Morningstar DBRS Assigns a Provisional Credit Rating to Vantage Data Centers Jersey Borrower SPV Limited

DBRS Ratings Limited (Morningstar DBRS) assigned a provisional credit rating of A (low) (sf) to the Class A-2 Asset-Backed Fixed-Rate Notes (Class A-2 notes) to be issued by Vantage Data Centers Jersey Borrower SPV Limited (the Issuer). The trend is Stable.

The GBP 600.0 million Class A-2 notes pay an indicative fixed coupon of 6.7% on an interest-only basis during the initial five-year period until the Anticipated Repayment Date (ARD) in May 2029, with an amortisation schedule over the remaining 10 years of the transaction. Following the Class A-2 ARD, any excess cash flow will be used to amortise the outstanding principal balance of the notes in accordance with the priority of payments until the final maturity of the notes in May 2039.

The transaction additionally includes Class A-1 Variable Funding Notes (VFN) with a maximum note principal amount of GBP 100.0 million, which - if drawn - rank senior to the Class A-2 notes prior to enforcement in terms of interest, fees and principal and will not be rated by Morningstar DBRS. On the closing date, the Class A-1 notes will be issued alongside the Class A-2 notes but will remain undrawn and retained by Barclays Bank PLC and SMBC London Branch. Future draws by the Issuer on the Class A-1 VFN are subject to the satisfaction of certain conditions as laid out in the transaction documents, including, but not limited to, a rating agency confirmation being obtained. Class A-1 VFN and Class A-2 notes rank pari passu in a post-enforcement scenario.

The transaction is collateralised by the Issuer's leasehold and fee-simple interests in two data centres, CWL 11 and CWL 13, respectively. The data centres are in close proximity with one another just outside of Newport, Wales, and account for 111,828 kilowatts (kW) in total leased capacity as of the cut-off date (31 December 2023). CWL 11 was repurposed into a data centre in 2010 and is held leasehold under a number of leases on a phased basis with the lessor being the Welsh Ministers for a remaining lease term of approximately 111 years. CWL 13, which is held freehold, was constructed in 2022 as a purpose-built data centre for a single hyperscaler. The tenancy at CWL 11 comprises 65 unique tenants, including retail and wholesale clients as well as two hyperscalers, one of which is also the single tenant at the CWL 13 asset.

Both assets have booked-but-not billed (BBnB) capacity that will be coming online in 2024 and 2025. BBnB capacity represents capacity that has been leased but is not yet ready for service (RFS). The assets are 95.0% leased to investment-grade tenants or their main UK subsidiaries on a kW basis. The two hyperscalers account for 91.0% of total leased capacity at the collateral including the BBnB capacity.

The CWL 11 asset accounts for 71,828 kW in total leased capacity, 16,009 kW (22.3%) of which is BBnB capacity. The single-tenant CWL 13 asset accounts for 40,000 kW in total leased capacity, 16,000 kW (40.0%) of which is BBnB capacity. At CWL 13, 12 megawatts (MW) of the total RFS capacity (24 MW) is operational and income producing and the remaining 12 MW has been delivered recently but is currently nonincome producing because of a five-month rent-free period. All of the BBnB capacity across both assets is leased to investment-grade tenants or the UK subsidiaries of investment-grade tenants. The RFS dates of the BBnB capacity across the collateral range from May 2024 to July 2025. According to the budget provided by the sponsor, remaining fit-out costs for CWL 11 and CWL 13 total GBP 117.1 million and GBP 18.8 million respectively. Morningstar DBRS gave credit to the rental income from BBnB capacity from rent commencement onwards on the basis of Vantage Data Centers' (Vantage) expertise and its history of BBnB delivery at the assets as well as the rest of the Vantage portfolio. The transaction is additionally structured with an executed forward starting lease reserve and an issuer capital expenditure reserve sized at GBP 10.0 million and GBP 12.1 million initially.

