DBRS Morningstar Assigns Provisional Ratings to Taurus 2021-4 UK DAC

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Taurus 2021-4 UK DAC (the Issuer):

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

The Issuer is a partial securitisation (the Transaction) of two senior commercial real estate (CRE) loans: the Fulham loan (GBP 637.5 million) and the United VI loan (GBP 210.9 million) (together, the Loans). The Loans are to be advanced by [Bank of America Europe DAC] to entities owned and managed by the Blackstone Group Inc. (Blackstone or the Sponsor). The Loans are secured separately by two portfolios which, in aggregate, comprise 325 light-industrial and logistics assets in the UK.

Both loan portfolios are integrated into Blackstone's logistics platform, Mileway, as part of its UK portfolio, which already covers three other DBRS Morningstar-rated commercial mortgage-backed security (CMBS) transactions: BAMS CMBS 2018-1 DAC, Taurus 2019-2 UK DAC, and Scorpio (European Loan Conduit No.34) DAC. For a complete view of the securitised Mileway platform in Europe, please refer to the Mileway (Blackstone) public portfolio on DBRS Viewpoint, DBRS Morningstar's free, web-based CMBS platform.

Fulham
The Fulham loan relates to a term loan facility granted to [10] Fulham borrowers or Blackstone as ultimate beneficiary. The purpose of the loan is for the Sponsor to refinance the existing Fulham loan, which was previously securitised in Taurus 2020-2 UK DAC, following Blackstone's acquisition of three portfolios of urban logistic assets: Hansteen, Cara, and United (together, the Fulham portfolio). The loan follows a pari passu-ranking A+B structure where Facility A of GBP 540.1 million and Facility B of GBP 90.4 million, when aggregated, form the total commitments under the loan.

The Fulham portfolio is highly granular with 276 mostly urban logistics and multi-let properties, [12] of which are classified as land parcels. The portfolio offers a total of 15.5 million square feet (sf) which, as of the cut-off date on [], was 90% occupied by over 2,000 tenants. The largest 10 tenants represent only 13.0% of the gross rental income (GRI) and the largest tenant, XPO Supply Chain UK Limited (XPO), only accounts for 3.8%. No other tenant contributes more than 1.5% in total GRI. The weighted-average unexpired lease term (WAULT) and WA unexpired lease to break (WAULB) are 3.6 years and 2.6 years, respectively.

The portfolio is geographically diversified across the UK; however, there is some concentration in the North East and Yorkshire and the Midlands, which represent 26% and 19% of the total market value (MV), respectively. The remaining assets are located in the North West (11% of MV), South East and London (17%), South West and Wales (13%), and Scotland (14%). The majority of the properties are located within 20 kilometres (km) of major metropolitan areas.

On 21 June 2021, Jones Lang Lasalle Incorporated (JLL) conducted valuations on the properties and appraised their MV at GBP 934.4 million. JLL is of the opinion that the MV of the portfolio, as a single lot, is GBP 1,027.5 million, which equates to a premium of 10% above the aggregated individual property valuations; however, for the purposes of the financing, the portfolio premium was capped 5%, giving a value of GBP 980.8 million. Based on this valuation, the Fulham loan represents a loan-to-value (LTV) ratio of 65%. The valuer's net operating income (NOI) is GBP 57.3 million, implying a net initial yield (NIY) of 5.8% and a day-one debt yield (DY) of 9.0%. DBRS Morningstar’s long-term stable net cash flow (NCF) assumption for the Fulham portfolio is GBP 49.7 million and DBRS Morningstar's value for the portfolio is GBP 712.2 million. DBRS Morningstar notes that there is a potential stamp duty liability in reference to certain properties in the Hansteen subportfolio, which could arise when the legal titles are transferred. DBRS Morningstar made a negative adjustment of GBP 4 million, matching that of the potential liability, to conclude a DBRS Morningstar value of GBP 708.2 million, representing a haircut of 27.8% to the JLL value. DBRS Morningstar notes that it did not attribute any value to the 12 undeveloped land parcels which JLL valued at GBP 29.0 million; as such, the value haircut between DBRS Morningstar's stressed value and the commercial buildings' MV is 25.6%.

The Sponsor has identified 44 properties as noncore assets, which mostly include land parcels, office properties, and other nonindustrial properties. Prior to the refinancing, seven assets had already been disposed of or excluded from the collateral pool due to agreed sales. The Sponsor can dispose of any assets under permitted disposals by repaying a release price of 105% of the allocated loan amount (ALA) up to the release price threshold, which equals 10% of the portfolio valuation. Once the release price threshold is met, the release price will be 110% of the ALA. The release price will be reduced pro rata by prepayment of release premiums to a minimum of 102.5% of the ALA. Following a change of control (COC), the release price will be 115% of the ALA.

