DBRS Morningstar Confirms Ratings of Berg Finance 2021 DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the Commercial Mortgage-Backed Floating-Rate Notes Due April 2033 (the notes) issued by Berg Finance 2021 DAC (the Issuer), as follows:

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

The trends on all ratings remain Stable.

The rating confirmations follow the good performance of the loans, driven by an orderly deleveraging of the transaction due to disposal of properties. The proceeds have been applied pro rata, and note-to-value has improved for all classes since issuance.

The transaction is a EUR 295.3 million securitisation of initially two senior commercial real estate (CRE) loans: the Big Mountain loan (EUR 148.3 million) and the Sirocco loan (EUR 150.8 million). The two loans were advanced in March and April 2021, respectively, by Goldman Sachs Bank Europe SE (Goldman Sachs Europe) to unrelated independent borrowing entities. The loans were secured by on aggregate 29 predominantly office assets in the Netherlands, France, Austria, Finland, and Germany.

The purpose of the Big Mountain loan was for the sponsor, Fortress Investment Group LLC, to finance the acquisition of certain target companies in the Stena AB group, which owned office assets in the Netherlands and in France. Furthermore, the loan refinanced the existing intragroup indebtedness. The purpose of the Sirocco loan was for the sponsors, Ares European Real Estate Fund V SCSp and Ares European Real Estate Fund V (Dollar) SCSp, to refinance existing indebtedness and permitted capital expenditure projects.

As communicated in a notice published on 19 May 2022, the Big Mountain loan was pre-paid in full. The Sirocco loan amount is EUR 90.6 million, now representing the only outstanding loan in the transaction. The number of properties in the transaction decreased to 2, from 29 at origination.

According to the special notice, the proceeds from Big Mountain loan repayment will be applied towards the notes on the note payment date in July 2022.

The Sirocco loan is a three-year floating-rate loan with two one-year extension options. The loan maturity is on 15 April 2024 and the longest extended maturity date is 15 April 2026. The loan interest is based on the three-month Euribor rate (subject to zero floor) plus a margin of 3.75% p.a. The loan is fully hedged with an interest rate cap with a strike rate of 1.75%. There is no scheduled amortisation for the first 18 months. Afterwards, the borrower is required to amortise the loan by 0.25% of the outstanding loan amount per quarter until the second loan anniversary date, after which the repayment steps up to 0.5% per quarter. After the third anniversary of the loan utilisation date and until the fourth anniversary date, the quarterly repayment steps up to 0.75% of the outstanding loan amount.

Since origination, two properties were sold, and the current market value of the two remaining properties stands at EUR 162.6 million, according to the initial valuation prepared by Jones Lang LaSalle in March 2021. The properties are located in Rotterdam (the Netherlands) and Vienna (Austria). The tenancy profile of the portfolio is granular with a total of 42 tenants. The top 5 tenants represent 48.3% of the current contractual rent with a weighted-average unexpired lease term (WAULT) of 3.3 years. The vacancy rate has slightly increased to 17.5%, from 16.9% at cut-off.

The resulting loan to value (LTV) is down to 55.7% from 63.5% at closing. The servicer reported an issuer net cash flow (NCF) of EUR 6.6 million and a debt yield (DY) of 7.6%, down slightly from 7.7% at cut-off. All covenants were met and the loan is performing.

DBRS Morningstar updated its underwriting NCF to EUR 6 million and confirmed the cap rate at 6%. The resulting DBRS Morningstar value of EUR 100.9 million reflects a 37.9% haircut to the initial valuation.

The transaction benefits from a liquidity reserve facility, 95% of which was funded from the Class A notes at closing. The remaining 5% was funded by the issuer. The current outstanding balance of the facility is EUR 7.7 million and it covers the interest payments of Class A to Class D notes. The Class D and Class E notes are subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes. Based on a blended cap strike rate of 1.63%, DBRS Morningstar estimated that the liquidity reserve would cover 34 months of interest payments, or 16 months of interest payments if based on the Euribor cap of 5% after loan maturity.
The maturity of the notes is in April 2033, providing seven years of tail period after the Sirocco loan’s extended maturity.

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/396929.

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.

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 quarterly investor reports provided by Mount Street Mortgage Servicing Limited, as well as EIRP files, latest available tenancy schedules and transaction notices.

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 on this transaction took place on 26 May 2021, when DBRS Morningstar finalised its provisional ratings on the notes.

The lead analyst responsibilities for this transaction have been transferred to Patrizia Catanese.

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 with the parameters used to determine the ratings (the Base Case):

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

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

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

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

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

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, Credit Ratings
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 27 April 2021

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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 (17 May 2022), https://www.dbrsmorningstar.com/research/396929

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].