DBRS Morningstar Places All Classes of Salus (European Loan Conduit No. 33) DAC Under Review with Negative Implications

DBRS Ratings Limited (DBRS Morningstar) placed its credit ratings on the following classes of commercial mortgage-backed floating-rate notes due January 2029 issued by Salus (European Loan Conduit No. 33) DAC Under Review with Negative Implications (UR-Neg):

-- Class A rated AAA (sf)
-- Class B rated AA (sf)
-- Class C rated A (low) (sf)
-- Class D rated BBB (sf)

This rating action reflects the reduction in the tail period to four years from five following the Senior Loan Amendments that came into effect on 15 December 2023.

CREDIT RATING RATIONALE
The transaction is a securitisation of a GBP 367.5 million floating-rate senior commercial real estate loan that Morgan Stanley & Co. International plc (Morgan Stanley) advanced in November 2018 to CityPoint Holdings I Ltd., which is controlled by Brookfield Asset Management Inc. (the sponsor). The senior loan is split into two pari passu facilities: Facility A, which totals GBP 354.0 million, and Facility B (the capital expenditure (capex) facility), which totals GBP 13.5 million. Facility A refinanced the borrower’s existing debt whereas the capex facility financed some refurbishment works that the sponsor planned at issuance. Additionally, there is a nonsecuritised mezzanine facility totaling GBP 91.9 million that is contractually and structurally subordinated to the senior facilities.

The senior loan is secured by a single asset known as the Citypoint office building located in the City of London. The asset is a 36-storey office tower that was originally built for British Petroleum Plc in 1967. The building offers 704,657 square feet (sf) of office space and more than 60,000 sf of retail space, including several restaurants and the largest health club in the square mile, Nuffield Health. It is one of the largest office buildings in the City of London, and underwent a comprehensive reconstruction in 2001. Since then, the owner has maintained the property at high-quality standards with ongoing refurbishment works and, as such, the building does not show any significant signs of obsolescence. In particular, as part of the sponsor’s business plan to capture the asset’s reversionary value potential, during the course of 2020–21, levels five to eight (the podium floors) underwent a comprehensive refurbishment at a cost of around GBP 167 per sf to provide high-quality Grade A offices and an additional floor area and walkway. Landscaped terraces were also included and the dedicated podium reception was refurbished. After the refurbishment, there was letting activity on level eight with the execution of a new lease that commenced on 1 March 2023. The contracted rent for the new lease is GBP 1.47 million per annum and the rent commencement date is 1 December 2023. Negotiations with potential new tenants for levels five through seven are ongoing. Vacancy at the property was 17.6% as of the October 2023 Interest Payment Date (IPD). The loan is in cash trap with respect to its Debt Yield, which was reported at 7.9% as of October 2023, below the cash trap covenant of 8.0%. The loan-to-value (LTV) ratio of the loan, which stands at 54.9%, is compliant with the cash trap covenant of 72.5%.

The senior loan was initially scheduled to mature on 20 January 2022 with two one-year conditional extension options available to the borrower. The borrower exercised these options, thus extending the senior loan’s maturity to 22 January 2024. The senior borrower then requested an additional 12 months’ maturity extension to 20 January 2025. The servicer agreed in December 2023 to the extension and in connection with the extension the senior borrower and the servicer agreed to additional amendments including, but not limited to, increasing the senior loan margin by 0.35% to 2.50% per annum for the period from 20 January 2024 to 20 January 2025 and a one-off maturity fee of 0.25% of the principal amount outstanding of the senior loan, both to be passed on to the noteholders and the VRR lender. The senior borrower will also purchase hedging for 100% of the senior loan at a strike rate of 2.5% per annum for the period from 20 January 2024 to 20 January 2025.

DBRS Morningstar understands the final maturity date of the notes remains unchanged at 23 January 2029, thus reducing the tail period between the loan maturity and the final note maturity to four years from five years. A shorter tail period may not be sufficient time to work out the loan, if necessary, and repay the bondholders. As a result, DBRS Morningstar is placing its credit ratings on the notes Under Review with Negative Implications. In addition, DBRS Morningstar will undertake a thorough review of the loan performance and all the amendments that were put into effect on 15 December 2023 along with the extension in order to resolve the UR-Neg status and take other rating actions, which may be deemed appropriate.

The senior loan is interest-only and currently accrues interest at the aggregate of compounded Sonia and a credit adjustment spread of 0.1193%, plus a margin of 2.15% per annum, which will increase to 2.50% in January 2024. It is fully hedged with an interest rate cap provided by Wells Fargo Bank, N.A. with a strike rate of 2.5%. The cap agreement will expire on 20 January 2024 but as noted above, there is a commitment in place for the senior borrower to purchase new hedging at the same strike rate of 2.5% per annum for the period from 20 January 2024 to 20 January 2025.

The liquidity facility support stands at GBP 20 million as of April 2023, unchanged since issuance, and covers the Class A through Class D notes. Based on the cap strike rate of 2.5%, DBRS Morningstar estimated that the liquidity facility will cover 14.8 months of interest payments on the notes.

DBRS Morningstar’s credit rating on the notes issued by Salus (European Loan Conduit No. 33) addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are Initial Principal Amounts and Interest Amounts.

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, Sonia Excess Amounts, Default Interest Amounts and Prepayment 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. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a relevant or significant 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” 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 British pound sterling 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.

The sources of data and information used for these credit ratings include the servicer reports published by Mount Street Mortgage Servicing Limited and the Regulatory Information Services (RIS) notification dated 20 December 2023.

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 credit rating process.

The last credit rating action on this issuer took place on 6 June 2023 when DBRS Morningstar confirmed its credit ratings on the notes with Stable trends and removed its credit ratings on Class B to Class D from Under Review with Negative Implications.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

This credit rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):

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

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

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

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class D notes to BBB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class D notes to 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, Credit Ratings,
Rating Committee Chair: David Lautier, Senior Vice President, Global Structured Finance
Initial Rating Date: 11 December 2018

DBRS Ratings Limited
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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.

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].