DBRS Morningstar Confirms Ratings on Usil European Loan Conduit No. 36 DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by Usil European Loan Conduit No. 36 DAC (Usil ELoC No. 36 DAC or the Issuer):

-- Class RFN Notes at AAA (sf)
-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BB (high) (sf)
-- Class F Notes at B (high) (sf)

The trend on all ratings remains Stable.

The rating confirmations follow the transaction’s stable performance over the last 12 months, with no significant change in rental performance from the last review in spite of the disruptions to rental income brought on by the Coronavirus Disease (COVID-19) pandemic and fire damage in one of the assets.

Usil Eloc No. 36 DAC is the securitisation of a EUR 723.3 million (EUR 723.9 million at issuance), floating-rate senior commercial real estate loan (the senior loan) advanced by both Morgan Stanley Principal Funding, Inc. and Morgan Stanley Bank, N.A. to borrowers sponsored by Blackstone Group L.P. (Blackstone, or the Sponsor). The senior loan is backed by a portfolio of 99 assets (100 at inception) located throughout Germany. The assets are predominantly light-industrial and warehouse properties and are part of the Mileway logistics platform. The loan refinanced the original acquisition loan and funded a progressive capex programme. In addition to the senior loan, the transaction includes a EUR 105.6 million mezzanine loan, which is structurally and contractually subordinated to the securitised senior loan.

The transaction includes a EUR 44.8 million capex facility as part of the securitized senior loan and a further EUR 6.9 million from the mezzanine loan to support Blackstone’s EUR 66 million capex budget over the life of the loan. As part of its business plan, the Sponsor intended to increase both occupancy and rental rates through the implementation of the capex project. As of August 2021, EUR 27.5 million of the capex facility has been drawn.

The portfolio has been performing steadily since the last review with contracted gross rent remaining above EUR 62.0 million over the last 12 months. The weighted-average unexpired lease term stands at 2.89 years as of Q3 2021 compared with 3.07 years in Q3 2020. Certain deferrals, rent-free periods, or lease re-gears took place, as some tenants have asked for rental relief following the onset of the COVID-19 pandemic. Per the August 2021 investor report, EUR 2.2 million worth of rent-free periods have been granted year-to-date across the portfolio.

Meanwhile, the vacancy has increased from 13.9% at last review to 18.0% in Q3 2021. This is largely driven by leases elapsing in the first quarter of the year in the Louis-Krages-Straße 30 property in Bremen, Germany, the second-largest property by annual rent in the portfolio. There was a fire at the property in April 2020, with a total of 30,000 m2 destroyed as a result. The asset is now in line for substantial redevelopment, with the sponsor allowing leases to elapse in order for the works to go ahead.

The increase in vacancy, however, did not have a negative impact on the contracted rent, which on the contrary increased to EUR 64.1 million in Q3 2021 from EUR 63.0 million in Q3 2020. This is due to the increase in the rental rates for some of the remaining tenants, notably between Q1 2021 and Q2 2021.

DBRS Morningstar has also noted a stronger performance in net rental income, which increased to EUR 58.9 million from EUR 56.9 million since the last review. This can be partially explained by the decrease in rental arrears from EUR 4.0 million in Q3 2020 to EUR 2.7 million in the latest quarter.

As a result, no changes were made to DBRS Morningstar’s underwriting assumptions with the DBRS Morningstar Net Cash Flow and stressed value remaining at EUR 49.1 million and EUR 744.4 million, respectively.

DBRS Morningstar notes that the underlying loan’s initial maturity date is 15 February 2022, with three one-year extension options available. As of the date of this rating action, it was unclear if the extension option will be exercised; as per the Senior Facility Agreement, the extension request should be submitted during the period commencing the date falling 90 days prior to the Initial Repayment Date (17 November 2021) and ending on the date falling 30 days prior to the Initial Repayment Date (16 January 2022).

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate 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 arise for many commercial mortgage-backed security (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 ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

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-creditratings.

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-riskexposure-roadmap.

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 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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include investor reports provided by Mount Street Global Limited.

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 30 October 2020, when DBRS Morningstar confirmed the ratings on all classes of notes with Stable trends.

The lead analyst responsibilities for this transaction have been transferred to Daniel Rakhamimov.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):

Class RFN Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class RFN rating of AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class RFN rating of AAA (sf)

Class A-1 Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class A-1 rating of AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class A-1 rating of AAA (sf)

Class A-2 Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class A-2 rating of AA (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class A-2 rating of A (sf)

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

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

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

Class E Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class E rating of B (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class E rating of CCC (sf)

Class F Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class F rating of CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class F rating of 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: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 21 October 2019

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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 (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/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.
-- 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].