The loan is interest only (IO) and bears interest equal to the floating rate of Sterling Overnight Index Average (Sonia) plus a loan margin of [1.75]%, which is subject [in certain circumstances] to a downward adjustment following the application of any reverse-sequential principal in respect of the rated notes in an amount [corresponding to any related reduction in the note WA cost (WAC)] and subject to a floor of not less than the percentage points per annum (p.a.) that are sufficient to cover the Issuer's ability to meet payments in respect of the Issuer's priority expenses. The interest rate risk is to be fully hedged by a prepaid cap set at the higher of 1.5% and the level required to ensure at least 2.0 times (x) hedged interest coverage ratio (ICR) and is to be provided by [tbd], a hedge provider with a rating plus relevant triggers that are commensurate with that of DBRS Morningstar’s rating criteria as at the cut-off date.

The Fulham loan has LTV and DY covenants for cash trap and following a permitted COC (PCOC) for events of default (EODs). The LTV cash trap covenant is set at 75%. The DY cash trap covenant is triggered if the DY falls below 8.1% on or prior to the third anniversary of the utilisation date and if it falls below 9.4% thereafter. Following a PCOC, the LTV financial covenant is triggered if the LTV ratio is greater than the lower of (1) the sum of (A) the LTV Ratio (expressed as a percentage) on the COC date and (B) 15%; and (2) the sum of (A) [opening LTV ratio] and (B) 15% or if the DY is less than the higher of (1) [7.65]% and (2) [the DY as at the COC date multiplied by 0.85%]. The loan maturity date is in August 2026.

The loan seller, Bank of America Europe DAC (BofA), will retain an ongoing material economic interest of approximately [20]% of the loan, part of which will include the applicable regulatory requirements of a Vertical Risk Retention (VRR) loan of no less than 5% of the securitised loan balance that the loan seller will advance to the Issuer at closing. DBRS Morningstar anticipates that there will be a 81% LTV mezzanine facility that will attach at 65% LTV, but will be structurally and contractually subordinated to the senior facility.

United VI
The United VI loan relates to a term loan facility granted to [6] United VI borrowers or Blackstone as ultimate beneficiary. The purpose of the loan is for the Sponsor to finance and refinance (1) the acquisition of a portfolio of 49 mostly urban logistics single-let and multi-let properties, (2) the indebtedness of members of the Group, and (3) general corporate expenses. The loan follows a pari passu-ranking A+B structure where Facility A of GBP 199.1 million and Facility B of GBP 11.8 million, when aggregated, form the total commitments under the loan.

The portfolio of logistics assets offers a total of 2.9 million sf which, as of the cut-off date, was 84% occupied by approximately 250 tenants. The largest 10 tenants represent 38.0% of the GRI and the largest tenant, AAH Pharmaceuticals Limited (AAH), accounts for 5.3%. The WAULT and WAULB are 4.3 years and 3.6 years, respectively.

The portfolio is geographically diversified across the UK; however, there is significant concentration in the North west, which represents 48% of the total MV. The remaining assets are located in the North East (11% of MV), South East and London (18%), and the Midlands (11%). The majority of the properties are located within 20 km of major metropolitan areas.

On 24 May 2021, Cushman & Wakefield plc (C&W) conducted valuations on the properties and appraised their MV at GBP 304.1 million. The MV of the portfolio, including a portfolio premium, is GBP 319.4 million. For the purposes of the financing, the MV of the United VI portfolio is taken to be GBP 324,452,250, which includes the anticipated cost price of the Magna Business Park property that remains under construction. Based on this valuation, the United VI loan represents a LTV ratio of 65%. The valuer's NOI is GBP 14.7 million, implying a NIY of 4.5% and a day-one DY of [7.0]%. DBRS Morningstar’s long-term stable NCF assumption for the United VI portfolio is GBP 13.1 million and DBRS Morningstar's value for the portfolio is GBP 210.7 million, representing a haircut of [32.0]% to the C&W value.

