DBRS Morningstar Confirms Ratings on Frost CMBS 2021-1 DAC with Stable Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by Frost CMBS 2021-1 DAC (the Issuer) due in November 2033:

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

The trends on all ratings remain Stable.

The rating confirmations are based on the underlying loan performance, which has been in line with the terms of the facilities agreement. The borrower fulfilled all debt service requirements over the past 12 months and the debt yield (DY) ratio remains well above the cash trap covenant threshold.

The transaction is a securitisation of two commercial real estate loans advanced by Goldman Sachs Bank Europe SE (Goldman Sachs) to entities owned and managed by NewCold European Holding B.V., which is ultimately owned by NewCold Holdings LLC, a temperature-controlled logistics company based in the Netherlands. The GBP loan is secured by a single cold-storage property in Wakefield, Yorkshire, UK (the Wakefield property). The EUR loan is secured by one cold-storage asset in Rheine, Westphalia, Germany (the Rheine property) and one asset in Argentan, France (the Argentan property). Together, the GBP loan (GBP 112.35 million) and the EUR loan (EUR 92.0 million) form the loan under the facilities agreement. The purpose of the loan is to refinance existing indebtedness or, in respect of the Argentan property, refinance the purchase of the Argentan property; to pay related financing costs; and for the NewCold Group's general corporate purposes.

The loans are cross-collateralised and cross-defaulted. No amortisation is scheduled for the first year. The loans will start amortising from the second year onwards.

Interest payments have been made regularly and funds were distributed to the noteholders at the November 2022 interest payment date (IPD), upon the Wakefield Propco's receipt of an HMRC(HM Revenue & Customs) relief direction in respect of the Issuer.

The loans bear interest equal to the sterling overnight index average (Sonia) plus a loan margin of 3.25% in respect of the GBP loan and three-month Euribor plus a loan margin of 2.80% in respect of the EUR loan for the terms of the loans. The interest rate risk is fully hedged in accordance with the terms of the facilities agreement, including a prepaid cap with a strike rate of 2.0% provided by Goldman Sachs.

Each borrower must repay the loans made available to it on the fifth, sixth, seventh, and eighth loan IPDs in an aggregate amount equal to 0.25%. Thereafter, if certain conditions pertaining to DY, loan-to-value (LTV), and capital expenditures (capex) in respect of the Rheine property are not satisfied, the loan will further amortise by 0.25% per quarter. If the DY at the time is higher than 10.31%, the loan amortises by 0.25% per quarter; if the DY is less, the loan amortises by 0.50% per quarter.

Based on CBRE Limited’s (CBRE) 1 October 2021 valuations of GBP 185.6 million for the Wakefield property, EUR 108.4 million for the Rheine property, and EUR 39.1 million for the Argentan property, the LTV ratios stood at 60.5% and 62.4% for the GBP and EUR loans, respectively. In aggregate, the LTV ratio stood at 61.3%.

The financial cash trap covenants are set at an LTV of 68.77% and a DY of 8.74% for the initial loan term while the default covenants are such that the LTV must always be less than or equal to 76.27% and the DY on each loan IPD must be higher than 7.71%.

Reported DY at the August 2022 IPD was 9.79% based on adjusted net operating income (NOI) of EUR 21.8 million, 4.5% lower than in the previous year. In spite of higher revenue (+6.4%), increased direct expenses resulting from energy price increases, overflow expenses, and transport expenses (+18.7%) offset the positive result.

The initial loan maturity date is in November 2024 with two one-year extension options available thereafter. If fully extended, the transaction is expected to repay in full by November 2026. If the loans are not repaid by then, the transaction will have seven years tail period to allow the special servicer to work out the loan(s) by November 2033 at the latest, which is the legal final maturity date.

DBRS Morningstar maintains initial underwriting assumptions of cap rate at 7.5% for both loans and net cash flow (NCF) of GBP 10.7 million for the GBP loan and EUR 8.5 million for the EUR loan. Based on data from the most recent investor reporting in August 2022, the Issuer’s adjusted net operating income (NOI) for the GBP loan dropped by 14% since origination along with a decrease in occupancy rate to 74%, from 76% at cut off, while the issuer’s adjusted NOI for the EUR loan remain unchanged along with a slight increase of occupancy rate to 90.5%, from 89.7%. DBRS Morningstar’s haircut on the NCF for the GBP loan and the EUR loan stands at 15% and 16%, respectively. As at August 2022, DBRS Morningstar’s haircut on the appraised value remained unchanged at -38% and -22% for the GBP and EUR loan, respectively.

To maintain compliance with applicable regulatory requirements, Goldman Sachs Bank USA retained an ongoing material economic interest of no less than 5% of the securitisation via an Issuer loan, which Goldman Sachs Bank USA advanced on the closing date (30 November 2021).

The Issuer also established two reserves, one for the GBP notes (the Issuer GBP liquidity reserve) and one for the EUR notes (the Issuer EUR liquidity reserve). The liquidity reserve in respect of both the GBP and EUR notes covers the interest payments on Class A to Class D. The Class GBP E, Class EUR E, and Class GBP F notes are subjected to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin on the notes. Based on a cap strike rate of 2%, DBRS Morningstar estimates that the liquidity reserve will cover 11 months of interest payments in respect of the covered GBP notes and 18 months of interest payments in respect of the covered EUR notes. The interest rates on the notes will be capped at 4.0% plus their respective margins. Based on a Sonia and a Euribor cap of 4.0%, DBRS Morningstar estimates that the liquidity reserve will cover seven months of interest payments in respect of the covered GBP notes and 11 months of interest payments in respect of the covered EUR notes, assuming the Issuer does not receive any revenue.

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 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 Mounts Street Mortgage Servicing Limited, U.S. Bank Trustees Limited since issuance, and the valuation report provided by CBRE 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 2 December 2021, when DBRS Morningstar finalised its provisional ratings on the notes.

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

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

Class B (GBP) Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class B notes to AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class B notes to AA (low) (sf)

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

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

Class E (GBP) Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class E notes to BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class E notes to BB (sf)

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

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

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

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

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

Class E (EUR) Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class E rating of BB (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class E rating of B (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: Mirco Iacobucci, Senior Vice President
Initial Rating Date: 1 November 2021

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor
London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
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.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- 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.
-- 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].