DBRS Morningstar Confirms Ratings of Bruegel 2021 DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the Commercial Mortgage-Backed Floating-Rate Notes Due May 2031 (the notes) issued by Bruegel 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 (sf)

The trends on all ratings remain Stable.

The rating confirmations are supported by the good performance of the loan, a stable cash flow since cut-off, and the deleveraging of the transaction following the disposal of one property. The proceeds from the sale have been applied pro rata, and the note-to-value has improved slightly for all classes of notes since issuance.

The transaction is a EUR 220.15 million securitisation of one Dutch senior commercial real estate loan whose main purpose was to refinance the PPF loan securitised in another DBRS Morningstar-rated commercial mortgage-backed securities (CMBS) transaction, Kantoor Finance 2018 DAC. The senior loan was advanced by Goldman Sachs Bank Europe SE. At origination the loan was secured against nine Dutch assets – eight office buildings and one retail asset. One office building was sold in November 2021. Hence, the total number of properties now securing the loan is eight. PPF Group N.V. (PPF or the Sponsor) and NL Asset Management B.V. remain the owner and asset manager of the portfolio, respectively.

The outstanding loan amount has decreased to EUR 216.63 million, from EUR 220.15 million at cut-off. The March 2021 valuation prepared by CBRE had reported a value of EUR 389.16 million. A new valuation is not yet available. Therefore, the resulting loan-to-value (LTV) of 55.67% is down slightly from 55.71% in 2021.

The loan carries a floating interest rate equal to three-month Euribor (subject to zero floor) plus a margin of 2.3% and is fully hedged with an interest rate cap strike of 1.5% provided by HSBC Continental Europe. The expected loan maturity is on 15 May 2024, but the borrowers have two one-year extension options. The loan amortises by 1.0% per annum (p.a.) in years two to four and 2.0% p.a. in year five.

As of the May 2022 interest payment date (IPD), the servicer reported issuer net operating income (NOI) at EUR 22.1 million and debt yield (DY) at 10.8%, up from 8.9% at cut-off. Metrics have improved since origination. The vacancy has decreased to 4.6% from 5.7% at origination. The weighted-average unexpired lease term to expiry date (WAULTe) and the weighted-average unexpired lease term to break option (WAULTb) have also remained relatively long (i.e., longer than the maturity of the loan) at 6.1 years (from 6.4 years at cut-off) and 6.6 years (from 7.1 years at cut-off).

The tenant profile is fairly granular and diversified, covering a multitude of sectors, both locally and internationally. The largest tenant represents 10% of the gross rental income (GRI) in the portfolio, while the top 10 tenants provide circa 51% of the portfolio GRI. Arrears represent 2.2% of the GRI, of which nearly 40% is 90+ days and relates to the retail component of the portfolio where tenants have requested some incentives, such as rent reduction or a rent-free period, as a consequence of the restrictions imposed during the Coronavirus Disease (COVID-19). Agreements were reached with most tenants.

DBRS Morningstar updated its initial underwriting net cash flow (NCF) to EUR 18.2 million by accounting for the property that has been sold. DBRS Morningstar’s assumptions of capitalisation rate and vacancy remain unchanged from the initial underwriting. The resulting DBRS Morningstar value of EUR 279.34 million reflects a 28.2% haircut to the initial valuation.

At closing, the transaction benefited from a liquidity reserve of EUR 9.75 million, or 4.4% of the total outstanding balance of the notes and Issuer loan. The liquidity reserve was funded by the issuance of the Class A notes and can be used to cover interest shortfalls on the Class A, Class B, Class C, and Class D notes. Class D is subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes. Currently the liquidity facility balance is EUR 9.19 million. The liquidity reserve amount is equivalent to approximately 17 months on the covered notes, based on the interest rate cap strike rate of 1.5% per year and seven months based on the Euribor cap after the loan maturity of 5.0% per year.

The legal final maturity of the notes is in May 2031, providing a tail period of five years after the fully extended loan maturity.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 euro 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 investor reports provided by CBRE Services 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.

This is the first rating action since the Initial Rating Date.

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

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

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

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

Class D notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class D notes at BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class D notes at BB (low) (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, Credit Ratings
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 4 June 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/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].