DBRS Morningstar Upgrades and Confirms Credit Ratings on Taurus 2018-1 IT S.R.L., Removes From Under Review With Positive Implications

DBRS Ratings GmbH (DBRS Morningstar) took credit rating actions on the following classes of commercial mortgage-backed security (CMBS) notes issued by Taurus 2018-1 IT S.R.L. (the Issuer):

-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AA (sf) from AA (low) (sf)
-- Class C Notes upgraded to A (sf) from BBB (high) (sf)

DBRS Morningstar also removed the Class B and Class C Notes from Under Review with Positive Implications, where they were placed on 13 October 2023. The trends on all classes are Stable.

CREDIT RATING RATIONALE
The confirmation of the credit rating on the Class A Notes and the upgrade of the credit ratings on the Class B and C Notes reflect the transaction’s improved performance, as well as a substantial partial prepayment of the loan over the last 12 months, which contributed to the deleveraging of the transaction.

The transaction is a securitisation of one floating-rate senior commercial real estate loan, the Bel Air loan. Two loans, the Logo loan and the Camelot loan that also formed part of the original transaction, were repaid in full. The loans were advanced by BAML International Limited, Milan Branch (the Camelot and Bel Air loans) and BAML International Limited (the Logo loan). Financing was advanced for the acquisition of the Camelot and Bel Air portfolios and the refinancing of the Logo portfolio. As of the November 2023 interest payment date (IPD), the remaining loan, Bel Air, which is sponsored by Partners Group L.P. and managed by Kryalos Asset Management, was backed by four Italian shopping centres.

The outstanding Bel Air loan amount was EUR 57.7 million as of the November 2023 IPD compared with EUR 110.0 million at the cut-off date in May 2018. The Bel Air loan was initially backed by a portfolio of six shopping centres. Since then, two properties were sold – the Primavera shopping centre in June 2020, and the Airone shopping centre in September 2023.

Following the restructuring executed in February 2023, the sponsor obtained the extension of the final loan maturity and injected EUR 10 million in equity as a voluntary prepayment, which was applied in reverse sequential order to the notes to fully redeem the Class D Notes first and then the Class A to Class C Notes on a pro rata basis on the February 2023 note payment date. As part of the restructuring, the loan has been amortising 1.5% per annum (p.a.) since, and will be amortised by 2.5% p.a. from the February 2024 IPD until the final loan maturity in February 2025. For more details on the restructuring, please refer to the commentary "DBRS Morningstar Comments on Taurus 2018-1 IT S.R.L. Restructuring" at https://www.dbrsmorningstar.com/research/410358. On the November 2023 IPD, a further EUR 9.5 million from disposal proceeds from the sale of the Airone shopping centre was applied to the notes.

The loan is fully hedged with a cap strike rate of 2.25% p.a. until 15 February 2024. Conditions precedent to the extension of loan maturity until February 2025 are the execution of a new hedging agreement on February 2024 and a debt-yield (DY) not less than 16%.

The DY stood at 22.7% as of the November 2023 IPD, up from 13.4% at cut-off and 15.6% at last year’s review, while the loan-to-value (LTV) stood at 43.6%, down from 51.0% at origination. The reduction in the loan balance over the last year has offset the portfolio’s drop in value. According to the valuation report prepared by Savills Limited, the portfolio value is EUR 138.5 million as of November 2022, down 19.9% from the previous valuation dated December 2021. A new valuation has been mandated and is expected prior to the next IPD in 2024. The loan features LTV and DY financial covenants at 70% and 10%, respectively, and cash trap triggers at 11% DY and/or 60% LTV. The loan is current and no breach of covenants is outstanding.

As of the November 2023 IPD, the occupancy stands at 99.0%, with a weighted average (WA) lease term of 4.3 years. The occupancy rate has been improving from 90% at cut-off and 96.1% at last year’s review. This is reflected in a gross rental income GRI of EUR 15.5 million as of November 2023, 11% higher than the GRI reported on the November 2022 IPD on a like-for-like basis (i.e., excluding the rent generated by the Airone shopping centre). Capital expenditures to reduce the carbon intensity of the properties are also progressing in line with the sponsor’s business plan, with Building Research Establishment Environmental Assessment Methodology (BREEAM) certification pre-assessment completed on all four properties in the portfolio. The final BREEAM certification is expected by year-end 2024.

DBRS Morningstar considered the tenancy schedule provided by the servicer and dated September 2023. DBRS Morningstar changed its capitalisation rate assumption to 9% from 7.3%, reflecting the prolonged weakness of the retail market in Italy. This resulted in a DBRS Morningstar net cash flow (NCF) of EUR 8.6 million and a DBRS Morningstar value of EUR 95.3 million, equivalent to a 28.0% haircut over the most recent Issuer appraised value. The DBRS Morningstar LTV and DY were 60.6% and 14.9%, respectively. DBRS Morningstar also adjusted its LTV hurdles by removing the Italian sovereign stress previously applied and by updating the amortisation credit since the loan was interest only prior to the restructuring.

The transaction benefits from a liquidity facility of EUR 3.0 million as of the November 2023 IPD provided by Bank of America N.A., London Branch. This is available to cover interest shortfalls on the Class A and Class B Notes. Based on a WA note interest rate of 5.16%, the coverage is 14 months. Based on the Euribor cap of 4%, DBRS Morningstar estimates that the liquidity reserve would cover 11 months of interest payment shortfalls.

As part of the restructuring, the final note maturity was extended to May 2032 from May 2030. This results in a seven-year tail period, unchanged since origination.

DBRS Morningstar’s credit ratings on the notes issued by Taurus 2018-1 IT S.R.L. address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the interest payments 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, Euribor Excess Amounts, Pro Rata Default Interest Amounts, and Note Exit 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.

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:
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 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/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 reports provided by Banca Finanziaria Internazionale SpA and CBRE Loan Services 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 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 13 October 2023, when DBRS Morningstar placed its credit ratings on the Class B and C Notes Under Review with Positive Implications.

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 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 AA (high) (sf)

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

Class C Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected credit rating on the Class C Notes of A (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected credit rating on the Class C Notes of BBB (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: Patrizia Catanese, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 24 April 2018

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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 (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].