DBRS Morningstar Confirms Ratings on Last Mile Logistics Pan Euro Finance DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of commercial mortgage-backed floating rate notes due August 2033 issued by Last Mile Logistics Pan Euro Finance DAC (the Issuer):

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

All trends on all classes of notes remain Stable.

The transaction is a securitisation of a EUR 510.2 million senior commercial real estate (CRE) loan backed by a pan-European portfolio of light-industrial and logistics assets managed collectively by Mileway and owned by Blackstone Real Estate Partners (Blackstone or the Sponsor). The senior loan is divided into two term facilities—term A and term B—with term A advanced to non-Irish borrowers and term B advanced only to Irish borrowers. Additionally, there was a EUR 102.0 million mezzanine facility at origination, contractually and structurally subordinated to the securitised senior loan, which was repaid in April 2022 as per Mileway’s recapitalisation.

The senior loan is backed by 112 predominately light-industrial or logistics assets across seven European countries (Germany, France, the Netherlands, Finland, Spain, Denmark and Ireland). At origination, the loan was backed by 113 properties with the acquisition of the Choisy asset to be completed shortly after the loan utilisation. However, the property’s completion was delayed beyond the longstop date and the loan proceeds for the asset were applied pro rata toward prepayment of the loan at the November 2021 interest payment day (IPD). As a result, the loan balance decreased by EUR 2.3 million to EUR 507.9 million while the portfolio value declined by EUR 4.5 million to EUR 758.7 million based on the aggregate market value of each property or to EUR 796.6 million, including a 5% portfolio premium, as per a valuation that Jones Lang LaSalle Limited conducted in May 2021. The loan-to-value (LTV) ratio stood at 63.8% at the May 2022 IPD, in compliance with the LTV cash trap covenant of 73.7%.

The loan performance has been in line with expectations over the past 12 months, with gross rental income (GRI) increasing to EUR 46.5 million in May 2022 from EUR 41.6 million in Q3 2021, helped by the slight improvement in vacancy. In Q1 2022, the servicer reported net operating income of EUR 45.7 million and a debt yield (DY) of 9.0%, up from 8.3% a year ago. The tenant profile remains granular, with the top 10 tenants contributing approximately 21% of the portfolio GRI.

Reflecting the changes in the portfolio’s composition outlined above, DBRS Morningstar updated its DBRS Morningstar net cash flow (NCF) to EUR 36.0 million. With the capitalisation rate remaining unchanged from the initial rating, the resulting DBRS Morningstar Value is EUR 553.1 million, representing a haircut of 27.1% to the appraised value. This did not trigger any changes to the ratings on all classes of notes, which DBRS Morningstar confirmed with Stable trends. For DBRS Morningstar’s underwriting assumptions at issuance, please refer to the transaction’s rating report.

DBRS Morningstar noted that the senior facility is denominated in euros (EUR) whereas the Danish assets and income, which amount to approximately 6.9% of the portfolio aggregated MV, are denominated in Danish kroner (DKK). In the absence of a currency swap, the borrower takes on the foreign-exchange risk between the two currencies. However, the Danish central bank has pegged the DKK exchange rate to EUR and historical data shows little fluctuation in the DKK/EUR exchange rate. To reflect this, DBRS Morningstar applied an exchange rate of DKK 7.6282 per EUR to the GRI generated by the Danish assets, the highest exchange rate allowed by the Danish central bank for all non-AAA (sf)-rated investment-grade stress scenarios and a higher exchange rate of 12.1086 DKK per EUR in the AAA (sf) stress scenario.

There are no financial covenants applicable prior to a permitted change of control (COC), but cash trap covenants are applicable both before and after a permitted COC. The cash trap covenants are set at 73.67% LTV while the DY covenant is set at 7.55% for the first and second year and steps up to 7.93% on and from the third year. After a permitted COC, the financial default covenants on the LTV and the DY will be applicable. These covenants are set at 10% above the LTV at the time of the permitted COC and the higher of 85% of the DY at the time of the permitted COC and 7.34%, respectively. The loan will also start to amortise at 1% per year after a permitted COC; however, DBRS Morningstar noted that, to be qualified as a permitted COC, the LTV should not exceed 63.67% and the new owner needs to be a qualifying transferee.
 
The transaction benefits from the liquidity reserve of EUR 11.9 million (EUR 12.0 million at origination), which is funded through the overissuance of Class A notes and through the Issuer loan, which funds the Issuer loan share of the reserve. The liquidity reserve can be used to cover any potential interest shortfalls on the Class A, Class B, and the relevant portion of the Issuer loan. DBRS Morningstar estimated that the commitment amount is equivalent to approximately 20 months of coverage based on the interest rate cap strike of 1.25% or approximately nine months of coverage based on the 4% Euribor cap.

The Class E and Class F notes are subject to an available funds cap where the shortfall is attributable to a reduction in the interest-bearing balance of the senior loan that results from prepayments or by a final recovery determination of the senior loan.

The two-year senior loan has three one-year extension options, which can be exercised if certain conditions are met. As such, the legal final maturity of the notes is in August 2033, seven years after the fully extended loan maturity date.

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 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 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 servicer reports prepared by CBRE Limited, well as EIRP files, and latest available tenancy schedules.

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 21 July 2021, when DBRS Morningstar finalised its provisional ratings on the Class A, Class B, Class C, Class D, Class E, and Class F 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 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 Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s net cash flow (NCF) would lead to an expected rating of the Class A notes at AAA (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class A notes at AA (high) (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 (high) (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class B notes at BBB (high) (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 (high) (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class C notes at BBB (low) (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 CC (high) (sf)

Class F Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class F notes at CCC (high) (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class F notes at CC (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: Violetta Volovich, Senior Analyst - European CMBS
Rating Committee Chair: Mirco Iacobucci, Senior Vice President
Initial Rating Date: 21 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.
-- Currency Stresses for Global Structured Finance Transactions (4 February 2022), https://www.dbrsmorningstar.com/research/391916/currency-stresses-for-global-structured-finance-transactions.

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].