DBRS Morningstar Confirms Ratings on Arrow CMBS 2018 DAC with Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes due May 2030 issued by Arrow CMBS 2018 DAC (the Issuer):

-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (low) (sf)

The trends on all ratings remain Stable.

The rating confirmations reflect the stable performance of the transaction, with consistent growth of the portfolio’s rental income since closing. The ratings are based on information provided to DBRS Morningstar by the servicer as of the date of this press release.

The transaction is a securitisation of an originally EUR 308.2 million (69.7% loan-to-value (LTV) ratio) floating-rate senior commercial real estate (CRE) loan advanced jointly by Deutsche Bank AG, London Branch and Société Générale, London branch, with the loan sellers jointly holding approximately 5.0% of the senior loan. The loan has been extended to November 2022, with the third extension option still available. The transaction is secured by 79 CRE assets (down from 89 at issuance), which are predominantly logistics assets located in France (71.5% of market value (MV)), Germany (22.9% of MV), and the Netherlands (5.6% of MV). As of the August 2021 interest payment date (IPD), the outstanding loan balance had reduced to EUR 267.6 million (86.8% of the original whole-loan balance) following the disposal of 10 assets. Coupled with the higher valuation for the remaining assets updated in January 2021, the loan has deleveraged since issuance by more than 10 percentage points to an LTV of 59.1%.

The senior loan refinanced the existing indebtedness of the borrowers, which are located in France, Luxembourg, and the Netherlands and ultimately owned by a joint venture between Blackstone Inc. and M7. The assets are now under the management of Mileway. The sponsor’s plan was to dispose the portfolio’s non-logistics assets and to integrate the remaining part of the portfolio into its pan-European logistics platform. As of August 2021, there have been 10 property disposals: eight in France and two in the Netherlands.

The three assets disposed since the previous review are Paris Beethoven, Concorde, and La Rafale, all of which are located in France, with an aggregate MV of EUR 25.97 million at sale. As of the August 2021 IPD, the remaining portfolio reported an annualised rental income of EUR 31.7 million, down from EUR 32.9 million one year earlier that also included the combined gross rental income (GRI) of EUR 1,455,327 from the three sold properties. Overall, the rental income from the remaining assets has grown by around 3.3% since issuance.

Cushman & Wakefield conducted a revaluation of the portfolio in January 2021. The aggregated value of the 79 assets still in the portfolio was estimated at EUR 452.8 million, which is 13.0% higher than the original valuation of the same assets at issuance in June 2018.

Reflecting changes in the loan and notes balance, the portfolio’s MV and GRI, DBRS Morningstar updated its underwriting assumptions, which resulted in a DBRS Morningstar net cash flow (NCF) and DBRS Morningstar value of EUR 20.3 million and EUR 295.7 million, respectively. This did not trigger any changes to the ratings on all classes of notes, which DBRS Morningstar confirmed with Stable trends.

The transaction benefits from a liquidity facility of EUR 11.7 million (EUR 13.5 million at origination), which equals 7.6% of the total outstanding balance of the covered notes. The liquidity facility is provided by Deutsche Bank AG, London Branch and Société Générale, London Branch and can be used to cover interest shortfalls on the Class A1, Class A2, and Class B notes. According to DBRS Morningstar’s analysis, the commitment amount could provide interest payments on the covered notes of up to 26 months and 14 months based on the interest rate cap strike rate of 2.0% and the Euribor cap of 5% after loan maturity, respectively.

The borrower submitted the second extension option notice, extending the loan to November 2022, with the third extension option still available. The transaction has a 6.5-year tail period to allow the special servicer to work out the loan by 22 May 2030 at the latest, which is the legal final maturity of the notes.

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 continue to arise for many commercial mortgage-backed security (CMBS) borrowers, some meaningfully. In addition, CRE 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-credit-ratings.

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: 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 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 mainly include servicer reports provided by Situs Asset Management Ltd. 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 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 20 November 2020, when DBRS Morningstar confirmed the ratings on all 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.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the ratings (the Base Case):

Class A1 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A1 notes to AA (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A1 notes to A (high) (sf)

Class A2 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A2 notes to AA (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A2 notes to A (low) (sf)

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

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

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

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

Class F Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class D notes to B (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class D notes to 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: 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 Limited for use in the United Kingdom.

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 23 October 2018

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Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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.
-- 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].