DBRS Morningstar Assigns Provisional Ratings to Cassia 2022-1 S.R.L. with Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Cassia 2022-1 S.R.L. (the Issuer):

-- Class A1 notes at AA (low) (sf)
-- Class B1 notes at BBB (high) (sf)
-- Class C1 notes at BB (high) (sf)
-- Class D1 notes at B (low) (sf)

The trends on all ratings are Stable.

The transaction is a two-loan conduit securitisation arranged by Bank of America Securities and Goldman Sachs International and comprises two separate commercial real estate (CRE) senior loans (the Thunder II Loan and Jupiter Loan) advanced to borrowing entities ultimately owned by The Blackstone Group Inc. (Blackstone or the Sponsor).

The two loans, totaling EUR 276.4 million as of 30 September 2021 (the Cut-Off Date) are backed by 42 big-box and last-mile logistics properties in Italy. On 1 October 2021, CBRE Ltd. (CBRE) conducted valuations on the properties and appraised their market value (MV) at EUR 384.6 million. CBRE believes that the MV of the portfolio as a single lot is EUR 394.9 million, which equates to a premium of approximately 2.7% above the aggregated individual property value. The two senior loans vary in size, but they have the same loan-to-value ratio (LTV) of 70.0%.

By loan amount, the larger loan is the Thunder II loan with an outstanding balance of EUR 191.8 million whereas the Jupiter loan has an outstanding balance of EUR 84.6 million. Each loan bears interest at a floating rate equal to three-month Euribor (subject to zero floor), plus a margin that is a function of the weighted average (WA) of the aggregate interest amounts payable on the notes. As a result, there will be no excess spread and the Sponsor will pay the Issuer costs in accordance with the ongoing financing costs letter.

The interest rate risk is to be fully hedged by a prepaid cap with a strike rate set at the higher of 1.5% and the level required to ensure at least 2.0 times (x) hedged interest coverage ratio and is to be provided by a hedge provider with a rating plus relevant triggers that are commensurate with that of DBRS Morningstar’s rating criteria.

The Thunder II borrower is an Italian closed-end fund, whereas the Jupiter borrowers are split among an Italian closed-end fund, Jupiter Fund, and two limited liability companies, Mileway Italy 2021 Bidco S.r.l. (Mileway or the Bidco) and Bracchi Immobiliare Logistica S.r.l. (Bracchi or the Target Company) with the three relevant facilities: (1) EUR 55,547,318 Jupiter Facility A, (2) EUR 25,075,682 Jupiter Facility B, and (3) EUR 4,000,000 Jupiter Facility C. The Sponsor plans to restructure the borrower structure of the Jupiter loan and complete the reverse merger of the Bidco into its subsidiary, the Target Company (with Bracchi as the surviving legal entity) within six months of utilisation. Until the restructuring is completed, the Bidco will not have sufficient cash to service its portion of the loan (the Jupiter Facility B) and will not benefit from the security over the assets, which are held instead by the Target Company. In the unlikely scenario that a loan defaults during the restructuring and the start of an insolvency proceeding under Italian law, the Bidco's debt will rank junior to any unsecured creditors of the Target Company. To mitigate this risk, Facilities B and C will be funded to a blocked account and only released once the merger has happened. If the merger does not occur within six months of utilisation, both Facility B and Facility C must be prepaid in full.

Although the Coronavirus Disease (COVID-19) has negatively affected all CRE sectors, the light-industrial/logistics assets seem to fare better than other asset types. The portfolio has performed resiliently through the pandemic and, based on collection data from the Sponsor, there is currently only around 3.0% of gross rental income (GRI) in arrears for more than 30 days.

The Thunder II loan is backed by 20 big-box logistics assets that are predominantly located in the central and northern regions of Italy, including Florence, Milan, and Genoa (the Thunder II Portfolio). The purpose of this loan is to refinance Blackstone's acquisition of the Thunder II Portfolio, which was acquired through 11 separate transactions. As at the Cut-Off Date, the collateral offered 341,323 square metres (sqm), which was fully occupied on a WA unexpired lease term to break (WAULTb) and to expire (WAULTe) of 4.1 years and 9.7 years, respectively.

