DBRS Morningstar Confirms Ratings on Bruegel 2021 DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of commercial mortgage-backed floating-rate notes due May 2031 (the notes) issued by Bruegel 2021 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 (sf)

The trends on all ratings remain Stable.

The rating confirmations are supported by the good performance of the loan over the past 12 months, with a stable cash flow since cut-off. The key credit metrics have been improving due to the amortisation of the loan that commenced in August 2022 and which has been in line with the expectations since the initial underwriting.

The transaction is a EUR 220.15 million securitisation of one Dutch senior commercial real estate loan whose main purpose was to refinance the PPF loan once securitised in another DBRS Morningstar-rated commercial mortgage-backed securities (CMBS) transaction, Kantoor Finance 2018 DAC. The senior loan was advanced by Goldman Sachs Europe SE. At origination the loan was secured against nine Dutch assets, of which eight are office buildings and one is a retail asset. One office building was sold in 2021 and the disposal proceeds were applied pro rata towards prepayment of the notes. Hence, the total number of properties now securing the loan is eight. PPF Group N.V. (PPF or the sponsor) and NL Asset Management B.V. remain the owner and asset manager of the portfolio, respectively.

The current securitised balance of the transaction has decreased to EUR 214.4 million from EUR 216.6 million at the last review. Based on the latest available valuation report dated 22 July 2022, which was prepared by CBRE Valuation & Advisory Service B.V. (CBRE), the total appraised value of the portfolio is EUR 390.6 million, which is about 0.4% higher than the like-for-like basis valuation at origination. This results in a loan-to-value (LTV) of 54.9% as of the May 2023 interest payment date (IPD), down from last year’s LTV of 55.7%. The current LTV ratio level is below the cash trap covenant of 63% and the default covenant of 75%. The loan carries a floating interest rate equal to three-month Euribor plus a margin of 2.3% and is fully hedged with an interest rate cap strike of 1.5% provided by HSBC Continental Europe.

The expected loan maturity is on 15 May 2024, but the borrowers have two one-year extension options. The loan amortises by 1.0% per annum (p.a.) in years two to four and 2.0% p.a. in year five. A regular quarterly amortisation of EUR 550,375 has been applied since the August 2022 IPD.

As of the May 2023 IPD, the servicer reported issuer adjusted net rent of EUR 25.5 million and a debt yield (DY) of 11.9%, up from 10.8% at the last annual review and 8.9% at cut-off. The current DY ratio level is above the cash trap covenant of 9.4% – applicable from year three to five – and the default covenant of 7.9%.

The vacancy rate of the portfolio has decreased further to 3.2% from 4.6% last year and 5.7% at origination. The weighted-average unexpired lease term to expiry date (WAULTe) and the weighted-average unexpired lease term to break option (WAULTb) have remained longer than the maturity of the loan at 6.1 years (from 6.4 years at cut-off) and 6.2 years (from 7.1 years at cut-off), respectively.

The tenant profile is fairly granular and diversified, covering a multitude of sectors, both locally and internationally. The gross rental income (GRI) stood at EUR 30.6 million as of the May 2023 IPD. The largest tenant represents 12% of the GRI in the portfolio, while the top 10 tenants provide circa 51% of the portfolio GRI. Rental arrears have decreased to 1.2% of the GRI, from 2.2% at the last annual review. Nearly 50% of the outstanding arrears are 0-30 days old. Compared with the previous quarters, there has been a reduction in the 90+ days arrears to 35%, indicating an active recovery of the outstanding rents.

DBRS Morningstar’s assumptions remain unchanged from the last annual review: net cash flow of EUR 18.2 million and the capitalisation rate at 6.5%. The resulting DBRS Morningstar value of EUR 279.34 million reflects a 28.5% haircut to the Issuer appraised value.

At closing, the transaction benefited from a liquidity reserve of EUR 9.8 million, which was 4.4% of the total outstanding balance of the notes and the Issuer loan. The liquidity reserve was funded by the issuance of the Class A notes and can be used to cover interest shortfalls on the Class A, Class B, Class C, and Class D notes. Class D is subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes. Currently, the balance of the liquidity facility is EUR 9.1 million. The liquidity reserve amount is equivalent to approximately 17 months of interest payments on the covered notes, based on the interest rate cap strike rate of 1.5% per year and seven months of interest payments based on the Euribor cap of 5.0% per year after the final loan maturity.

The legal final maturity of the notes is in May 2031, providing a tail period of five years after the fully extended loan 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 the valuation report from CBRE, and quarterly investor reporting from CBRE Loan Services Limited and U.S. Bank Global Trustees 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 24 June 2022, when DBRS Morningstar confirmed its ratings on the Class A, Class B, Class C, and Class D notes at AAA (sf), AA (low) (sf), A (low) (sf), and BBB (sf), respectively, 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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

Class A Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class A Notes at AA (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class A Notes at AA (low) (sf)

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

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

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class D Notes at BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class D Notes at BB (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. 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: 4 June 2021

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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 (16 June 2023),
https://www.dbrsmorningstar.com/research/415976/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].