DBRS Morningstar Finalises Provisional Credit Ratings on Class A to C Notes of Stark Financing 2023-1 DAC with Stable Trends

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional credit ratings on the following classes of Commercial Mortgage-Back Floating-Rate Notes due in August 2033 issued by Stark Financing 2023-1 DAC (the Issuer):

-- Class A notes at AAA (sf)
-- Class B notes at AA (low) (sf)
-- Class C notes at A (low) (sf)

The trends on all classes remain Stable.

The transaction is a one-loan conduit securitisation arranged by Merrill Lynch International (BofA Securities) and Deutsche Bank AG, London Branch (Deutsche Bank). The commercial real estate senior loan was advanced to Sussex Bidco LP, ultimately owned by The Blackstone Group Inc. (Blackstone or the Sponsor) in connection with the recent acquisition of Industrials Real Estate Investment Trust (Industrials REIT) Limited (the Target).

To streamline the current structure and rationalise the intragroup debt of the Target, the Sponsor is expected to establish a new holding structure, still within the UK real estate investment trust regime. The new structure will include the transfer of the securitised properties from the existing property companies (propcos) to new propcos, under the provisions of the financing documents which discipline the permitted reorganization of the Target.

The securitisation represents 85.3% of a senior loan, totaling GBP 339.5 million as of the securitization date, backed by 103 logistics and light industrial properties located across the United Kingdom. On 7 July 2023, Cushman & Wakefield Limited (C&W) conducted valuations on the properties and appraised their aggregate market value (MV) at GBP 617.4 million, and at GBP 679.1 million, attributing a 10% premium for the portfolio as a single lot. However, the senior loan’s loan-to-value ratio (LTV) of 52.4% is calculated on the portfolio value as a whole capped at a 5% premium and equivalent to GBP 648.2 million.

The senior loan bears interest at a floating rate equal to three-month Sterling Overnight Index Average (Sonia) (subject to zero floor), plus a securitised loan margin of 2.85% per annum (p.a.). The interest rate risk is hedged on a notional of GBP 322.5 million (95% of the senior loan amount) by a prepaid swap agreement, which includes a strike rate set at 3.25% p.a. until the August 2024 interest payment date (IPD), stepping up to 4.5% p.a. until the August 2026 IPD, the first repayment date of the senior loan. There are two one-year extension options to the loan repayment date, providing certain condition precents are met, with the final loan repayment date at the August 2028 IPD.

After the expected note maturity date, the Sonia component of the rate of interest payable on the notes (other than the Class X notes) will be capped at 6.5% p.a., subject to a floor of zero.

As of the utilisation date, 29 June 2023, the portfolio generated GBP 43.4 million of gross rental income (GRI) and GBP 42.0 million of net operating income (NOI), which reflects a 7.0% gross initial yield (GIY) and a 6.5% net initial yield (NIY), respectively, and a day-one debt yield (DY) of 12.4%. DBRS Morningstar’s long-term stable net cash flow (NCF) assumption and the DBRS Morningstar Value for the portfolio are GBP 35.0 million and GBP 493.2 million, respectively, with the latter representing a haircut of 23.9% to the C&W valuation capped at 5% premium.

The senior loan has LTV and DY cash trap covenant ratios set at 62.5% and 10.0%, respectively, until August 2026 and 60.0% and 12.0% until the final repayment date if the senior loan repayment date is extended. Following a permitted change of control (CoC) event, the LTV financial covenant is set at 15.0% greater (on an absolute basis) than the LTV as at the CoC date, and the DY is set to the greater of 85.0% of the DY as at the CoC date and 9.2%. Furthermore, the borrower must repay the aggregate outstanding principal amount of the loan in quarterly instalments equal to 0.25% of the aggregate outstanding principal amount of the loan as at the date of the CoC.

The Sponsor can dispose of any assets securing the loan by repaying a release price of 105.0% of the allocated loan amount (ALA) up to the first release price threshold, which equals 10.0% of the portfolio valuation. Once the first release price threshold is met, the release price will be 110.0% of the ALA up to the second release price threshold, which equals 20.0% of the portfolio valuation. The release price will be 115.0% of the ALA thereafter. Following a CoC, the release price will be 115.0% of the ALA.

If the senior loan extension options are exercised, the final repayment date of the senior loan is on 15 August 2028. The final legal maturity of the notes falls on 17 August 2033, five years after the final maturity of the loan. DBRS Morningstar believes that this provides sufficient time to enforce on the loan collateral and repay the bondholders, given the security structure and jurisdiction of the underlying loan.

The transaction features a Class X interest diversion structure. The diversion is triggered by (1) a loan failure event, and (2) the breach of the threshold of 9.2% DY or 65% LTV on the senior loan. Once triggered, any interest and prepayment fees due to the Class X certificateholders will instead be paid directly into the Issuer’s transaction account and credited to the Class X diversion ledger. The diverted amount will be released once the trigger is cured; only following the expected note maturity or the delivery of a note acceleration notice can such diverted funds be used to amortise the notes and the Issuer loan (as described further below).

Bank of America, N.A., London Branch and Deutsche Bank agreed to grant a GBP 20.4 million liquidity facility to the Issuer in order to make good any shortfall in the payment of any interest (including deferred interest) due by the Issuer to any of the holders of the Class A notes, the Class B notes, and the Class C notes. DBRS Morningstar estimates that the liquidity facility support is equivalent to approximately 12 months of coverage based on the hedging terms mentioned above or approximately nine months of coverage based on the 6.5% Sonia cap after scheduled maturity. The liquidity reserve will be reduced based on note amortisation, if any, and in the event of a substantial MV decline of the property portfolio.

To comply with the applicable regulatory requirements, Bank of America and Deutsche Bank advanced a GBP 14.5 million (GBP 7.2 million each) loan representing 5% of the total securitised balance to the Issuer. In addition, on the closing date the loan sellers will fund into the Issuer transaction account and credit to the Issuer reserve ledger GBP 200,000 to pay for senior transaction costs.

DBRS Morningstar’s credit ratings on the notes issued by Stark Financing 2023-1 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 Amounts and Principal Amounts.

DBRS Morningstar’s credit ratings do 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 principal methodology.

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 credit ratings include data tapes, due-diligence reports, and additional reports provided by the arrangers and a valuation report dated 7 July 2023 prepared by C&W.

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

DBRS Morningstar was supplied with one or more 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.

These credit ratings concern expected-to-be issued new financial instruments. These are the first DBRS Morningstar credit ratings on these financial instruments.

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:
-- 10% decline in DBRS Morningstar NCF, expected credit rating of the Class A notes at AA (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected credit rating of the Class A notes at AA (sf)

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

Class C Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected credit rating of the Class B notes at BBB (sf)
-- 20% decline in DBRS Morningstar NCF, expected credit rating of the Class B notes at BB (high) (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: David Lautier, Senior Vice President
Initial Rating Date: 13 October 2023

DBRS Ratings Limited
1 Oliver's Yard 55-71 City Road, 2nd Floor,
London EC1Y 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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 (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.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023),
https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators
-- 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].