DBRS Morningstar Confirms Credit Ratings on Frost CMBS 2021-1 DAC with Stable Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of notes issued by Frost CMBS 2021-1 DAC (the Issuer) due in November 2033:

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

The trends on all ratings are Stable.

The credit ratings confirmations are based on the underlying loan’s performance, which has been in line with the terms of the facilities agreement and above its cash trap covenants that are based on debt yield (DY) and loan to value (LTV).

CREDIT RATING RATIONALE
The transaction is a securitisation of two commercial real estate facilities advanced by Goldman Sachs Bank Europe SE (Goldman Sachs) to entities owned and managed by NewCold European Holding B.V., which is ultimately owned by NewCold Holdings LLC, a temperature-controlled logistics company based in the Netherlands. One facility is denominated in British pounds sterling and is secured by a single cold-storage property in Wakefield, UK. The other is denominated in euros and is secured against a cold-storage asset in Rheine, Germany, and an asset in Argentan, France. Together, the GBP facility of GBP 112.4 million and the EUR facility of EUR 92.0 million formed the loan under the facilities agreement at issuance. The purpose of the loan was to refinance existing indebtedness or, in respect of the Argentan property to finance the purchase; to pay related financing costs; and for the NewCold Group's general corporate purposes.

The facilities are cross-defaulting and cross-collateralised. They started amortising from the second year in accordance with the facilities agreement and, as of August 2023, the outstanding principal balances were GBP 111.5 million and EUR 91.3 million for the GBP and the EUR facilities, respectively.

The facilities bear interest equal to the sterling overnight index average (Sonia) plus a margin of 3.25% in respect of the GBP facility and three-month Euribor plus a margin of 2.8% in respect of the EUR facility. The interest rate risk is fully hedged in accordance with the terms of the facilities agreement, including a prepaid cap with a strike rate of 2.0% provided by Goldman Sachs, which is co-terminus with the initial loan maturity of November 2024.

Following the eighth loan interest payment date (IPD), each borrower must repay the facilities made available to it in an aggregate amount equal to 0.25%; however, if certain conditions pertaining to DY, LTV, and capital expenditures (capex) in respect of the Rheine property are not satisfied, the loan will further amortise by 0.25% per quarter. If the DY at the time is higher than 10.31%, the loan amortises by 0.25% per quarter; if the DY is less, the loan amortises by 0.50% per quarter.

CBRE Limited (CBRE) revalued the portfolio in December 2022, resulting in an aggregated decline in value compared with CBRE’s October 2021 valuations. The Wakefield property was valued at GBP 169.6 million, down 9% from GBP 185.6 million. Although the Rheine property’s valuation was down 10% from EUR 108.4 million, an extension to the property has been added which led to the actual valuation increasing by 3% to EUR 111.4 million (including the extension to the Rheine property). The Argentan property was valued at EUR 34.9 million, down 11% from EUR 39.1 million. The LTV ratios stood at 65.4% and 62.1% for the GBP and EUR facilities, respectively. In aggregate, the LTV ratio for the loan stood at 64.71% as of August 2023, which increased from 61.3% 12 months ago, but still remains below the cash trap covenant threshold.

The financial cash trap covenants are set at an LTV of 68.77% and a DY of 8.74% for the initial loan term while the default covenants are such that the LTV must always be less than or equal to 76.27% and the DY on each loan IPD must be higher than 7.71%.

The reported DY at the August 2023 IPD was 9.12% based on adjusted net operating income (NOI) of EUR 20.2 million, which is 7.3% lower than in the previous year. This is largely due to increased direct expenses resulting from energy price increases and higher personnel costs, as well as lower occupancy rate of the Rheine property.

The initial loan maturity date is in November 2024 with two one-year extension options available thereafter. If fully extended, the transaction is expected to repay in full by November 2026. If the loan is not repaid by then, the transaction will have a seven-year tail period to allow the special servicer to work out the loan by November 2033 at the latest, which is the legal final maturity date.

DBRS Morningstar maintained its initial underwriting assumptions of a cap rate at 7.5% for both facilities and net cash flow (NCF) of GBP 10.7 million for the GBP facility and EUR 8.5 million for the EUR facility. Based on data from the most recent investor reporting in August 2023, the Issuer’s adjusted NOI for the GBP facility dropped by 4% since origination despite an increase in the occupancy rate to 86% from 76% at the cut-off date due to the increased operating expenses. The Issuer’s adjusted NOI for the EUR facility decreased by 22%, which mirrors a similar decline in the occupancy rate to 72.0% from 89.7%. This is largely due to the production shortage of the Rheine property’s anchor tenant, which has now been resolved. It is now anticipated that occupancy will improve going forward and, furthermore, the extension of the Rheine property is nearly complete and will begin to generate income in 2024. Additionally, contracts with customers are periodically indexed based on price indexes, and, therefore, increased energy prices will be compensated in the future. DBRS Morningstar’s current haircut to the NCF for the GBP facility and the EUR facility is 5.1% and plus 6.0%, respectively. As at August 2023, DBRS Morningstar’s haircut to the appraised property value stood at -16% and -22% for the GBP and EUR facilities, respectively.

To maintain compliance with applicable regulatory requirements, Goldman Sachs Bank USA retained an ongoing material economic interest of no less than 5% of the securitisation via an Issuer loan, which Goldman Sachs Bank USA advanced on the closing date (30 November 2021).

The Issuer also established two separate reserves, one for the GBP notes (the Issuer GBP liquidity reserve) and one for the EUR notes (the Issuer EUR liquidity reserve). The liquidity reserve in respect of both the GBP and EUR notes covers the interest payments on Class A to Class D. The Class GBP E, Class EUR E, and Class GBP F notes are subjected to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin on the notes. Based on a cap strike rate of 2%, DBRS Morningstar estimates that the liquidity reserve will cover 10 months of interest payments in respect of the covered GBP notes and 16 months of interest payments in respect of the covered EUR notes, assuming the Issuer does not receive any revenue. After the expected note maturity date in November 2026 the interest rates on the notes will be capped at 4.0% plus their respective margins. Based on a Sonia and a Euribor cap of 4.0%, DBRS Morningstar estimates that the liquidity reserve will cover seven months of interest payments in respect of the covered GBP notes and 11 months of interest payments in respect of the covered EUR notes, assuming the Issuer does not receive any revenue.

DBRS Morningstar’s credit rating on the Issuer addresses 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 Sonia excess amounts, Euribor excess amounts, prepayment fees, pro rata default interest, and interest potentially classified as deferred despite the presence of the available funds cap.

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.

Notes:
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 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/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 quarterly servicer and cash management reports provided by Mount Street Mortgage Servicing Limited and U.S. Bank Trustees Limited since issuance, and the valuation report prepared by CBRE and dated 31 December 2022.

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 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 rating process.

The last credit rating action on this transaction took place on 1 December 2022, when DBRS Morningstar confirmed its credit ratings on all classes of notes with Stable trends.

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

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

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

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

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

Class E (GBP) Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected credit rating on the Class E notes of BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected credit rating on the Class E notes of BB (sf)

Class F (GBP) Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected credit rating on the Class F notes of BB (sf)
-- 20% decline in DBRS Morningstar NCF, expected credit rating on the Class F notes of B (high) (sf)

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

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

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

Class D (EUR) Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected credit rating on the Class D notes of BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected credit rating on the Class D notes of BB (sf)

Class E (EUR) Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected credit rating on the Class E notes of BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected credit ratings on the Class E notes of B (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: 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: 1 November 2021

DBRS Ratings Limited
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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 (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].