DBRS Morningstar Comments on Taurus 2018-1 IT S.R.L. Restructuring

DBRS Ratings GmbH (DBRS Morningstar) commented on the recent amendments to the Bel Air Loan and the notes issued by Taurus 2018-1 IT S.R.L.

With a written resolution on 24 January 2023 and executed on 15 February 2023, the noteholders agreed (among other conditions) to extend the final loan maturity of the Bel Air Loan (the only remaining facility of the initial three facilities included in the transaction) to February 2024 from February 2023, with an additional one-year extension option available until February 2025. The final notes' maturity was also extended to May 2032 from May 2030. As a result, the seven-year tail period remains unchanged.

In addition, the sponsor injected EUR 10 million in equity as a voluntary prepayment, reducing the outstanding loan balance to EUR 67.9 million and applying reverse sequentially to the notes to fully redeem the Class D Notes first and then the Class A to Class C Notes on a pro rata basis on the note payment date on 20 February 2023. Subsequently, DBRS Morningstar discontinued its rating on the Class D Notes.

As part of the restructuring, the loan will now be amortising 1.5% per annum (p.a.) of the outstanding loan amount at the interest payment dates (IPDs) during the first extension period and 2.5% p.a. during the second extension period. The loan margin now bears the aggregate of a percentage rate p.a. equal to the weighted-average margin applicable to the notes and a percentage rate p.a., which the loan facility agent calculates as the ratio between (1) EUR 310,000 and (2) the outstanding securitised loan at the IPDs. Before the restructuring, the loan margin was 2.5% p.a.

In particular, the relevant margin applicable to the Class A, Class B, and Class C Notes was amended to 2.78% p.a., 3.48% p.a., and 5.84% p.a., respectively.

Furthermore, the Issuer will fully apply any net disposal proceeds toward loan and note repayment in the following order of priority: first, the allocated loan amount relating to property disposed shall be distributed to the notes still outstanding (other than the Class X Notes) in a sequential order; second, the release premium shall be applied pro rata to the notes still outstanding (other than the Class X Notes); and third, the remaining disposal proceeds shall be applied reverse sequentially to the notes. The Class X Notes ceased to receive any Class X amount.

DBRS Morningstar also reviewed a new valuation prepared by Savills dated November 2022. The new valuation reported a portfolio market value of EUR 146.5 million, down 19.9% from the previous valuation of EUR 182.8 million produced by Jones Lang LaSalle and dated December 2021. Despite the value decline, amid the deleveraging and based on the most recent valuation, the portfolio’s loan-to-value (LTV) ratio is 46.4% as of the February 2023 IPD, down from 51.0% at issuance while the portfolio’s debt yield (DY) increased to 18.1% as of the February 2023 IPD from 13.4% at issuance. There was no continuing default or cash trap event as of the February 2023 IPD, and the first new one-year loan extension option had been exercised.

A new hedging agreement was put in place on 15 February 2023 covering the full amount of the outstanding loan balance at a cap strike rate of 2.25%. The one-year hedge, provided by Merrill Lynch International, terminates on 15 February 2024. The borrower will be able to extend the loan for one additional year subject to certain conditions, such as new hedging, a DY that is not less than 16%, and the sale of at least one property until then.

In DBRS Morningstar's opinion, the executed amendments are credit neutral for the transaction and, with the exception of the discontinuation of the Class D Notes, DBRS Morningstar did not take any further rating action as a result of the restructuring. As such, the ratings on all other classes of notes in the transaction remain unchanged since the last rating action on 9 December 2022. The trend on the Class A Notes remains Stable while the trends on the Class B and Class C Notes remain Negative, reflecting macroeconomic concerns and the lack of liquidity in the commercial real estate property markets, particularly affecting the retail sector in Italy.

The transaction is a securitisation of one floating-rate senior commercial real estate loan (the Bel Air loan). Two other loans—the Logo and Camelot loans—that also formed part of the original transaction were repaid in full. The remaining Bel Air loan, which is sponsored by Partners Group L.P. and managed by Kryalos Asset Management S.r.l., is currently backed by five shopping centres in Italy.

The outstanding Bel Air loan amount was EUR 67.9 million as of the February 2023 IPD compared with EUR 110.0 million at the cut-off date in May 2018. This loan was initially backed by a portfolio of six shopping centres. However, one property—Primavera shopping centre—was sold in June 2020. A voluntary prepayment of EUR 5.0 million was made in November 2020 when the loan breached the DY cash trap covenants and an additional prepayment of EUR 4.6 million in cashtrapped funds was applied to the loan and notes in May 2021. A further amortisation of EUR 200,000 occurred in August 2022 because a small parcel of the shopping centres, the Borgogioioso shopping centre, was sold. Then, a voluntary prepayment of EUR 10 million occurred on the February 2023 IPD as part of the restructuring. The Issuer used these funds to redeem the Class D Notes and, pro rata, the Class A to Class C Notes.

DBRS Morningstar previously updated its underwriting net cash flow (NCF) for the Bel Air portfolio by removing the contribution generated by the Primavera asset that was sold without amending the capitalisation rates applied. DBRS Morningstar maintained its NCF assumption at EUR 8.1 million since origination by deducting only the contribution of the asset sold. In addition, DBRS Morningstar maintained its cap rate assumption at 7.3%, which translates to a DBRS Morningstar value of EUR 110.1 million, representing a 24.2% haircut to the most updated market value.

The loan’s final maturity date is now 17 February 2025, subject to the loan being extended for an additional year in February 2024.

The transaction benefits from a liquidity reserve facility of EUR 3.56 million available to the Class A and Class B Notes. Based on the Euribor cap strike rate of 2.25%, DBRS Morningstar estimated that the liquidity reserve would cover 15 months of interest payment shortfalls. However, based on a Euribor cap of 4.00%, DBRS Morningstar estimates that the liquidity reserve would cover only 12 months of interest payment shortfalls.

Notes:
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).

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.

For more information on this issuer, visit www.dbrsmorningstar.com or contact us at [email protected].

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