DBRS Morningstar Confirms Ratings on Cassia 2022-1 S.R.L. with Stable Trends following Amendment

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of commercial mortgage-backed security (CMBS) notes issued by Cassia 2022-1 S.R.L. (the issuer):

-- Class A notes at AA (low) (sf)
-- Class B notes at BBB (high) (sf)
-- Class C notes at BB (sf)

The trend on all ratings remains Stable.

The rating confirmations result from a review of the transaction also considering certain amendments applied to the issuer transaction documents as a result of an inadvertent release of funds from the issuer liquidity reserve on the August 2022 interest payment date (IPD). DBRS Morningstar is of the view that the amendments to the transaction documents will ensure that the transaction’s third-party liquidity provisions are correctly replenished to a level that is sufficient to address potential interest shortfalls on the Class A and the Class B notes (the covered notes). Moreover, the rating confirmations reflect the senior loans’ stable performances since issuance.

The transaction is a two-loans conduit securitisation arranged by Bank of America Securities and Goldman Sachs International and comprises two separate commercial real estate (CRE) senior loans (the Thunder II Loan and the Jupiter Loan) advanced to borrowing entities ultimately owned by The Blackstone Group Inc. (Blackstone or the Sponsor). The two loans, totalling EUR 236.4 million as of 30 September 2021 are backed by 42 big-box and last-mile logistics properties in Italy. On 1 October 2021, CBRE Ltd. (CBRE) conducted valuations on the properties and appraised their market value (MV) at EUR 384.6 million. CBRE assessed that the MV of the portfolio as a single lot was EUR 394.9 million, which equates to a premium of 2.7% above the aggregated individual property values. The two senior loans vary in size, but they have the same loan-to-value (LTV) ratio of 59.9%. The floating rate loans are fully hedged at borrower level via prepaid cap agreements with strike rates of 1.0%, which were provided by Merrill Lynch International. After the expected note maturity date on 22 May 2027, the Euribor rate payable at note level will be capped at 4.0%.

By loan amount, the larger loan is the Thunder II loan with an outstanding balance of EUR 164.0 million at the August 2022 IPD, whereas the Jupiter loan had an outstanding balance of EUR 72.4 million at the August 2022 IPD. Each loan bears interest at a floating rate equal to three-month Euribor (subject to zero floor), plus a margin that is a function of the weighted average (WA) of the aggregate interest amounts payable on the notes. As a result, there is no excess spread and the Sponsor pays the issuer costs in accordance with the ongoing financing costs letter.

For the purpose of satisfying the applicable risk retention requirements, Bank of America Europe DAC, Milan Branch (the VRR Lender) advanced a EUR 6.2 million loan (the VRR Loan) to the issuer on the closing date and Goldman Sachs Bank Europe SE (the VRR Noteholder) subscribed for EUR 6.2 million in notes (the VRR Notes and, together with the VRR Loan, the VRR Instruments) issued by the issuer on the closing date. As at the closing date, the aggregate principal amount of the VRR Instruments was EUR 12.4 million.

On the closing date, EUR 10,925,000 of the proceeds of issuance of the Class A Notes together with EUR 575,000 of the amount drawn under the VRR Instruments were used by the issuer to fund the issuer liquidity reserve in an aggregate amount equal to EUR 11,500,000 and such amount was made available to provide liquidity support to the covered notes and certain payments under the VRR Instruments.

DBRS Morningstar understands that on the first IPD in August 2022, an amount equal to EUR 1,818,153 has been inadvertently released from the issuer liquidity reserve account as a result of a wrong percentage reported in the definition of the issuer liquidity reserve required amount in the issuer transactions documents. As a result, 95% of the aforementioned amount was applied as principal receipt to partially redeem the notes on a pro-rata basis, while the remaining 5% was applied to pay the VRR Instruments pre-acceleration liquidity reserve contribution amount into the issuer liquidity reserve, in compliance with the pre-acceleration principal allocation rules. However, no principal receipts occurred on the securitised senior loans, whose outstanding balances remained the same as at issuance.

As a result, the outstanding balance of the issuer liquidity reserve stood at EUR 9,772,755 on the August 2022 IPD. DBRS Morningstar estimates this amount to provide approximately 17.0 months of coverage, based on the cap strike rate of 1.0%, or 9.8 months of coverage, based on the 4% Euribor cap after the expected note maturity date. The previous coverage, based on the initial commitment amount of EUR 11,500,000, was instead equal to approximately 20.0 months and 11.4 months based on the 1.0% cap strike rate and the 4% Euribor cap, respectively. The estimated coverage is therefore one-quarter shorter than the one estimated at issuance. However, certain amendments were incorporated into the Issuer transaction documents in order to replenish the issuer liquidity reserve balance up the initial commitment amount.

In particular, the definition of issuer liquidity reserve required amount has been amended to replace the reference to the wrong percentage (5.18768395%) with the correct one (6.161873%). Moreover, since the principal amount outstanding on the senior loans is now exceeding the principal amount outstanding under the notes by an amount equal to the funds inadvertently used to redeem the notes (the rebalancing amount), there will be a surplus in the interest paid on the senior loans over the interest payable for the related period in respect of the notes. According to the amended issuer transaction documents, this amount will be applied, on each IPD going forward, to top-up the issuer liquidity reserve to its required amount. In addition, as soon as there is a (voluntary or mandatory) prepayment on a senior loan, an amount equal to the then remaining rebalancing amount will be deducted from the note principal receipts and will not be applied in accordance with the pre-acceleration principal allocation rules. Such amount will instead be applied as a super-senior item before the pre-acceleration principal allocation rules are applied, to top-up the issuer liquidity reserve to the corrected required amount.

DBRS Morningstar has reviewed the provisions included into the amended issuer transaction documents, and has concluded that such amendments will prevent a detrimental impact on the ratings assigned to the notes as a result of the decreased availability of third-party liquidity funds. Moreover, as both the senior loans are performing well in line with expectations since issuance, DBRS Morningstar did not revise any of its underwriting assumptions.

The loan maturity for both loans is May 2027, which is five years after the utilisation date. There are no extension options. The final legal maturity of the Notes falls in May 2034, seven years after the maturity of the loans. If necessary, DBRS Morningstar believes that this provides sufficient time to enforce on the loan collateral and repay the bondholders, given the security structure and jurisdiction of the underlying loan.

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.

DBRS Morningstar has conducted a review of the transaction’s legal documents provided in the context of the aforementioned amendments. A review of any other transaction’s legal documents was not conducted as the 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/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 Situs Asset Management Limited, Banca Finint S.p.A and The Bank of New York Mellon 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 8 April 2022, when DBRS Morningstar finalised its provisional ratings on the notes with Stable trends.

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

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

Class C Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class C Notes to B (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class C Notes to CCC (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
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 18 March 2022

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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 (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].