DBRS Morningstar Assigns Rating to Senior Commercial Real Estate Loan Advanced to Entities Owned and Managed by Blackstone; Trend Stable

DBRS Ratings Limited (DBRS Morningstar) assigned a rating to the following senior commercial real estate loan advanced by BNP Paribas (the senior lender) to several entities (the senior borrowers) ultimately owned and managed by The Blackstone Group Inc. (Blackstone or the sponsor).

-- Senior Loan rated A (low)

The trend on the Senior Loan is Stable.

The rating reflects the GBP 141.9 million (44.5% loan-to-value (LTV)) senior loan advanced by the senior lender to the senior borrowers to finance and refinance (1) the acquisition of a portfolio of 41 mostly urban logistics single-let and multi-let properties, (2) the indebtedness of the senior borrowers’ group, and (3) general corporate expenses. In addition to the Senior Loan, there is also a GBP 109.3 million (78.8% LTV) mezzanine loan, which is structurally and contractually subordinated to the Senior Loan.

The Senior Loan has a five-year fixed term with no extension options available to the senior borrowers. The maturity date is scheduled on 15 May 2027. The Senior Loan is interest only and accrues interest at Sonia plus a margin of 1.81% per annum.

The senior borrowers are required to hedge interest rate risk during the entire loan term. Specifically, the senior borrowers will be required to enter into prepaid interest rate cap agreements with a strike rate to be set at the higher of 1.5% and the level required to ensure hedged interest coverage ratio of at least 2.0 times (the required hedging conditions). The Senior Loan is currently fully hedged until the first hedging extension date, which is scheduled on 1 April 2024, with a strike rate that complies with the required hedging conditions.

The underlying portfolio is geographically diversified across the UK. In particular, the largest concentration of the portfolio’s market value (MV) is in the South East, which represents 26.1%, while the North West and the Midlands represent 20.6% and 19.5%, respectively. The remaining assets are located in Yorkshire and the Humber, the South West, Scotland, Wales, and the East, which represent 12.1%, 11.7%, 5.7%, 2.2%, and 2.0% of the MV, respectively. Most of the properties are located within 20 kilometres of major metropolitan areas.

The portfolio offers a total of 2.8 million square feet which, according to the data tape as of June 2022 from the sponsor, were 91.7% occupied by more than 250 tenants. The tenant mix is granular in nature with the largest 10 tenants representing 26.5% of the portfolio’s in-place contracted rent and no single tenant accounting for more than 6.1%. As of Q2 2022, the portfolio’s weighted-average lease terms to break and to expiry were 3.8 years and 4.9 years, respectively.

Following a permitted change of control (COC), the senior borrowers are required to repay the aggregate outstanding principal amount of the senior loan in quarterly instalments equal to 0.25% of the aggregate outstanding principal amount of the Senior Loan as at the COC date.

The sponsor can dispose of any assets under permitted disposals by repaying a release price of 105% of the allocated loan amount (ALA) up to the release price threshold, which equals 10% of the portfolio valuation. Once the release price threshold is met, the release price will be 110% of the ALA. The release price will be reduced pro rata by prepayment of release premiums to a minimum of 102.5% of ALA. Following a permitted COC, the release price will be 115% of the ALA.

The Senior Loan has LTV and debt yield (DY) covenants for cash trap and, following a permitted COC, for events of default. The LTV cash trap covenant is set at 52.0% while the DY cash trap covenant is triggered if the DY is equal or lower than 9.12%. Following a permitted COC, the LTV financial covenant is triggered if the LTV ratio is higher than the LTV ratio as at the COC date plus 10% or if the DY is lower than 8.62%.

On 22 February 2022, Jones Lang LaSalle Incorporated (JLL) conducted valuations on the properties and appraised their MV at GBP 303.6 million. The MV of the portfolio, including a portfolio premium of 5% for LTV calculation purposes, is GBP 318.7 million. Based on this valuation, the Senior Loan represents a LTV ratio of 44.5%. As of June 2022, the portfolio’s in-place net rent was GBP 15.8 million, representing a DY of 11.1%. DBRS Morningstar’s long-term stable net cash flow (NCF) assumption for the portfolio is GBP 13.5 million and DBRS Morningstar's value for the portfolio is GBP 216.2 million, representing a haircut of 32.2% to JLL’s portfolio value including the 5% premium. DBRS Morningstar’s LTV and DY are 65.6% and 9.5%, respectively.

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 pounds sterling unless otherwise noted.

The principal methodology applicable to the rating is: “European CMBS Rating and Surveillance Methodology” (14 December 2022).

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 principal methodology.

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 this rating include the data tape as of June 2022, the tenancy schedule, the valuation report, the due-diligence report, the legal documents, and additional reports provided by BNP Paribas SA.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

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 this rating 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 rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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):

Senior Loan:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Senior Loan of BBB
-- 20% decline in DBRS Morningstar NCF, expected rating on the Senior Loan of BB (high)

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.

This rating is 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: 30 December 2022

DBRS Ratings Limited
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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 (14 December 2022), https://www.dbrsmorningstar.com/research/407379/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].