borrowers are ultimately owned by Lineage Logistics Holdings LLC (Lineage or the Sponsor). The purpose of the loan was to refinance an initial bridge facility provided by Goldman Sachs International for the acquisition of the Yearsley Group, a large cold storage logistics service provider, and a further refinancing of two existing UK cold storage assets. Loan proceeds were also used for general operation purposes. To maintain compliance with applicable regulatory requirements, the Sponsor holds 5.0% interest in the transaction through the issuance of non-rated Class R notes.

The senior loan is backed by a portfolio of 14 temperature-controlled and ambient storage industrial properties located throughout the United Kingdom. In November 2018, Lineage acquired Yearsley Group, which included 12 temperature-controlled storage facilities and its operational platform. The portfolio offers largely frozen storage facilities, with five of the assets providing a mixture of chilled and ambient storage options.

The portfolio is located strategically close to customers’ distribution centres as well as their target market throughout the United Kingdom, including one property in Scotland. The two largest assets by market value are located in Gloucester and Wisbech, Cambridgeshire. Since issuance, the overall performance of the portfolio has been stable. As of May 2021, 74% of the portfolio’s capacity in terms of pallet space was occupied, quarterly EBITDA was reported to be GBP 8.7 million and the 12-month trailing EBITDA GBP 34.6 million which is in line with the budget. The debt yield of 10.5% is well above the cash trap and default covenants of 9.6% and 8.6%, respectively.

The portfolio’s storage space is split with approximately 61% allocated to retail supermarkets and operators who supply to supermarkets. It is understood that this segment of the business has performed strongly during the Coronavirus Disease (COVID-19) pandemic and is still performing well. The rest of the space is taken up by restaurants and storage space for this segment of the business was still being utilised during the pandemic up to May 2021, albeit with a lower churn of inventory; however, as the UK restrictions begin to ease and more restaurants open and operate at normal levels, inventory turnover and utilisation is expected to improve. DBRS Morningstar is of the opinion that and there is sufficient headroom in the transaction for the borrower to maintain its obligations under the senior loan term.

The loan structure includes financial default covenants such that the borrower must ensure that the LTV ratio is less than 83.6% and that the DY on each interest payment date must not be equal to or less than 8.6%. Other standard events of default (EOD) include: (1) any missing payment, including failure to repay the loan at the maturity date; (2) borrower insolvency; and (3) a loan default arising as a result of any creditor’s process or cross-default.

The transaction benefits from a liquidity support facility of GBP 12.9 million (13 million at issuance) and is provided by Crédit Agricole Corporate and Investment Bank. The liquidity facility may be used to cover shortfalls on the payment of certain amounts of interest due by the Issuer to the holders of the Class A to Class D notes and no more than 20% of the outstanding Class E notes. According to DBRS Morningstar’s analysis, the liquidity reserve amount will be equal to approximately 12 months on the covered notes, based on the interest rate cap strike rate of 3.0% per annum (p.a.), and approximately nine months of coverage, based on the LIBOR cap after loan maturity of 5.0% p.a.

The final legal maturity of the notes is expected to be in August 2029, five years after the fully extended loan term. The latest expected loan maturity date, including potential extensions, is 15 August 2024. Given the security structure and jurisdiction of the underlying loan, DBRS Morningstar believes this provides sufficient time to enforce on the loan collateral, if necessary, and repay the bondholders.

COVID-19 CONSIDERATIONS
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 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. The ratings are based on additional analysis as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were 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 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 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 the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 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 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 on www.dbrsmorningstar.com 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 forRating 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 servicer reports provided by CBRE Loan Services Ltd since issuance (last 12 months).

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 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 8 July 2020, when DBRS Morningstar confirmed its ratings on the 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 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:
-- A 10% decline in DBRS Morningstar Net Cash Flow (NCF) would lead to an expected rating of the Class A notes at AAA (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at AAA (high) (sf)

Class B Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at A (high) (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at A (low) (sf)

Class C Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BBB (high) (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BBB (low) (sf)

Class D Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BB (high) (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C
notes at BB (sf)

Class E Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BB (low) (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at B (sf)

For further information on DBRS Morningstar’s 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, Vice President
Rating Committee Chair: Mirco Iacobucci, Senior Vice President
Initial Rating Date: 31 May 2019

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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.
-- 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].