CBRE valued the Thunder II Portfolio at EUR 266.9 million as of 1 October 2021, with a 2.7% premium provided that the assets are sold in a single transaction, which brings the valuation up to EUR 274.0 million. As at the Cut-off Date, the properties generated EUR 16.2 million of GRI and EUR 14.1 million of net operating income (NOI), which reflects a 5.9% gross initial yield (GIY) and a 5.2% net initial yield (NIY), respectively, and a day-one debt yield (DY) of 7.4%. DBRS Morningstar’s long-term stable net cash flow (NCF) assumption and the DBRS Morningstar Value for the Thunder II Portfolio are EUR 11.7 million and EUR 178.9 million, respectively, representing a haircut of 34.7% to the CBRE valuation.

The Thunder II loan has LTV and DY covenants for cash trap and, following a permitted structural change (PSC), for events of default (EODs). The LTV cash trap covenant is set at the LTV ratio (expressed as a percentage) on the date of the facility agreement plus 10%. The DY cash trap covenant is set at 6.0% in years one to three and at 6.5% in years four to five. Following a PSC, the LTV financial covenant is triggered if (1) the LTV ratio is higher than the lower of (A) LTV ratio as at the date of the facility agreement plus 12.5% and (B) the LTV ratio as at the PSC date plus 15%; and if (2) the DY is less than the higher of (A) 87.5% of the DY as at the date of the facility agreement and (B) 85% of the DY as at the PSC date.

The Jupiter Loan is secured by 22 last-mile logistics assets located across Italy, including Bergamo, Milan, and Florence (the Jupiter Portfolio), which Blackstone is acquiring in seven transactions. This portfolio will sit within Blackstone’s established Mileway platform. As at the Cut-Off Date, the properties offered 165,997 sqm, which was 93.8% occupied on a WAULTb and WAULTe of 3.8 years and 9.6 years, respectively.

CBRE valued the Jupiter Portfolio at EUR 117.7 million as of 1 October 2021, with a 2.7% premium provided that the assets are sold in a single transaction, which brings the valuation up to EUR 120.9 million. As at the Cut-Off Date, the properties generated EUR 8.3 million of GRI and EUR 7.0 million of NOI, which reflects a 6.8% GIY and a 5.8% NIY, respectively, and a day-one DY of 8.3%. DBRS Morningstar’s long-term stable NCF assumption and the DBRS Morningstar Value for the Jupiter Portfolio are EUR 5.7 million and EUR 85.8 million, respectively, representing a haircut of 29.0% to the CBRE valuation.

The Jupiter loan has LTV and DY covenants for cash trap and, following a PSC, for EODs. The LTV cash trap covenant is set at the LTV ratio (expressed as a percentage) on the date of the facility agreement plus 10%. The DY cash trap covenant is set at 7.5% in years one to three and at 7.7% in years four to five. Following a PSC, the LTV financial covenant is triggered if (1) the LTV ratio is higher than the lower of (A) LTV ratio as at the date of the facility agreement plus 12.5% and (B) the LTV ratio as at the PSC date plus 15%; and if (2) the DY is less than the higher of (A) 87.5% of the DY as at the date of the facility agreement and (B) 85% of the DY as at the PSC date.

The Sponsor can dispose of any assets securing the loans by repaying a release price of 100% of the allocated loan amount (ALA) up to the first-release price threshold, which equals 10% of the portfolio valuation. Once the first-release price threshold is met, the release price will be 105% of the ALA up to the second release price threshold, which equals 20% of the portfolio valuation. The release price will be 110% of the ALA thereafter. Following a PSC, the release price will be 115% of the ALA.

