DBRS Morningstar Confirms Credit Ratings on Usil European Loan Conduit No. 36 DAC With Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit ratings on the following classes of notes issued by Usil European Loan Conduit No. 36 DAC (the Issuer):

-- Class RFN Notes at AAA (sf)
-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BB (high) (sf)
-- Class F Notes at B (high) (sf)

The trend on all ratings remains Stable.

CREDIT RATING RATIONALE
The credit rating confirmations follow the transaction’s stable performance over the last 12 months (LTM), with no significant change in rental performance from the last annual review and no cash trap covenant breaches recorded to date.

The transaction is the securitisation of a EUR 723.9 million floating-rate senior commercial real estate loan (the senior loan) advanced by both Morgan Stanley Principal Funding, Inc. and Morgan Stanley Bank, N.A. to borrowers sponsored by Blackstone Group L.P. (Blackstone, or the sponsor). As per the latest available investor report released in August 2023, the senior loan’s outstanding balance stood at EUR 691.8 million, which includes a EUR 647.8 million term loan (EUR 679.1 million at issuance) and a EUR 43.9 million capital expenditure (capex) loan (EUR 44.8 million at issuance). The senior loan refinanced the original acquisition loan and funded a progressive capex programme. In addition to the senior loan, the transaction comprised a EUR 112.5 million mezzanine loan (including an undrawn mezzanine capex facility of EUR 6.9 million), which is structurally and contractually subordinated to the securitised senior loan and was repaid in full on 29 April 2022.

The senior loan is backed by a portfolio of 91 remaining properties (100 at issuance) spread throughout well-developed suburban areas in Germany. The assets are predominantly light-industrial and warehouse properties and are part of the Mileway logistics platform. Nine property sales have occurred since issuance, resulting in a EUR 32.1 million total repayment on the senior loan (equal to 4.4% of the senior loan’s initial balance).

According to Cushman & Wakefield’s (C&W) most recent valuation dated 31 October 2022, the aggregated market value (MV) of the 91 properties remaining in the securitised portfolio increased to EUR 1,110.6 million from a previous valuation of EUR 1,078.9 million dated 31 March 2021, though the latter included a 5.0% portfolio premium and three additional properties sold during the last two quarters, with a combined MV of EUR 23.6 million under the new valuation. On a like-for-like basis (i.e., based on the aggregated 91 remaining properties’ value without any portfolio premium), the new valuation represents an increase of 10.6% compared with the previous one.

The senior loan’s deleveraging, combined with the increased valuation of the remaining properties, resulted in a decrease of the senior loan’s reported loan-to-value ratio (LTV) to 62.3% at the August 2023 interest payment date (IPD) from 65.6% at the August 2022 IPD and 66.9% at issuance. The debt yield (DY) has also improved slightly over the LTM to 8.65% as of August 2023 IPD from 8.40% as of August 2022 IPD. Both metrics are in line with the cash-trap covenants set at 71.16% LTV and at 8.00% DY, respectively.

According to the servicer report for the August 2023 IPD, contracted rent has increased by 3.9% over the LTM to EUR 68.4 million as of August 2023 from EUR 65.8 million as of August 2022, despite three properties sold in between and a jump in physical vacancy to 19.99%. Among the properties that contributed most to the increase in vacancy were the An der Breiten Wiese 3-5 property in Hannover, which became fully vacant after its single tenant decided to vacate its 38,904 square meters (sqm) of lettable area at the lease termination date on 31 January 2023, and the Louis-Krages-Straße 30 property in Bremen, where vacancy rate increased from 9.2% in August 2022 to 27.5% in August 2023. The property is the largest by value (8.2% of the total MV) and by contracted rent (6.5% of total contracted rent). In April 2020, the property was damaged by a fire, which destroyed 30,000 sqm of space. As a result, the asset is still undergoing substantial redevelopment, with the sponsor allowing leases to lapse for the works to proceed. Moreover, according to the August 2023 IPD servicer report, the borrower provided notice of a permitted capex project aimed at demolishing one building, which is currently fully vacant, in order to save costs of maintaining the vacant and unlettable warehouse units. The cost of demolition is estimated to be around EUR 140,000.

There is no scheduled amortisation before the completion of a permitted change of control, at which time the borrower must repay the aggregate outstanding principal amount of the senior loan by 1.0% per year. The senior loan was initially scheduled to mature on 15 February 2022, with three conditional one-year extension options available. In compliance with the terms of the senior facility agreement (SFA), the borrower exercised the first two extension options to extend the senior loan maturity date up to 15 February 2024 (the second extended maturity date), with another conditional extension option available to the borrower to extend the senior loan maturity for a further one year to 15 February 2025 (the fully extended maturity date), upon satisfaction of the required conditions under the SFA.

The senior loan carries a floating interest rate with a Euribor benchmark plus a margin of 2.15% per annum. The senior loan is fully hedged with an interest rate cap provided by HSBC Bank plc, with a strike rate of 1.75%. The cap agreement’s expiry coincides with the senior loan’s second extended maturity date. For the senior loan to be further extended, the borrower is required to ensure that a subsequent hedging agreement is purchased, with a termination date that coincides with the newly extended loan maturity date.

DBRS Morningstar updated its net cash flow (NCF) assumption to EUR 46.4 million from EUR 49.2 million at issuance to reflect the nine property sales that have occurred since issuance. In addition, DBRS Morningstar maintained its cap rate assumption at 6.6%, as at issuance, which translates to a DBRS Morningstar value of EUR 703.3 million, representing a 36.7% haircut to C&W’s most recent valuation.

The final legal maturity of the notes is expected to be in February 2030, five years after the fully extended loan term. Given the security structure and jurisdiction of the underlying loan, DBRS Morningstar believes the final legal maturity date provides sufficient time to enforce, if necessary, on the loan collateral and repay the bondholders.

DBRS Morningstar’s credit ratings on the notes issued by Usil European Loan Conduit No. 36 DAC address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. For the securities listed above, the associated financial obligations are the Interest Payments and the Principal Amount.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Euribor Excess Amounts, Default Interest Amounts and Notes 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. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (4 July 2023).

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is:
European CMBS Rating and Surveillance Methodology (19 October 2023) https://www.dbrsmorningstar.com/research/422173/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 ratings 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/421590.

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 servicer reports and quarterly data provided by Mount Street Mortgage Servicing Limited and U.S. Bank Global Corporate Trust Limited since issuance.

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

At the time of the initial credit ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit ratings 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 October 27, 2022, when DBRS Morningstar confirmed its ratings on the 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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

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

Class A-1 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Class A-1 Notes of AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on the Class A-1 Notes of AAA (sf)

Class A-2 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Class A-2 Notes of AA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on the Class A-2 Notes of A (sf)

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

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

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

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

Class F Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Class F Notes of CCC (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on the Class F Notes of 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://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: Andrea Selvarolo, Senior Analyst, Credit Ratings
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: October 21, 2019

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 (19 October 2023) https://www.dbrsmorningstar.com/research/422173/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 (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.

-- 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].