DBRS Morningstar Confirms Credit Ratings on Taurus 2019-2 UK DAC with Stable Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed its credit ratings on the commercial mortgage-backed floating-rate notes due November 2029 issued by Taurus 2019-2 UK DAC (the Issuer) as follows:

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

The trends on all credit ratings remained Stable.

The credit rating confirmations follow the stable performance of the securitised senior loan over the last 12 months.

The transaction is a securitisation of a 92.1% interest in a GBP 418.1 million (loan-to-value ratio (LTV) of 63.9%) floating-rate senior commercial real estate loan advanced by Bank of America Merrill Lynch International DAC (Bank of America) to borrowers sponsored by Blackstone Group L.P. For the purpose of satisfying the applicable risk retention requirements, Bank of America also advanced a GBP 19.2 million loan (the Issuer Loan) to the Issuer on the closing date.

The senior loan was advanced to refinance the indebtedness of 126 urban logistic and multi-let industrial properties that are well diversified throughout the UK with strategic locations in and around major logistics hubs. Additionally, Planeta Industries S.A. provided a coterminous GBP 65.0 million mezzanine loan with an LTV of 73.9%, which was repaid in full. Since the utilisation date, the senior loan has been deleveraging by nearly 5% down to GBP 397.1 million as at the August 2023 interest payment date (IPD). The GBP 21.0 million total repayment on the senior loan is the result of 15 property sales since February 2021. As a consequence, the Issuer has received a total of GBP 19.3 million principal receipts since issuance, which were used to pay down the notes (95%) and the Issuer Loan (5%) on a pro rata basis.

According to Cushman & Wakefield’s (C&W) revaluation as of 31 March 2023, the aggregate value of the remaining 111 properties was GBP 735.7 million, which is 1.3% higher than the previous valuation on a like-for-like basis. However, the reported LTV of the senior loan stood at 54.0% in August 2023. This is slightly higher than last year’s LTV of 52.1%, since C&W did not include a 5% portfolio premium, which was previously included in the LTV calculation. The net rental income increased by 12.6% year over year to GBP 43.6 million from GBP 38.6 million in August 2022, resulting in a debt yield (DY) of 11.0% in August 2023 compared with 9.7% in August 2022 and 8.1% at issuance. Vacancy slightly decreased to 8.1% from 8.5% as at the last annual review, well below 11.6% level at issuance.

There is no scheduled amortisation before the completion of a permitted change of control (COC), at which time the borrower must repay the aggregate outstanding principal amount on the senior loan in quarterly instalments equal to 0.25% of the outstanding principal amount as at the date of the permitted COC. To date, no COC occurred.

The senior loan was initially scheduled to mature on 15 November 2021, with three conditional one-year extension options available. In accordance with the senior facility agreement, the senior loan term was extended twice by one year to 15 November 2023 (the second extended maturity date), with one more extension option available to the borrower. According to the senior facility agreement, notice for another one-year extension should be delivered not less than 30 days and not more than 90 days prior to the first extended maturity date.

The senior loan carries a floating interest rate with a Sterling Overnight Index Average (Sonia) benchmark plus a margin of 2.1% per annum. The senior loan is 95.0% hedged with an interest rate cap, provided by Bank of America N.A., London branch, with a strike rate of 2.64%.

DBRS Morningstar revised its net cash flow (NCF) assumption to GBP 30.6 million from GBP 29.0 million at issuance, and kept its cap rate assumption at 6.54%, the same as at issuance. This translates into a DBRS Morningstar value of GBP 469.1 million, representing a 36.2% haircut to C&W’s most recent valuation.

The transaction benefits from a liquidity facility, provided by Bank of America N.A., London branch, that the Issuer can use to cover interest shortfalls on the Class A and Class B notes. The liquidity facility commitment was GBP 8.0 million at issuance, with GBP 7.6 million outstanding on the August 2023 IPD, providing 9.5 months and 6.4 months of coverage on the covered notes based on the cap strike of 2.64% and the Sonia notes cap of 5.0% after loan maturity, respectively. In addition to the liquidity reserve, the transaction also features a GBP 50,000 issuer reserve to cover the Issuer’s senior expenses.

The legal final maturity of the notes is in November 2029, five years after fully extended loan maturity. Considering the remaining one-year extension option that is conditional upon the senior loan being hedged, the latest loan maturity date is 17 November 2024. Given the security structure and jurisdiction of the underlying senior loan, DBRS Morningstar believes that this provides sufficient time to enforce the loan collateral, if necessary, and repay the noteholders.

Cash trap covenants are set on a DY at 8.3% and on an LTV at 71.4%. The senior loan structure does not include financial default covenants unless there is a permitted COC, after which the default covenants are based on LTV and DY. The LTV ratio is set at a level that is not greater than the sum of the LTV ratio on the permitted COC date and an additional 15.0%. Additionally, the new obligors must ensure that, after the permitted COC date, the DY is not less than the greater of 85.0% of the DY as of the permitted COC date or 6.75%.

DBRS Morningstar’s credit rating on Taurus 2019-2 UK DAC addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Sonia Excess Amounts, Pro Rata Default Interest Amounts, and Exit Payment Amount.

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 British pound sterling 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 credit 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 servicer reports and quarterly data provided by CBRE Loan Services Ltd. and U.S. Bank Global Corporate Trust Limited since issuance, and C&W valuation report dated 31 March 2023.

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 22 September 2022, when DBRS Morningstar upgraded ratings on classes B to AA (sf) from AA (low) (sf), C to A (sf) from A (low) (sf) and E to BB (sf) from BB (low) (sf) notes and confirmed ratings on classes A at AAA (sf) and D at BBB (low) (sf) notes with stable trends.

The lead analyst responsibilities for this transaction have been transferred to Deniz Gokce.

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

To assess the impact of changing the transaction parameters on the credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the Base Case):

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

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

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

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

Lead Analyst: Deniz Gokce, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 August 2019

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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.

-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023) https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions

-- Derivative Criteria for European Structured Finance Transactions (18 September 2023)
https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions

-- Legal Criteria for European Structured Finance Transactions (30 June 2023)
https://www.dbrsmorningstar.com/research/416730/legal-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].