Two properties have not yet been acquired by the relevant obligor: [Crosspark 52] and [Magna 34 Business Park (Dev) units 1A – 3H] (the Magna Business Park Development). The Magna Business Park Development is currently under construction and will be acquired by the relevant obligor(s) once practical completion has been achieved. The Senior Facility Agreement makes accommodation for these delayed acquisitions through separate tranches where funds are held in a prepayment account, although DBRS Morningstar notes that there is no guarantee that the Magna Business Park Development will ultimately be acquired by the relevant obligor(s), to which end the funds will be used to prepay the loan. The Sponsor can dispose of any assets under permitted disposals by repaying a release price of 105% of the ALA up to the release price threshold, which equals 10% of the portfolio valuation. Once the release price threshold is met, the release price will be 110% of the ALA. The release price will be reduced pro rata by prepayment of release premiums to a minimum of 102.5% of ALA. Following a COC, the release price will be 115% of the ALA.

The loan is IO and bears interest equal to Sonia plus a loan margin of 1.95%, which is subject [in certain circumstances] to a downward adjustment following the application of any reverse-sequential principal in respect of the rated notes in an amount [corresponding to any related reduction in the note WAC] and subject to a floor of not less than the percentage points p.a. that are sufficient to cover the Issuer's ability to meet payments in respect of the Issuer's priority expenses as estimated by the arranger acting reasonably and in good faith. The interest rate risk is to be fully hedged by a prepaid cap set at the higher of 1.5% and the level required to ensure at lease 2.0x hedged ICR and is to be provided by [tbd], a hedge provider with a rating plus relevant triggers that are commensurate with that of DBRS Morningstar’s rating criteria as at the cut-off date.

The United VI loan has LTV and DY covenants for cash trap and following a PCOC for EODs. The LTV cash trap covenant is set at 75%. The DY cash trap covenant is triggered if the DY falls below 6.5% on or prior to the third anniversary of the utilisation date and if it falls below 7.5% thereafter. Following a PCOC, the LTV financial covenant is triggered if the LTV ratio is greater than the lower of (1) the sum of (A) the LTV ratio (expressed as a percentage) on the COC date and (B) 15%; and (2) the sum of (A) [opening LTV ratio] and (B) 15%, or if the DY is less than the higher of (1) [5.95%; and (2) [the DY as at the COC date multiplied by 0.85%]. The loan maturity date is in August 2026.

The loan seller, BofA, will retain an ongoing material economic interest of approximately [(1) [10]% of the securitisation, part of which will include the applicable regulatory requirements of a VRR loan of no less than 5% of the securitised loan balance that the loan seller will advance to the Issuer at closing. It is anticipated there will be a 81% LTV mezzanine facility that will attach at 65% LTV, but will be structurally and contractually subordinated to the senior facility.

In aggregate, DBRS Morningstar's NCF and valuation for the Fulham and United VI portfolios are GBP 62.9 million and GBP 918.8 million, respectively, implying a blended cap rate of 6.8%.

The Transaction is expected to repay in full by 15 August 2026. If the Loans are not repaid by then, the Transaction will have [five] years to allow the special servicer to work out the loan(s) by [August 2031] 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 certificateholders 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.

The Arranger has indicated that on the transaction closing date, the Issuer will establish a reserve that will be credited with the initial Issuer liquidity reserve required amount. Part of the noteholders’ subscription for the Class A Notes will be used to provide 95% of the liquidity support for the Transaction, which will be set at EUR 15.5 million or 2.2% of the total outstanding balance of the notes. The remaining 5% will be funded by the Issuer loan. DBRS Morningstar understands that the liquidity reserve will cover the interest payments to the Class A to C Notes. 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 D, Class E, and Class F Notes. The Class E and Class F Notes are subjected to an available funds cap where the shortfall is attributable to an increase in the WA margin of the notes.

Based on a cap strike rate of 1.5% and a Sonia cap of 4.00% for the two loans, DBRS Morningstar estimated that the liquidity reserve will cover 12 months of interest payments and eight months of interest payments, respectively, assuming the Issuer does not receive any revenue.

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. The ratings are based on additional analysis 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 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-tocredit-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-coronaviruscovid-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 British pound sterling unless otherwise noted.

The principal methodology applicable to the rating 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 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/381451/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include Bank of America, JLL and C&W and its delegates.

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 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 an expected to be issued new financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

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 with the parameters used to determine the rating (the Base Case):

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

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

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

Class E 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 GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: Mirco Iacobucci, Senior Vice President
Initial Rating Date: 27 July 2021

DBRS Ratings Limited
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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.
-- Currency Stresses for Global Structured Finance Transactions (18 February 2021), https://www.dbrsmorningstar.com/research/373856/currency-stresses-for-global-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].