DBRS Morningstar Finalises Provisional Credit Ratings on Classes A to D Notes of Magritte CMBS NV/SA

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional credit ratings on the following classes of Commercial Mortgage-Back Floating-Rate Notes due in January 2033 issued by Magritte CMBS NV/SA (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 (high) (sf)

The trends on all classes are Stable.

CREDIT RATING RATIONALE
The issuance is a securitisation of a EUR 208.4 million senior commercial real estate (CRE) loan (55.0% Loan-to-Value (LTV)) backed by a portfolio of eight office properties located in Belgium and Luxembourg. The senior loan is advanced by the Issuer to four borrowers (the Borrowers) ultimately owned by Brookfield Strategic Real Estate Partners IV (Brookfield or Sponsor) for the purposes of refinancing existing indebtedness of the Borrowers and for general corporate purposes. There is a mezzanine facility, which is structurally and contractually subordinated to the senior facility, and is not part of the securitisation. The initial maturity date of the loan is on 31 December 2025, but the borrower has two one-year extension options, which can be exercised if certain conditions are met.

The transaction represents the refinancing of a sub-portfolio of the wider Befimmo's portfolio. Befimmo SA is a Belgian REIT, which was acquired by the Sponsor in 2022 and taken fully private in 2023.

DBRS Morningstar notes that three of the four senior Borrowers (apart from the Luxembourg borrower) are incorporated as Belgian institutional investment companies (institutionele bevak naar Belgisch recht/sicaf institutionnelle de droit belge) and registered with the Federal Public Service Finance as a specialised real estate investment fund (gespecialiseerd vastgoedbeleggingsfonds – GVBF/fonds d’investissement immobilier spécialisé – FIIS). A FIIS is a public real estate investment trust incorporated as a limited liability company under Belgian law and regulated by the Belgian royal decree of 9 November 2016 (the Royal Decree) with the exclusive purpose of investment in real estate assets.

The collateral securing the loan comprises eight office buildings: seven are located in Belgium (92.2% of the portfolio by market value (MV)), and one is in Luxembourg (7.8% of the portfolio by MV). Of the seven properties located in Belgium, two are in Liége, the capital of the Wallonia region, while the other five are located across Brussels, including the Leopold and CBD districts. Valuations prepared for the properties by Savills Advisory Services Limited (Savills or the Valuer) in September 2023 concluded an aggregate market value of the collateral at EUR 378.9 million (the valuation is based on a special assumption of share sale and represents gross present value less 1% transaction costs).

The portfolio is well occupied with an occupancy rate of 98.2%, and vacancy present only in one property. It also benefits from long-term leases, with a WALTb and WALTe of 11.3 years and 11.6 years, respectively, and strong tenant covenant, as 88.7% of the contracted rent is generated by governmental tenants such as the European Parliament, regional government of Wallonia, and Belgian state government entities.

As at the Cut-off Date (1 October 2023), the properties generated EUR 22.5 million of gross rental income and EUR 22.0 million of net operating income, which reflects a day-one debt yield (DY) of 10.6%. DBRS Morningstar’s long-term sustainable net cash flow (NCF) assumption and the DBRS Morningstar Value for the senior loan are EUR 18.2 million and EUR 303.4 million, respectively, representing a haircut of 20% to the Savills valuation.

There are no financial covenants applicable prior to a permitted change of control (PCC), but cash trap covenants are applicable both prior and post PCC. More precisely, the cash trap covenants are set at 65.0% LTV, and at 9.5% DY prior to a PCC; and at 60.0% LTV and at 9.50% DY following a PCC. After a PCC, the financial default covenants on the LTV and the DY will be applicable; they are set, respectively, at 65.0% LTV and at 8.44% DY.

The senior loan is interest-only prior a PCC and carries a floating rate of three-month EURIBOR (floored at 0%) plus a margin that is a function of the weighted average (WA) of the aggregate interest amounts payable on the notes. However, the senior loan margin shall not in any case exceed 3.5%. DBRS Morningstar understands that the borrower will purchase an interest cap agreement to hedge against increases in the interest payable under the loan within three months from the utilisation date. The cap agreement will cover 100% of the outstanding loan balance with a strike rate of 3.25% until the initial termination date, in December 2025 and, thereafter, the higher of 3.25% and the strike rate required to ensure a hedged interest coverage ratio of not less than 1.5 times (x). The cap documentation is not fully in line with DBRS Morningstar’s Derivative Criteria for European Structured Finance Transactions methodology, as it allows for hedging agreement by a way of a long-form confirmation. A long-form confirmation does not always include a credit support annex, and as such, there could be no provisions regarding posting collateral, which is one of the crucial requirements in DBRS Morningstar’s Derivative Criteria. However, it was confirmed to DBRS Morningstar that the cap documentation will meet the requirements described in DBRS Morningstar’s Derivative Criteria for European Structured Finance Transactions, including those regarding the posting of eligible collateral. Subsequently, DBRS Morningstar has determined that this does not affect the credit ratings assigned to the notes. After the expected note maturity, the Euribor rate will be capped at 4.5%.

For the purpose of satisfying the applicable risk retention requirements, Morgan Stanley Principal Funding, Inc. advanced EUR 11.2 million loan (the Issuer Loan) to the Issuer, representing 5% of the total securitised balance.

On the closing date, EUR 14.0 million of the proceeds from the issuance of the Class A notes and EUR 0.7 million of the Issuer Loan were used to fund the issuer liquidity reserve. The liquidity reserve covers the Class A, Class B, and the relevant portion of the Issuer loan. DBRS Morningstar estimates that the commitment amount at closing is equivalent to approximately 18 months of coverage based on the hedging terms mentioned above or approximately 15 months of coverage based on the 4.5% Euribor cap. 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 (appraisal reduction).

The Class C and Class D notes are subject to an available funds cap, where the shortfall is attributable to the increase in WA margin on the notes due to sequential allocation of principal payments.

The two-year senior loan has two one-year extension options, which can be exercised if certain conditions are met. The legal final maturity of the notes is in January 2033, five years after the fully extended loan maturity date. DBRS Morningstar believes that this provides sufficient time to enforce the loan collateral and repay the bondholders, given the security structure and jurisdiction of the underlying loan.

DBRS Morningstar’s credit ratings on the Issuer address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related interest payment amounts and related class balance.

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, ratings on the notes listed above do not address payments of the Euribor excess amounts, exit payment amounts, and pro rata default interest.

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 are to be 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/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 rating 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 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 a data tape with a cut-off date of 1 October 2023, valuation reports prepared by Savills with valuation date of 15 September 2023, technical due diligence reports prepared by Theop with issue date of 31 October 2023, transaction documentation and related legal opinions, all provided by Morgan Stanley & Co. International plc.

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

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.

These credit ratings concern newly issued financial instruments. These are the first DBRS Morningstar credit ratings on these financial instruments.

This is the first rating action since the Initial Rating Date.

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 rating (the Base Case):

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

Class B Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on the Class B notes of A (low) (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 BB (high) (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 (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 Limited for use in the United Kingdom.

Lead Analyst: Violetta Volovich, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 November 2023

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

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].