DBRS Morningstar Upgrades and Confirms Ratings on Oranje (European Loan Conduit No. 32) DAC; Maintains Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the Commercial Mortgage-Backed Floating Rate Notes due November 2028 issued by Oranje (European Loan Conduit No. 32) DAC (the Issuer):

-- Class A notes confirmed at AAA (sf)
-- Class B notes upgraded to AA (high) (sf) from AA (low) (sf)
-- Class C notes upgraded to A (sf) from A (low) (sf)
-- Class D notes upgraded to BBB (high) (sf) from BBB (low) (sf)
-- Class E notes upgraded to BBB (sf) from BB (sf)

The trends on all ratings are Stable.

The rating confirmation and the upgrades follow the repayment in full of the Cheetah loan in February 2022, with the proceeds being applied pro rata to the notes at the February 2022 interest payment date (IPD).

Before full repayment, the Cheetah loan had an outstanding balance of EUR 44.33 million and was scheduled to mature in February 2023. The prepayment leaves just the Marathon sponsored Phoenix loan in the CMBS transaction, which was originally backed by five loans.

The Phoenix loan was and, following loan prepayments, remains the largest loan in the transaction. It represented 51.5% of the total portfolio’s market value (MV) as at issuance. Since then, four properties have been sold, resulting in an overall 15.2% decrease in the outstanding loan balance to EUR 84.35 million as at the November 2021 IPD from an original balance of EUR 99.5 million. It is currently backed by 14 properties, which Savills Advisory Services Limited (Savills) valued at EUR 173.61 million in March 2021.

The Phoenix loan's debt yield (DY) stands at 12.49% as at the November 2021 IPD , well above the DY cash trap covenant of 10.50%. The current LTV is 48.59%, well below the LTV cash trap covenant of 61.15%. Vacancy across the portfolio slightly decreased to 19.6% (from 20.8% as at the previous quarter), with contractual rent increasing to EUR 13.3 million (from EUR 12.9 million as at the previous quarter), as shown in the latest available investor report released in November 2021. The Phoenix loan is scheduled to mature in August 2022, though it has another one-year extension option available. The final legal maturity of the notes is on 15 November 2028.

DBRS Morningstar maintained its net cash flow (NCF) assumption constant since the last review in December 2021 for the Phoenix loan at EUR 8.72 million, which, based on a cap rate of 7.25%, translates to a DBRS Morningstar value of EUR 120.3 million, representing a 30.7% haircut to the latest appraised MV of EUR 173.6 million.

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 CMBS borrowers. In addition, commercial real estate values could 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 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update 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” (17 December 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 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 servicer reports, updated rent roll and valuation reports provided by Mount Street Mortgage Servicing Limited, as well as investor and cash management reports provided by U.S. Bank Global Corporate Trust Limited.

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 3 December 2021, when DBRS Morningstar confirmed its ratings on the Class A, Class B, Class C, Class D, and Class E notes with Stable trends.

The lead analyst responsibilities for this transaction have been transferred to Violetta Volovich.

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 NCF, expected rating of Class A notes to AA (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A notes to AA (low) (sf)

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

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

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class E notes to BB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class E notes to BB (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: Violetta Volovich, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 6 November 2018

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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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 (17 December 2021), https://www.dbrsmorningstar.com/research/389947/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].