DBRS Morningstar Confirms Ratings on Usil European Loan Conduit No. 36 DAC with Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by Usil European Loan Conduit No. 36 DAC (the Issuer):

-- Class RFN Notes at AAA (sf)
-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BB (high) (sf)
-- Class F Notes at B (high) (sf)

The trend on all ratings remains Stable.

The rating confirmations follow the transaction’s stable performance over the last 12 months, with no significant change in rental performance from the last annual review and no cash trap covenant breaches recorded to date.

The transaction is the securitisation of a EUR 723.9 million floating-rate senior commercial real estate loan (the senior loan) advanced by both Morgan Stanley Principal Funding, Inc. and Morgan Stanley Bank, N.A. to borrowers sponsored by Blackstone Group L.P. (Blackstone, or the sponsor). As per the latest available investor report released in August 2022, the senior loan’s outstanding balance was EUR 708.0 million, which breaks down into a EUR 663.7 million term loan (EUR 679.1 million at issuance) and a EUR 44.3 million capital expenditure (capex) loan (EUR 44.8 million at issuance). The senior loan refinanced the original acquisition loan and funded a progressive capex programme. In addition to the senior loan, the transaction comprises a EUR 112.5 million mezzanine loan (including an undrawn mezzanine capex facility of EUR 6.9 million), which is structurally and contractually subordinated to the securitised senior loan and was repaid in full on 29 April 2022.

The senior loan is backed by a portfolio of 94 assets (100 at issuance) spread throughout Germany. The assets are predominantly light-industrial and warehouse properties and are part of the Mileway logistics platform. Six property sales have occurred since issuance, resulting in a EUR 15.9 million total repayment on the senior loan. According to Cushman & Wakefield’s (C&W) most recent valuation as of 31 May 2021, the aggregate value of the remaining 94 properties was EUR 1,078.9 million, including a 5% portfolio premium, which is around 1.1% higher than the EUR 1,066.7 million initial value of the 100 properties included in the securitised pool at inception. The senior loan’s deleveraging, combined with the rise in the portfolio’s valuation since issuance, resulted in a slight decrease in the senior loan’s reported loan-to-value ratio to 65.63% as of August 2022 from 66.24% in August 2021 and 66.85% at issuance.

Net rental income increased marginally to EUR 60.0 million in August 2022 from EUR 58.8 million as of August 2021, resulting in a debt yield of 8.4% in August 2022 compared with 8.3% in August 2021. The vacancy rate dropped to 14.0% in August 2022 from 18.0% at the last annual review, when it increased mainly due to lapsing leases at the Louis-Krages-Straße 30 property in the first quarter of the year. The development is the second-largest property by annual rent in the portfolio. In April 2020, the property was damaged by a fire, which destroyed 30,000 square metres of space. The asset is now in line for substantial redevelopment, with the sponsor allowing leases to lapse for the works to proceed.

There is no scheduled amortisation before the completion of a permitted change of control, at which time the borrower must repay the aggregate outstanding principal amount of the senior loan by 1% per year. The senior loan was initially scheduled to mature on 15 February 2022, 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 February 2023 (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 Euribor benchmark plus a margin of 2.15% per annum. The senior loan is fully hedged with an interest rate cap, provided by HSBC Bank plc, with a strike rate of 1.75%. The cap agreement’s expiry coincides with the senior loan’s first extended maturity date. For the senior loan to be further extended, the borrower is required to ensure that a subsequent hedging agreement is purchased, with a termination date that coincides with the newly extended loan maturity date.

DBRS Morningstar updated its net cash flow (NCF) assumption to EUR 47.9 million from EUR 49.2 million at issuance to reflect the six property sales that have occurred since issuance. In addition, DBRS Morningstar maintained its cap rate assumption at 6.6%, as at issuance, which translates to a DBRS Morningstar value of EUR 726.0 million, representing a 32.7% haircut to C&W’s most recent valuation.

The final legal maturity of the notes is expected to be in February 2030, five years after the fully extended loan term. Given the security structure and jurisdiction of the underlying loan, DBRS Morningstar believes the final legal maturity date provides sufficient time to enforce, if necessary, on the loan collateral and repay the bondholders.

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 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 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 Mount Street Mortgage Servicing Limited 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 28 October 2021, when DBRS Morningstar confirmed its ratings on the notes with Stable trends.

The lead analyst responsibilities for this transaction have been transferred to Andrea Selvarolo.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: 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 RFN Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Class RFN Notes of AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on the Class RFN Notes of AAA (sf)

Class A-1 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Class A-1 Notes of AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on the Class A-1 Notes of AAA (sf)

Class A-2 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Class A-2 Notes of AA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on the Class A-2 Notes of A (sf)

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

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

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

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Class E Notes of B (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on the Class E Notes of CCC (high) (sf)

Class F Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Class F Notes of CCC (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on the Class F Notes of 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 Limited for use in the United Kingdom.

Lead Analyst: Andrea Selvarolo, Senior Analyst
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 21 October 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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].