DBRS Morningstar Confirms Rating on Senior Commercial Real Estate Loan Advanced to Entities Owned and Managed by Blackstone; Trend Remains Stable

DBRS Ratings Limited (DBRS Morningstar) confirmed the credit rating on the senior commercial real estate loan (the Senior Loan) advanced by BNP Paribas (the Senior Lender) to several entities (the Senior Borrowers) ultimately owned and managed by The Blackstone Group Inc. (Blackstone or the sponsor) at A (low). The trend on the Senior Loan is Stable.

CREDIT RATING RATIONALE
The rating confirmation results from the stable performance of the Senior Loan over the last 12 months, in line with DBRS Morningstar expectations since 30 December 2022 (the Initial Rating Date), when DBRS Morningstar initially assigned the credit rating to the Senior Loan.

The GBP 141.9 million Senior Loan was advanced by the Senior Lender to the Senior Borrowers to finance and refinance (1) the acquisition of a portfolio of 41 mostly urban logistics single-let and multi-let properties, (2) the indebtedness of the Senior Borrowers’ group, and (3) general corporate expenses. In addition to the Senior Loan, there is also a GBP 109.3 million mezzanine loan, which is structurally and contractually subordinated to the Senior Loan.

The Senior Loan has a five-year fixed term with no extension options available to the Senior Borrowers. The maturity date is scheduled on 15 May 2027. The Senior Loan is interest only and accrues interest at Sonia plus a margin of 1.81% per annum. As at the November 2023 interest payment date (IPD), quarterly accrued interest has always been paid in full.

On 31 May 2023, Jones Lang LaSalle (JLL) revalued the underlying portfolio at GBP 297.6 million, including a 5.0% portfolio premium over the aggregated property values. This translates into a modest 6.6% decrease from JLL’s initial valuation of GBP 318.7 million dated 22 February 2022, which also included a 5.0% portfolio premium. As a result, the Senior Loan’s loan-to-value ratio (LTV) increased slightly to 47.7% at the November 2023 IPD from 44.5% at the Initial Rating Date.

The underlying portfolio is geographically diversified across the UK. In particular, the largest concentration of the portfolio’s market value is in the South East, which represents 29.7%, while the North West and the Midlands represent 20.8% and 18.2%, respectively. The remaining assets are located in the South West (12.0%), Yorkshire and the Humber (11.7%), Scotland (6.0%), and Wales (1.6%). Most of the properties are located within 20 kilometers of major metropolitan areas.

The portfolio offers a total of 2.9 million square feet, which, according to the November 2023 IPD’s quarterly management report that DBRS Morningstar received from the servicer, were 92.3% occupied by more than 250 tenants. The tenant mix is granular in nature with the largest 10 tenants representing 26.4% of the portfolio’s in-place contracted rent and no single tenant accounting for more than 6.0%. As at the November 2023 IPD, the portfolio generated a total net rental income (NRI) of GBP 15.9 million, representing a debt yield (DY) of 11.2%, which remains in line with the level reported as at the Initial Rating Date.

DBRS Morningstar’s assumptions remained unchanged since its initial analysis, with DBRS Morningstar’s Stabilised Net Cash Flow (NCF) at GBP 13.5 million and DBRS Morningstar's value for the portfolio at GBP 216.2 million, thus representing a haircut of 27.3% to the latest JLL’s valuation. DBRS Morningstar’s LTV and DY are 65.6% and 9.5%, respectively.

The Senior Borrowers are required to hedge interest rate risk during the entire loan term, in compliance with the required hedging conditions under the senior facility agreement. Specifically, the Senior Borrowers are required to enter into prepaid interest rate cap agreements with a strike rate to be set at the higher of 1.5% and the level required to ensure hedged interest coverage ratio of at least 2.0 times (the required hedging conditions). The Senior Loan is currently fully hedged until the first hedging extension date, which is scheduled on 1 April 2024, with a strike rate that complies with the required hedging conditions.

Following a permitted change of control (COC), the Senior Borrowers are required to repay the aggregate outstanding principal amount of the Senior Loan in quarterly instalments equal to 0.25% of the aggregate outstanding principal amount of the Senior Loan as at the COC date.

The Senior Loan has LTV and debt yield (DY) covenants for cash trap and, following a permitted COC, for events of default. The LTV cash trap covenant is set at 52.0% while the DY cash trap covenant is triggered if the DY is equal or lower than 9.12%. Following a permitted COC, the LTV financial covenant is triggered if the LTV ratio is higher than the LTV ratio as at the COC date plus 10% or if the DY is lower than 8.62%.

DBRS Morningstar’s credit rating on the Senior Loan addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for the Senior Loan are the interest at the applicable interest rate and the Senior Loan principal balance.

DBRS Morningstar’s credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations, including, for example, the default interest, which is conditional on the Senior Borrowers failing to pay any amount payable by it under a finance document on its due date, or redemption fees, which are conditional on the Senior Borrowers making a voluntary prepayment prior to the Senior Loan’s maturity date.

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 pounds sterling 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 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 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 this credit rating include the quarterly management reports and the compliance certificates for the relevant IPDs, which DBRS Morningstar received from CBRE Loan Servicing Limited.

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 this credit rating 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.

This is the first credit 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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the Base Case):

Senior Loan:
-- 10% decline in DBRS Morningstar NCF, expected rating on the senior loan of BBB
-- 20% decline in DBRS Morningstar NCF, expected rating on the senior loan of BB (high)

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.

This credit rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President, Credit Ratings
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: December 30, 2022

DBRS Ratings Limited
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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 (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].