No later than the interest payment date (IPD) occurring on 22 August 2022 and on a date (the Second Closing Date) to be agreed with the arrangers, the Issuer will be entitled at its option to raise further funds through the issuance of new notes. The proceeds from the issuance of the new notes are expected to refinance one or two new loan facilities, namely the Camelot Loan and the Thunder I Loan, which will thereafter form part of the Issuer’s assets available for the purpose of making payments in respect of the notes. The new notes, if issued, will be issued in sub-classes of the existing notes (namely the Class A2, Class B2, Class C2, and Class D2 notes) and will rank pari passu with the existing notes. There will be conditions to the issuance of the new notes including, inter alia, that there is no event of default then outstanding and confirmation from the rating agencies that each sub-class of new notes will be assigned the same rating as the corresponding sub-class of original notes and/or receipt of a rating agency confirmation that the then current rating of the existing notes will not be adversely affected by the advancing of the relevant senior loan(s) and the issuance of the related new notes. The new notes will be priced on the further issuance date and may have a different margin than the initial notes. Following the issuance of the new notes, the loan margins will be reset to reflect the revised WA margin of the notes, thus all notes will be backed by all of the loans and any prepayments will be applied pro rata to notes of the same class as between existing and new notes.

For the purpose of satisfying the applicable risk retention requirements, Bank of America Europe DAC, Milan Branch (the VRR Lender) will advance a EUR [7.2] million loan (the VRR Loan) to the Issuer on the closing date and Goldman Sachs Bank Europe SE (the VRR Noteholder) will subscribe for EUR [7.2] million in notes (the VRR Notes and, together with the VRR Loan, the VRR Instruments) to be issued by the Issuer on the closing date. As at the closing date, the aggregate principal amount of the VRR Instruments will hence be EUR [14.4] million. On any Second Closing date, the Issuer will also make a further drawdown under the VRR Loan and a further subscription under the VRR Notes in an amount sufficient to comply with the applicable risk retention requirements.

On the closing date, EUR [10,925,000] of the proceeds of issuance of the Class A1 Notes together with EUR [575,000] of the amount drawn under the VRR Instruments will be used by the Issuer to fund a reserve (the Issuer Liquidity Reserve) in an aggregate amount equal to EUR [11,500,000] and such amount will be available to provide liquidity support to the Class A1 notes and the Class B1 notes and certain payments under the VRR Instruments. DBRS Morningstar estimates that the commitment amount at closing is equivalent to approximately 19 months of coverage based on the hedging terms mentioned above or approximately 12 months of coverage based on the 4% Euribor cap. The liquidity reserve will be reduced based on note amortisation, if any, and in the event of a substantial MV decline of the property portfolio. If any new notes are issued, the Issuer Liquidity Reserve will be further funded with a portion of proceeds from the issuance of the Class A2 notes, together with a portion of the further drawdown proceeds from the VRR Instruments on the Second Closing Date.

The Class D1 notes are subject to an available funds cap where the shortfall is attributable to an increase in the WA margin of the notes.

The loan maturity for each loan is May 2027, which is five years after the utilisation date. There are no extension options. The final legal maturity of the Notes falls in May 2034, seven years after the maturity of the loans. If necessary, DBRS Morningstar believes that this provides sufficient time to enforce on the loan collateral and repay the bondholders, given the security structure and jurisdiction of the underlying loan.

The Sponsor is also expected to finalise a 75% LTV mezzanine facility, which would be structurally and contractually subordinated to the senior facilities.

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.

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 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. 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 the data tape, the due-diligence reports, and additional reports provided by the arrangers and a valuation report from CBRE.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

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.

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

Class B1 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class B1 notes to BBB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class B1 notes to BB (high) (sf)

Class C1 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class C1 notes to B (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class C1 notes to CCC (sf)

Class D1 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class D1 notes to CCC (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class D1 notes to CC (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: Patrizia Catanese, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 18 March 2022

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
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 (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].