DBRS Morningstar Assigns Provisional Ratings to Frost CMBS 2021-1 DAC

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Frost CMBS 2021-1 DAC (the Issuer):

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

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

The trends on all ratings are Stable.

The transaction is a securitisation of two commercial real estate (CRE) loans (the Transaction) advanced by Goldman Sachs Bank Europe SE (Goldman Sachs) to entities owned and managed by NewCold European Holding B.V. (NewCold), which is ultimately owned by Newcold Holdings LLC (the Sponsor), a temperature-controlled logistics company based in the Netherlands. One loan is denominated in British pounds sterling (the GBP Loan or Facility A) and is secured by a single cold-storage property in Wakefield, Yorkshire, UK (the Wakefield Property). The other is denominated in euros (the EUR Loan or Facility B) and is secured against one cold-storage asset in Rheine, Westphalia, Germany (the Rheine Property) and one in Argentan, France (the Argentan Property). Together, the GBP Loan of GBP 112.35 million and the EUR Loan of EUR 92.0 million form the loan under the facilities agreement. The purpose of the loan is to refinance existing indebtedness or, in respect of the Argentan Property, refinance the purchase of the Argentan Property, to pay related financing costs and for the NewCold Group's general corporate purposes.

NewCold built the Rheine Property and the Wakefield Property in 2013. Subsequently, the Wakefield Property was significantly expanded in 2017. Both properties comprise temperature-controlled and ambient storage facilities. The Argentan Property, also a temperature-controlled storage facility, was built and acquired by NewCold in 2012. The portfolio of three cold-storage properties is largely automated with high bay access and offers a total pallet capacity size of 304,928 pallets across 62,844,671 cubic feet.

As of 30 June 2021, the portfolio was approximately 85.4% occupied and 65.8% of the capacity was occupied by customers with Operating Service Agreements (OSA) as at December 2020. NewCold benefits from longstanding customer relationships and global OSAs, including those with, among others, Froneri International (Froneri) and McCain Foods Limited (McCain), which, on a weighted-average (WA) basis, equates to a contract term of 7.9 years. The assets are located strategically close to customers’ distribution centres as well as their target markets, placing NewCold as an integral part of the supply chain process for most of its key customers. The top 10 total customers contributed 80.3% to 2020 portfolio revenue with the top seven contributing 75.1% of total revenue. Froneri made up 35.4% of total 2020 revenue and is present in Wakefield, Rheine, and Argentan (to a lesser extent). McCain made up 17.1% of total 2020 revenue.

While the facilities agreement provides that the income (including interest) and principal received in respect of the Wakefield Property is allocated to prepay or repay the GBP Loan and the income (including interest) and principal received in respect of the Rheine Property and the Argentan Property is allocated to prepay or repay the EUR Loan, the GBP Loan and the EUR Loan are cross-collateralised, include cross-default provisions, and secured by all three properties. Cash flows arising in respect of the Wakefield Property will be used first to make payments under the GBP notes and cash flows in respect of the Rheine Property and the Argentan Property will be used first to make payments under the EUR notes; however, due to the cross-collateralisation and cross-default features in the facilities agreement, the GBP noteholders will be exposed to the performance of the EUR Loan and the two European properties while the EUR noteholders will be exposed to the performance of the GBP Loan and the Wakefield Property, including in each case any related foreign-exchange risk relating to the then-applicable GBP/EUR exchange rate.

The GBP Loan and the EUR Loan represent moderate-leverage financing with a loan-to-value (LTV) ratio of 60.5% and 62.4%, respectively, based on CBRE Limited’s (CBRE) 1 October 2021 valuation of GBP 185.6 million for the Wakefield Property, EUR 108.4 million for the Rheine Property, and EUR 39.1 million for the Argentan Property. DBRS Morningstar derived its calculated LTV of 78.4% and 79.1% for the GBP and EUR Loans, respectively, from DBRS Morningstar’s valuations of GBP 143.3 million and EUR 114.3 million, respectively. This relatively higher LTV is mitigated by cash trap covenants set at an LTV of 68.77% and a debt yield (DY) of 8.74% for the initial loan term. DBRS Morningstar notes that the cash trap covenants contained in the facilities agreement are calculated on an aggregate basis and any appraisal reductions are determined at a portfolio level. In these circumstances, while a base currency concept is applied, there is a related foreign-exchange exposure relating to the then-applicable GBP/EUR exchange rate. Additionally, the facilities agreement sets out financial default covenants, which are also calculated on an aggregated basis. The financial default covenants are such that the LTV must at all times be less than or equal to 76.27% and the DY on each loan interest payment date is greater than 7.71%. Based on a reported trailing 12-month (T-12) net operating income (NOI) to June 2021 of GBP 11.68 million and EUR 10.30 million, the DY at the utilisation date of 18 October 2021 was 10.4% for the GBP-denominated notes and 11.2% for the EUR-denominated notes. Accordingly, DBRS Morningstar's computed day-one DY is 9.5% for the GBP Loan and 9.3% for the EUR Loan, and is determined from a DBRS Morningstar net cash flow (NCF) assumption of GBP 10.69 million and EUR 8.54 million on the GBP Loan and the EUR Loan, respectively. The loans will bear interest equal to the sterling overnight index average (Sonia) plus the loan margin of 3.25% in respect of the GBP Loan and three-month Euribor plus the loan margin of 2.8%, in respect of the EUR Loan for the term of the loan. The interest rate risk is to be fully hedged in accordance with the terms of the facilities agreement, including by a prepaid cap with a strike rate of 2.0% provided by a hedge provider with a rating and relevant triggers, as at the cut-off date, commensurate with that of DBRS Morningstar’s rating criteria.

