DBRS Morningstar Confirms Ratings on Last Mile Logistics Pan Euro Finance DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of commercial mortgage-backed floating rate notes due August 2033 issued by Last Mile Logistics Pan Euro Finance DAC (the Issuer):

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

All trends on all classes of notes remain Stable.

CREDIT RATING RATIONALE
The transaction is a securitisation of a EUR 510.2 million senior commercial real estate loan backed by a pan-European portfolio of light-industrial and logistics assets managed collectively by Mileway and owned by Blackstone Real Estate Partners (Blackstone or the Sponsor). The senior loan is divided into two term facilities—term A and term B—with term A advanced to non-Irish borrowers and term B advanced only to Irish borrowers. Additionally, there was a EUR 102.0 million mezzanine facility at origination, contractually and structurally subordinated to the securitised senior loan, which was repaid in April 2022 as per Mileway’s recapitalisation.

The senior loan has a term of two years with three one-year extension options. With initial maturity of the loan scheduled on 15 August 2023, DBRS Morningstar expects that the borrower will exercise the first extension option and will extend the loan to August 2024.

The senior loan is backed by 109 predominately light-industrial or logistics assets across seven European countries (Germany, France, the Netherlands, Finland, Spain, Denmark and Ireland). At origination, the loan was backed by 113 properties with the acquisition of the Choisy asset to be completed shortly after the closing date. However, the property’s completion was delayed beyond the longstop date and allocated loan amount was used to prepay the loan at the November 2021 interest payment day (IPD). Additionally, three assets were sold in February 2023. As a result, the loan balance decreased by EUR 9.2 million since origination to EUR 501.0 million, with all principal receipts applied pro-rata to the notes.

Jones Lang LaSalle Limited conducted a revaluation of the portfolio in September 2022 and appraised the aggregate market value of the 109 properties at EUR 804.6 million (excluding the 5.0% portfolio premium), a 7.7% increase from the 2021 valuation on the like-for-like basis. This translates into a loan-to-value (LTV) ratio of 59.3% as of the May 2023 IPD, an improvement from 63.8% LTV reported at last review.

The loan performed in line with the expectations over the past 12 months, with net rental income increasing to EUR 49.9 million in May 2023 from EUR 46.5 million at the last review in spite of property disposals helped by improvement in vacancy and increase in average contracted rent per square meter. Consequently, debt yield (DY) increased to 10.0% in May 2023 from 9.0% a year earlier.

Reflecting the changes in the portfolio’s composition outlined above, DBRS Morningstar updated its DBRS Morningstar net cash flow (NCF) to EUR 35.6 million. With the capitalisation rate remaining unchanged from the initial rating, the resulting DBRS Morningstar Value is EUR 547.7 million, representing a haircut of 32.0% to the latest appraised value. This did not trigger any changes to the ratings on all classes of notes, which DBRS Morningstar confirmed with Stable trends. For DBRS Morningstar’s underwriting assumptions at issuance, please refer to the transaction’s rating report.

DBRS Morningstar noted that the senior facility is denominated in euros (EUR) whereas the Danish assets and income, which amount to approximately 7.8% of the portfolio aggregated MV, are denominated in Danish kroner (DKK). In the absence of a currency swap, the borrower takes on the foreign-exchange risk between the two currencies. However, the Danish central bank has pegged the DKK exchange rate to EUR and historical data shows little fluctuation in the DKK/EUR exchange rate. To reflect this, DBRS Morningstar applied an exchange rate of DKK 7.6282 per EUR to the GRI generated by the Danish assets, the highest exchange rate allowed by the Danish central bank for all non-AAA (sf)-rated investment-grade stress scenarios and a higher exchange rate of 12.1086 DKK per EUR in the AAA (sf) stress scenario.

There are no financial covenants applicable prior to a permitted change of control (COC), but cash trap covenants are applicable both before and after a permitted COC. The cash trap covenants are set at 73.67% LTV, while the DY covenant is set at 7.55% for the first and second year and steps up to 7.93% on and from the third year. After a permitted COC, the financial default covenants on the LTV and the DY will be applicable. These covenants are set at 10% above the LTV at the time of the permitted COC and the higher of 85% of the DY at the time of the permitted COC and 7.34%, respectively. The loan will also start to amortise at 1% per year after a permitted COC; however, DBRS Morningstar noted that, to be qualified as a permitted COC, the LTV should not exceed 63.67% and the new owner needs to be a qualifying transferee.

The transaction benefits from the liquidity reserve of EUR 11.8 million (EUR 12.0 million at origination), which is funded through the overissuance of Class A notes and through the Issuer loan, which funds the Issuer loan share of the reserve. The liquidity reserve can be used to cover any potential interest shortfalls on the Class A, Class B, and the relevant portion of the Issuer loan. DBRS Morningstar estimated that the commitment amount is equivalent to approximately 20 months of coverage based on the current interest rate cap strike of 1.25% or approximately nine months of coverage based on the 4% Euribor cap after loan maturity.

The Class E and Class F notes are subject to an available funds cap where the shortfall is attributable to a reduction in the interest-bearing balance of the senior loan that results from prepayments or by a final recovery determination of the senior loan.

The legal final maturity of the notes is in August 2033, seven years after the fully extended loan maturity date.

DBRS Morningstar’s credit ratings on Class A, Class B, Class C, Class D, Class E, and Class F of the commercial mortgage-backed floating rate notes issued by Last Mile Logistics Pan Euro Finance DAC address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this Press Release.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, pro-rata default interest, Euribor excess amount, and prepayment fees.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit 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 credit 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 credit ratings include quarterly Investor Reports prepared by CBRE Limited.

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

At the time of the initial credit rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 15 July 2022, when DBRS Morningstar confirmed its AAA (sf), AA (sf), A (sf), BBB (low) (sf), BB (sf), and B (high) (sf) credit ratings on the Class A, Class B, Class C, Class D, Class E, and Class F notes with Stable trends.

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the Base Case):

Class A Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s net cash flow (NCF) would lead to an expected rating of the Class A notes at AAA (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class A notes at AA (high) (sf)

Class B Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class B notes at A (high) (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class B notes at BBB (high) (sf)

Class C Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class C notes at BBB (high) (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class C notes at BBB (low) (sf)

Class D Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class D notes at BB (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class D notes at B (high) (sf)

Class E Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class E notes at B (low) (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class E notes at CC (sf)

Class F Risk Sensitivity:
-- a 10% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class F notes at CCC (sf)
-- a 20% decline in DBRS Morningstar’s NCF would lead to an expected rating of the Class F notes at CC (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://registers.esma.europa.eu/cerep-publication/. 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 credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Violetta Volovich, Senior Analyst
Rating Committee Chair: Mark Wilder, Senior Vice President
Initial Rating Date: 21 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 credit 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 (30 June 2023), https://www.dbrsmorningstar.com/research/416730/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.
-- Currency Stresses for Global Structured Finance Transactions (1 February 2023), https://www.dbrsmorningstar.com/research/409167/currency-stresses-for-global-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (16 June 2023), https://www.dbrsmorningstar.com/research/415976/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/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].