DBRS Morningstar Confirms Ratings of Scorpio (European Loan Conduit No.34) DAC

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings of the following classes Commercial Mortgage-Backed Floating Rate Notes due May 2029 issued by Scorpio (European Loan Conduit No.34) DAC:

-- Class RFN at AAA (sf)
-- 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 (sf)

All trends on all classes of notes remain Stable.

Scorpio (European Loan Conduit No.34) DAC is the securitisation of 82.5% (GBP 236.4 million) of a GBP 286.4 million floating-rate senior commercial real estate loan (the senior loan) advanced by Morgan Stanley Bank N.A. (the Loan Seller) to borrowers sponsored by Blackstone Group L.P. (Blackstone or the Sponsor). The remaining 17.5% of the senior loan was retained by the original senior lender and ranks pari passu with the securitised senior loan. The financing is also accompanied by a GBP 57.3 million (80% loan-to-value or LTV) mezzanine loan granted by BSRECP III Joint International S.à r.l. and Broad Street Credit Holdings S.à r.l. The mezzanine loan is structurally and contractually subordinated to the senior facility and is not part of the transaction.

The senior loan (64.8% LTV) is backed by a portfolio of 107 multi-let, last-mile industrial properties located throughout the United Kingdom. A total of five assets have been sold since issuance, resulting in a partial repayment of the loan by GBP 7.1 million. The current securitised loan balance is GBP 280.0 million. Blackstone acquired the assets through 16 sub-portfolio transactions between Q2 2018 and Q1 2019. Blackstone and M7 Real Estate Ltd. (M7) manage the portfolios, leveraging its asset and investment management platforms.

Since issuance, the overall performance of the portfolio has been stable, even amidst the Coronavirus Disease (COVID-19) pandemic. As of May 2022, 93.2% of the portfolio’s net lettable area (NLA) was occupied. The top five tenants contribute 7.3% of the gross rental income (GRI) with no tenant lease in the portfolio representing more than 2% of GRI. The assets are located across the UK: in Scotland (22.0% market value or MV), Northern England (25.8% MV), and the Midlands (24.8% MV). Properties accounting for a combined 27.4% of the portfolio MV are located in Southern England and Wales.

The quarter’s debt yield, to the May 2022 interest payment date, was 11.4%, which is in line with the previous quarters’ figures and is well above the covenant levels.

The borrower had three annual loan extension options available and having already extended once, and further satisfying all senior loan extension option conditions, the borrower exercised the second extension option and extended the loan maturity date until the second senior loan extended repayment date, being 15 November 2022. If all extensions are exercised the final loan maturity will be in May 2024 as the final extension option extends the loan maturity by 18 months.
In September 2020, the portfolio was revalued by Jones Lang Lasalle, which appraised the market value at GBP 439.2 million, an increase in value of 2.6% since issuance; however, following the disposal of assets the current valuation of the portfolio, as of May 2022, was GBP 430.5 million.

The loan structure does not include financial default covenants prior to a permitted change of control, but provides other standard events of default including: (1) any missing payment, including failure to repay the loan by the maturity date; (2) borrower insolvency; (3) a loan default arising as a result of any creditor’s process or cross-default. DBRS Morningstar notes that the lack of default financial covenants makes it easier for the borrower to exercise the loan maturity extension options included in the facility agreement.

The transaction includes a Reserve Fund Note (RFN), which funds 95% of the liquidity reserve (i.e., the note share part). The GBP 10.1 million RFN proceeds and the GBP 0.5 million Vertical Risk Retention (VRR) loan contribution, as of May 2022, stood to the credit of the transaction’s liquidity reserve, which works similarly to a typical liquidity facility by providing liquidity to pay property protection advances, senior costs, and interest shortfalls (if any) in relation to the corresponding VRR loan, Class A1, Class A2, Class B, Class C, and Class D notes (for further details, please see the “Liquidity Support” section in DBRS Morningstar’s rating report for this transaction). According to DBRS Morningstar’s analysis, the liquidity reserve amount will be equivalent to approximately 15 months on the covered notes, based on the interest rate cap strike rate of 2.0% per year and nine months based on the Sonia cap after the loan maturity of 5.0% per year.

The final legal maturity of the notes is expected to be in May 2029, five years after the fully extended loan term. The latest loan maturity date, considering potential extensions, is 15 May 2024. In DBRS Morningstar’s view, such structural feature provides further benefit to the securitisation with regard to loan refinancing risk and property value declines.

Class E is subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in GBP 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 investor reports and asset status reports from Mount Street Mortgage Servicing Limited and investor reports from U.S. Bank Global Corporate Trust.

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

At the time of the initial rating 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 21 June 2021, when DBRS Morningstar confirmed its ratings on the Class RFN, Class A1, Class A2, Class B, Class C Notes, Class D, and Class E notes with Stable trends.

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

Class A1 Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s net cash flow (NCF) would lead to an expected rating of the Class A1 notes at AAA (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class A1 notes at AA (low) (sf)

Class A2 Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class A2 notes at AA (low) (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class A2 notes at A (low) (sf)

Class B Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class B notes at A (low) (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class B notes at BBB (sf)

Class C Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class C notes at BBB (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class C notes at BB (high) (sf)

Class D Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class D notes at BB (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class D notes at B (sf)

Class E Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class E notes at B (low) (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class E notes at 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 GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 17 May 2019

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 (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/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].