DBRS Morningstar Upgrades and Confirms Ratings on Berg Finance 2021 DAC

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the Commercial Mortgage-Backed Floating-Rate Notes Due April 2033 (the notes) issued by Berg Finance 2021 DAC (the Issuer):

-- Class A notes confirmed at AAA (sf)
-- Class B notes upgraded to AA (sf) from AA (low) (sf)
-- Class C notes upgraded to A (sf) from A (low) (sf)
-- Class D notes upgraded to BBB (sf) from BBB (low) (sf)
-- Class E notes upgraded to BBB (low) (sf) from BB (high) (sf)

The trends on all ratings remain Stable.

The rating upgrades are driven by the full prepayment of the Big Mountain loan and the partial prepayment of the remaining loan (Sirocco) after property disposals, resulting in deleveraging.

The transaction is a EUR 295.3 million securitisation of two senior commercial real estate loans: Big Mountain (EUR 148.3 million) and Sirocco (EUR 150.8 million), originated by Goldman Sachs Bank Europe SE in March and April 2021, respectively. At issuance, the loans in aggregate were secured against 29 predominantly office assets located in the Netherlands, France, Austria, Finland, and Germany.

The purpose of the Big Mountain loan was for the sponsor, Fortress Investment Group LLC, to finance the acquisition of certain target companies in the Stena AB group, which owned 25 office assets in the Netherlands and in France. In addition, the loan refinanced the existing intragroup indebtedness.

The purpose of Sirocco loan was for the sponsors, Ares European Real Estate Fund V SCSp and Ares European Real Estate Fund V (Dollar) SCSp, to refinance existing indebtedness and to finance permitted capital expenditure projects.

Due to the property disposals, the outstanding balance of the loans has decreased sharply since origination. The Big Mountain loan prepaid fully in July 2022, and the Sirocco loan remains with only one property left in the portfolio and a loan balance of EUR 50.5 million as of the April 2023 Interest Payment Date (IPD).

The Sirocco loan is a three-year floating-rate loan with two one-year extension options. The loan maturity is on 15 April 2024 and the longest extended maturity date is 15 April 2026. The loan interest is based on the three-month Euribor rate plus a margin of 3.75% p.a. The loan is fully hedged with an interest rate cap that has a 1.75% strike rate. In accordance with the loan provisions, the borrower amortised the loan by 0.25% of the outstanding loan balance over the past two quarters. From the April 2023 IPD, the amortisation repayment steps up to 0.5% per quarter. After the third anniversary of the loan utilisation date and until the fourth anniversary date, the quarterly repayments step up to 0.75% of the outstanding loan amount.

Based on the latest available valuation of EUR 108.7 million prepared by Jones Lang LaSalle SE (JLL) and dated 1 September 2022, the Sirocco loan-to-value (LTV) as of the April 2023 IPD was 46.5%, down from 63.5% at cut off. The servicer reported the issuer net cash flow (NCF) at EUR 4.7 million as of the April 2023 IPD and the DY at 9.4% as of the April 2023 IPD, up from 7.7% at cut off and 7.6% as of the last annual review. The metrics have improved since origination, although the vacancy has increased to 23.2% from 16.9% at origination.

The collateral consists of the ‘Peak Vienna’ property located in Vienna, Austria, east of the Danube river. The property is a modern 31-storey office tower built in 2001 and refurbished in 2020, spanning over 40,246 sqm and being recently BREEAM certified. As of the April 2023 IPD, the gross rental income generated from 36 tenants stood at EUR 5.4 million, resulting in a net rent of EUR 4.7 million. The top 5 tenants pay 51.3% of the contractual rent with the weighted-average unexpired lease (WAUL) break and expiry of 2.5 years. About 95% of the contracted rent corresponds to the top 25 tenants and these tenants have a WAUL to break and expiry of 3.1 years. The asset was 23.2% vacant as of the April 2023 IPD, up from 21.3% at the last annual review.

DBRS Morningstar estimates the NCF at EUR 4.2 million. Based on the unchanged assumption of a 6% cap rate, DBRS Morningstar arrived at a property value of EUR 70.0 million, a 35.6% haircut to the latest available valuation.

The transaction benefits from a liquidity reserve facility, 95% of which was funded by the Class A notes at closing. The current outstanding balance of the facility is EUR 2.1 million and it covers the interest payments on the Class A to Class D notes. The Class D and the Class E notes are subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes. Based on a cap strike rate of 1.75%, DBRS Morningstar estimated that the liquidity reserve would cover 15 months of interest payments, or eight months of interest payments based on the Euribor cap of 5% after loan maturity.

The maturity of the notes is on 22 April 2033, providing seven years of tail period after the Sirocco loan’s extended maturity.

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.

Notes:
All figures are in euros 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/european-cmbs-rating-and-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 quarterly investor reports provided by Mount Street Mortgage Servicing Limited, as well as European Investor Reporting Package (EIRP) files, latest available tenancy schedules, transaction notices, cash manager report by U.S. Bank Global Corporate Trust, and the valuation report provided by JLL dated 10 November 2022.

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 20 May 2022 when DBRS Morningstar confirmed its ratings on the Class A, Class B, Class C, Class D, and Class E notes at AAA (sf), AA (low) (sf), A (low) (sf), BBB (low) (sf), and BB (high) (sf), respectively.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

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

Class B notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class B Notes of AA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class B Notes of A (sf)

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

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

Class E notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class E Notes of BBB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class E Notes 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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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: 27 April 2021

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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 (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].