DBRS Morningstar Confirms Ratings on Taurus 2021-1 UK DAC with Stable Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes due May 2031 issued by Taurus 2021-1 UK DAC (the Issuer):

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

The trends on all ratings remain Stable.

The rating confirmations reflect the transaction’s stable performance over the last 12 months.

The transaction is the securitisation of a GBP 340.1 million senior commercial real estate loan sponsored by funds managed by Blackstone Inc. (Blackstone) and secured by 45 light-industrial and logistics assets located in the United Kingdom with a large concentration in London and the South East. At issuance, the Issuer purchased the senior loan from the loan seller, Bank of America Europe DAC, using the proceeds from the note issuance and the issuer loan provided by the loan seller. The issuer loan was sized at 5% of the senior loan amount in order to satisfy risk retention requirements. The senior loan margin directly mirrors the weighted-average coupon on the notes; therefore, there is no excess spread in the transaction. However, the senior loan margin is capped at 2.29%.

The senior loan has refinanced Blackstone's acquisitions since the first quarter in 2020. In particular, it refinanced the original portfolio of 38 assets (the United IV sub portfolio) that were acquired before October 2020 and seven assets that were acquired between November 2020 and December 2020 (the add-on portfolio). The entire 45-asset pool is known as the United V portfolio and is integrated into Blackstone's logistics platform Mileway.

In conjunction with the senior loan, AustralianSuper Pty Ltd advanced a GBP 85.0 million mezzanine facility, which was subordinated to the securitised senior facility. The mezzanine facility was redeemed in full during the first quarter in 2022.

In September 2021, part of one of the properties, Sheffield Business Park, was sold and the disposal proceeds were applied in partial prepayment of the senior and mezzanine loans. GBP 2.5 million was then applied pro rata against the notes (95%) and against the issuer loan (5%) on the February 2022 interest payment date. Since then, no further sale has occurred. The senior loan balance stands at GBP 337,656,000.

The two-year senior loan with initial maturity on 15 May 2023 has three one-year extension options to 15 May 2026, which can be exercised if certain conditions are met, namely that no event of default is continuing and hedging is in place. The expected initial notes’ maturity date is on 17 May 2023, or any subsequent year depending on the loan maturity being extended.

The senior loan is fully hedged with a cap agreement, which has a cap strike rate of 1.5%. For each note interest period occurring on or after the expected note maturity date the note Sterling Overnight Index Average (SONIA) component of the rate of interest payable on the notes will be capped at 4% per annum, subject to a floor of zero.

Following a new valuation of the portfolio by Knight Frank LLP (Knight Frank) as of 28 October 2022, the valuation of the aggregate market value of the 45 properties in the portfolio has increased by 2.5% to GBP 537.2 million from GBP 523.8 million in January 2021. However, the loan-to-value has slightly increased to 62.9% from 61.4%, because it was previously based on a valuation including a portfolio premium capped at 5% of GBP 549.6 million as of September 2020. The new valuation prepared by Knight Frank does not include any premium.

DBRS Morningstar did not change its underwriting assumptions from issuance. In particular, DBRS Morningstar maintained its net cash flow (NCF) assumption of GBP 22.7 million, which, based on a capitalisation rate of 6.3%, translates to a portfolio value of GBP 362.8 million, i.e., a 32.5% haircut to the current portfolio market value.

The property portfolio’s and loan’s performance has been improved since issuance. The vacancy rate decreased to 6.6% from 8.4% at issuance, remaining well below DBRS Morningstar’s 10% underwritten level.

The net rental income has increased over the last year to GBP 28.4 million (as of November 2022) from GBP 26.3 million (as of November 2021). The debt yield ratio has increased to 8% from 7.4% at issuance, remaining substantially above the cash trap level of 6.1%.

Similarly to other Blackstone loans, there are no financial default covenants applicable prior to a permitted change of control. As of February 2023, the senior loan is fully compliant with its cash trap covenants and DBRS Morningstar does not foresee any breach in the upcoming quarters.

To cover potential interest payment shortfalls, Bank of America, N.A. London Branch provided the Issuer with a liquidity facility of GBP 11.4 million at issuance. The liquidity facility covers the Class A, Class B, and Class C notes as well as the corresponding portion of the issuer loan. The current liquidity facility balance stands at GBP 11.3 million. The coverage provided by the liquidity facility is for 20 months based on a 1.5% cap strike rate and for 11 months based on the 4% Sonia cap. The coverage provided by the liquidity facility is deemed to be commensurate with the ratings of the respective covered notes.

The final legal maturity of the notes is in May 2031, five years after the fully extended loan maturity date. DBRS Morningstar believes that this provides sufficient time to eventually enforce the senior loan collateral and repay the noteholders, given the security structure and the jurisdiction of the underlying loan and properties.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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.

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” (14 December 2022):
https://www.dbrsmorningstar.com/research/407379.

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.

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.

The sources of data and information used for these ratings include quarterly servicer reports provided by CBRE Loan Services Limited, valuation reports prepared by Cushman & Wakefield (UK) LLP dated 14 January 2021, by CBRE Limited dated 19 October 2020, and by Knight Frank dated 28 October 2022, as well as cash management reports provided by U.S. Bank Global Corporate Trust Limited.

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 March 2022, when DBRS Morningstar confirmed its ratings on the Classes A, B, C, D, and E 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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

Class A 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 AA (low) (sf)

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

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

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

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class E notes to B (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class E notes to 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 GmbH for use in the European Union.

Lead Analyst: Sioban Sugrue, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 10 February 2021

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.
-- 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].