Each borrower must repay the loans made available to it on the fifth, sixth, seventh, and eighth loan interest payment dates in an amount equal to 0.25%. Thereafter, if certain conditions pertaining to DY, LTV, and capital expenditures (capex) in respect of the Rheine Property are not satisfied, the loan will further amortise by 0.25% per quarter if the DY at the time is higher than 10.31% or by 0.50% per quarter otherwise.

The initial loan maturity date is in November 2024; however, two one-year extension options are available provided that (1) no cash trap event or loan default is continuing or would occur as a result of the extension and (2) hedging agreements in respect of the relevant extended period have been entered into that comply with the terms of the facility agreement. Based on the premise that the loans will be fully extended, the Transaction is expected to repay in full by November 2026. If the loans are not repaid by then, the Transaction will have seven years to allow the special servicer to work out the loan(s) by November 2033 at the latest, which is the legal final maturity date.

Any excess Issuer cash flows in either currency will be applied to satisfy the Issuer’s obligations under the relevant Class X notes, made up of the Class GBP-X notes and the Class EUR-X notes. The transaction as a whole features a Class X interest diversion structure where the Class X diversion trigger is aligned with the financial covenants of the loans; once triggered, any interest and prepayment fees due to the respective Class X noteholders will instead be paid directly into the Issuer’s transaction account and credited to the Class GBP-X or Class EUR-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, which is described in the next paragraph.

To maintain compliance with applicable regulatory requirements, Goldman Sachs Bank USA will retain an ongoing material economic interest of no less than 5% of the securitisation via an Issuer loan, which Goldman Sachs Bank USA will advance on the closing date. The Issuer will also establish two reserves: (1) in respect of the GBP notes, the Issuer GBP liquidity reserve and (2) in respect of the EUR notes, the Issuer EUR liquidity reserve, which will be credited with the relevant initial Issuer liquidity reserve required amount. Part of the noteholders’ subscription for the Class A (GBP) notes and Class A (EUR) notes will be used to provide 95% of the liquidity support for the Transaction, which is initially set at GBP 2,861,579 and EUR 4,206,316 or 2.5% of the total outstanding balance of the GBP notes and 4.6% of the total outstanding balance of the EUR notes, respectively. The remaining 5% will be funded by the Issuer loan. DBRS Morningstar understands that the liquidity reserve in respect of the GBP Notes will cover the interest payments to Class A to Class D of the GBP notes and the liquidity reserve in respect of EUR Notes will cover the interest payments to Class A to Class D of the EUR 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 E (GBP) notes or the Class F (GBP) notes or the Class E (EUR) notes. The Class E (GBP), Class E (EUR), and the Class F (GBP) notes are subject 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 2%, DBRS Morningstar estimates that the liquidity reserve will cover 12 months of interest payments in respect of the covered GBP notes and 18 months of interest payments in respect of the covered EUR notes. It is anticipated that interest rates on the notes will be capped at 4% plus their respective margins. Based on a Sonia and a Euribor cap of 4.00%, DBRS Morningstar estimates that the liquidity reserve will cover nine months of interest payments in respect of the covered GBP notes and 14 months of interest payments in respect of the covered EUR notes, assuming the Issuer does not receive any revenue.

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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. The 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:
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.

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. The 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 the presentation databook and stratification book as of June 2021 provided by the arranger Goldman Sachs Bank Europe SE, a valuation report prepared by CBRE Limited, and additional reports and presentations prepared by the arranger.

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 expected-to-be-issued new financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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

Class B (GBP) Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class B rating of AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class B rating of AA (low) (sf)

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

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

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

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

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

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

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

Class D (EUR) 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 BB (low) (sf)

Class E (EUR) Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class E rating of BB (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class E rating of B (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: Dinesh Thapar, Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 1 November 2021

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 (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.
-- 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].