DBRS Morningstar Upgrades and Confirms Ratings on Taurus 2019-2 UK DAC with Stable Trends

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the commercial mortgage-backed floating rate notes due November 2029 issued by Taurus 2019-2 UK DAC (the Issuer):

-- Class A notes confirmed at AAA (sf)
-- Class B notes upgraded to AA (sf) from AA (low) (sf)
-- Class C notes upgraded to A (sf) from A (low) (sf)
-- Class D notes confirmed at BBB (low) (sf)
-- Class E notes upgraded to BB (sf) from BB (low) (sf)

The trends on all ratings are Stable.

The rating confirmations and the upgrades follow the improved performances of the securitised senior loan in the last 12 months, with no cash trap covenant breaches recorded to date.

The transaction is a securitisation of a 92.1% interest in a GBP 418.1 million (loan-to-value (LTV) ratio of 63.9%) floating-rate senior commercial real estate loan advanced by Bank of America Merrill Lynch International DAC (Bank of America) to borrowers sponsored by Blackstone Group L.P. For the purpose of satisfying the applicable risk retention requirements, Bank of America also advanced a GBP 19.2 million loan (the Issuer Loan) to the Issuer on the closing date.

The senior loan was advanced to refinance the indebtedness of 126 urban logistic and multi-let industrial properties that are well diversified throughout the UK with strategic locations in and around major logistics hubs. Additionally, Planeta Industries S.A. provided a coterminous GBP 65.0 million mezzanine loan with an LTV of 73.9%, which is structurally and contractually subordinated to the senior facility and is not part of the transaction. As at the August 2022 interest payment date (IPD), the mezzanine loan was repaid in full. Since the utilisation date, the senior loan has been deleveraging by nearly 5% down to GBP 397.6 million as at the August 2022 IPD. The GBP 20.5 million total repayment on the senior loan is the result of 14 property sales since February 2021. As a consequence, the Issuer has received a total of GBP 18.9 million principal receipts since issuance, which were used to pay down the notes (95%) and the Issuer Loan (5%) on a pro-rata basis.

According to Cushman & Wakefield’s (C&W) revaluation as of 26 November 2021, the aggregate value of the remaining 112 properties was GBP 763.14 million, including a 10% portfolio premium capped at 5% for LTV calculation purposes, which is 16.7% higher than the aggregated value of the 126 properties initially included in the securitised pool. As a result, the reported LTV of the senior loan dropped to 52.1% as of August 2022 from 61.3% in August 2021 and 63.9% at issuance. Net rental income increased by 12.4% year over year to GBP 38.6 million from GBP 37.8 million in August 2022 as rent free periods rolled off, resulting in a debt yield (DY) of 9.7% in August 2022 compared with 9.0% in August 2021 and 8.1% at issuance. Vacancy decreased to 8.5% from 9.8% as at the last annual review, back in line with the 8.5% level at issuance.

There is no scheduled amortisation before the completion of a permitted change of control (COC), at which time the borrower must repay the aggregate outstanding principal amount on the senior loan in quarterly instalments equal to 0.25% of the outstanding principal amount as at the date of the permitted COC.

The senior loan was initially scheduled to mature on 15 November 2021, with three conditional one-year extension options available. In accordance with the senior facility agreement, the senior loan term was extended by one year to 15 November 2022 (the first extended maturity date), with another two extension options available to the borrower. According to the senior facility agreement, notice for another one-year extension should be delivered not less than 30 days and not more than 90 days prior to the first extended maturity date.

The senior loan carries a floating interest rate with a Sonia benchmark plus a margin of 2.1% per annum. The senior loan is 95.0% hedged with an interest rate cap, provided by Bank of America N.A., London branch, with a strike rate of 1.75%.

Given the revised portfolio composition resulting from several property sales and rent rollovers since issuance, and as a result of the senior loan’s improved performance, DBRS Morningstar updated its net cash flow (NCF) assumption to GBP 30.7 million from GBP 29.0 million at issuance, based on the latest tenancy schedule and quarterly data that the servicer received as of August 2022. In addition, DBRS Morningstar maintained its cap rate at 6.54% as at issuance, which translates to a DBRS Morningstar value of GBP 469.1 million, representing a 38.5% haircut to C&W’s most recent valuation.

The transaction benefits from a liquidity facility, provided by Bank of America N.A., London branch, that the Issuer can use to cover interest shortfalls on the Class A and Class B notes. The liquidity facility commitment was GBP 8.0 million at issuance, with GBP 7.6 million outstanding on the August 2022 IPD. In addition to the liquidity reserve, the transaction also features a GBP 50,000 issuer reserve to cover the Issuer’s senior expenses.

The legal final maturity of the notes is in November 2029, five years after fully extended loan maturity. Considering the remaining two one-year extension options that are conditional upon the senior loan being fully hedged, the latest loan maturity date is 17 November 2024. Given the security structure and jurisdiction of the underlying senior loan, DBRS Morningstar believes that this provides sufficient time to enforce the loan collateral, if necessary, and repay the noteholders.

Cash trap covenants are set on a DY at 8.3% and on a LTV at 71.4%. The senior loan structure does not include financial default covenants unless there is a permitted COC, after which the default covenants are based on LTV and DY. The LTV ratio is set at a level that is not greater than the sum of the LTV ratio on the permitted COC date and an additional 15.0%. Additionally, the new obligors must ensure that, after the permitted COC date, the DY is not less than the higher of both 85.0% of the DY as of the permitted COC date or 6.75%.

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 (17 May 2022).

Notes:
All figures are in British pound sterling 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 ratings 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/401817/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 servicer reports and quarterly data provided by CBRE Loan Services Ltd. and U.S. Bank Global Corporate Trust Limited since issuance.

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 23 September 2021, when DBRS Morningstar confirmed its ratings on the notes with Stable trends.

The lead analyst responsibilities for this transaction have been transferred to Dinesh Thapar.

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

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

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

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

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class E notes at BB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class E notes at B (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 GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 August 2019

DBRS Ratings Limited
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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 (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/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].