DBRS Morningstar Confirms Ratings of Taurus 2019-2 UK DAC; Maintains Stable Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating Rate Notes due November 2029 issued by Taurus 2019-2 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)

All trends are Stable.

The rating confirmations follow the transaction’s stable performance in spite of the Coronavirus Disease (COVID-19) pandemic, which has had no impact on rent collections based on the latest servicer report for the August 2021 interest payment date (IPD).

The transaction consists of the securitisation of a 92.1% interest in a GBP 418.1 million (63.9% loan-to-value or LTV at issuance) floating-rate senior commercial real estate loan advanced by Bank of America Merrill Lynch International DAC to borrowers sponsored by Blackstone Group L.P. (Blackstone or the Sponsor). The acquisition financing was also accompanied by a GBP 65.0 million (73.9% LTV) mezzanine loan, coterminous with the senior facility. The mezzanine loan is structurally and contractually subordinated to the senior facility and is not part of the securitisation transaction.

There is no scheduled amortisation before the completion of a permitted change of control (CoC), at which time the borrower must repay the aggregate outstanding principal amount of the senior loan in quarterly instalments equal to 0.25% of the outstanding principal amount as at the date of the permitted CoC.

The legal final maturity of the notes is in November 2029, five years after the latest possible loan maturity. Considering the three one-year extension options that are conditional upon the loan being fully hedged, the latest loan maturity date is 17 November 2024. Given the security structure and jurisdiction of the underlying loan, DBRS Morningstar believes that this provides sufficient time to enforce the loan collateral, if necessary, and repay the bondholders.

At closing, the senior loan was backed by 126 urban logistics and industrial assets, well diversified throughout the UK with strategic locations in and around major UK logistics hubs. Two properties have been sold since issuance, thus reducing the senior loan outstanding balance down to circa GBP 416.5 million as at the August 2021 IPD. Furthermore, the CMBS notes have been paid down pro rata by GBP 1.38 million, according to the latest available servicer report.

Since issuance, the overall performance of the underlying portfolio has been quite stable. Vacancy increased slightly to 9.78%, but was still below the DBRS Morningstar underwritten vacancy of 11.6%. Net rental income increased as well to GBP 37.8 million from GBP 33.9 million at issuance. Consequently, the senior loan debt yield (DY) increased to 9.08%, compared to a cash trap level of 7.4%.

The LTV of the senior loan has reduced slightly to 61.33%, following a revaluation of the underlying portfolio performed by Cushman & Wakefield in September 2020 as well as the loan repayments after the disposal of two assets. The new valuation of the portfolio is GBP 695.4 million (excluding also the second asset recently sold), which includes a portfolio premium of 7.5% based on the assumption that the properties were sold as a single lot. However, based on the Adjusted Portfolio Value, as per the Facility Agreement, the value used for the LTV computation is GBP 679.2 million, with the portfolio premium capped at 5%.

DBRS Morningstar kept its net cash flow (NCF) assumption constant at GBP 29.0 million as at underwriting. In addition, DBRS Morningstar maintained its cap rate at 6.54% as at underwriting, which translates to a DBRS Morningstar stressed value of GBP 443.7 million, representing a 34.67% haircut on the most updated market value.

The loan structure does not include financial default covenants prior to a permitted CoC, after which the default covenants are based on the LTV and DY. The covenant on the LTV is such that the LTV ratio must not exceed the sum of the LTV ratio on the permitted CoC date and an additional 15.0%. Additionally, the new obligors must ensure that after the CoC date, the DY is not less than the higher of both 85.0% of the DY as of the CoC date or 6.75%.

The transaction benefits from a liquidity facility of GBP 8.0 million (or 3.6% of the total outstanding balance of the Class A and Class B or the “Covered Notes”), provided by Bank of America N.A., London Branch to fund expense shortfalls (including any amounts owed to third-party creditors and service providers that rank senior to the notes), property protection shortfalls, and interest shortfalls (including with respect to deferred interest, but excluding default interest and exit payment amounts) in connection with interest due on the covered notes. As at the August 2021 IPD, the outstanding balance of the liquidity facility has slightly decreased to GBP 7,969,727.44, proportionally with the repayments on the covered notes.

According to DBRS Morningstar’s analysis, the commitment amount provides 12 months and 6 months of coverage on the covered notes based on the cap rate of 1.75% and the Libor notes cap of 5.0% after loan maturity, respectively.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading in some cases to 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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).

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/381451/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 and U.S. Bank Global Corporate Trust Limited since issuance.

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 24 September 2020 when DBRS Morningstar confirmed its ratings on the notes maintaining the Stable trends.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at 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 net cash flow (NCF), expected rating of the Class A notes at AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class A notes at AA (high) (sf)

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

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

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

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class E notes at B (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class E notes at CCC (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: 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 GmbH for use in the European Union.

Lead Analyst: Mirco Iacobucci, Senior Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 28 August 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: 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 (29 July 2021), https://www.dbrsmorningstar.com/research/382171/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 (20 September 2021), https://www.dbrsmorningstar.com/research/384624/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: 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].