The data centres are owned by Vantage Data Centers UK Limited, a special-purpose entity that owns no assets other than the data centres, tenant leases, and related assets. Vantage, which is active in 19 markets across five continents, acquired Next Generation Data Infrastructure 2 Limited (the Parent) in 2020. Vantage's core business is to build and lease data centres providing space, power, cooling, and physical security to customers. The data centres are managed by Vantage subsidiaries.

From the standpoint of the physical plants, the assets are heavily powered with 112 MW of critical IT load and feature 2N redundancy across the power equipment and a minimum of N+1 or N+20% redundancy across the mechanical systems such as cooling. While Morningstar DBRS views both data centres to be above-average quality with regard to the critical infrastructure, Morningstar DBRS considers the CWL 13 asset to be the stronger of the two, as it is a newer build and a purpose-built data centre as opposed to CWL 11, which was repurposed into a data centre in 2010.

Knight Frank LLP (Knight Frank) completed an appraisal of both properties in January 2024 and concluded a total appraised value of GBP 1,095,200,000 for the collateral. Total debt of GBP 600.0 million represents a 54.8% loan-to-value (LTV) ratio on the appraised value and an LTV of 69.2% on the Morningstar DBRS value of GBP 867.2 million, which is relatively modest when compared with other more leveraged single-asset/single-borrower transactions. The Morningstar DBRS value equates to a 20.8% haircut to the appraiser's market value of GBP 1.1 billion. The Morningstar DBRS year 1 net cash flow (NCF) is GBP 42.7 million across the collateral, representing a debt yield of 7.1%.

The Cardiff, Wales, data centre market, albeit modestly sized with only four operational data centre sites within the wider Cardiff area and one further to the north, is likely to become an emerging data centre hub with a number of cloud operators said to be in occupation based on the market information provided in the valuation report. Growing constraints and limitations seen in prime markets like London, including a lack of available power and land, combined with tightening planning restrictions, result in increasing capacity coming online in secondary markets such as Cardiff to meet the high demand for data centre space.

Based on the data tape dated 31 December 2023 and Morningstar DBRS' cash flow analysis, investment-grade tenants or their UK subsidiaries account for 88.3% of year 1 gross rent (from May 2024 through April 2025) and two hyperscaler tenants account for 81.6% of year 1 gross rent. Morningstar DBRS generally takes a positive view on the credit profile of the overall transaction based on its modest leverage, strong credit tenancy profile at the collateral, the strong data centre operator, favourable market composition, and the quality of the assets.

The notes pay interest on a monthly basis with the first payment date due in June 2024. The transaction is structured with a liquidity reserve, which will be funded from issuance proceeds and sized at GBP 10.4 million on Day 1, sufficient to cover three months of interest payments on the Class A-2 notes and Class A-1 VFN commitment fees.

The transaction is additionally structured with a cash trap event, which occurs if the debt service coverage ratio (DSCR) falls below 1.35 times (x) at any calculation date, a scheduled amortisation event (DSCR falling below 1.5x), and rapid amortisation events. A rapid amortisation event occurs if the DSCR falls below 1.2x or a breach of the tax deed of covenant (TDC Breach) occurs and is continuing and such TDC Breach is, in the opinion of the trustee, incapable of remedy or capable of remedy and remains unremedied for 30 days after the trustee has given written notice to the relevant party in breach of the Tax Deed of Covenant.

Morningstar DBRS' credit rating on the Class A-2 notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. For the security listed above, the associated financial obligations are the Interest on the Class A-2 Notes and the Class A-2 Note Principal Amount.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. This includes for the security listed above, Post-ARD Additional Interest and the Class A-2 Notes Prepayment Fee.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the credit rating is Rating and Monitoring Data Center Transactions (23 January 2024), https://dbrs.morningstar.com/research/427033.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include a data tape dated 31 December 2023, lease abstracts, due-diligence reports, and additional reports provided by the arrangers and a valuation report dated January 2024 prepared by Knight Frank.

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

Morningstar DBRS was supplied with third-party assessments. However, this did not affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS does not audit or independently verify the data or information it receives in connection with the credit rating process.

A provisional credit rating is not a final credit rating with respect to the above-mentioned security and may change or be different than the final credit rating assigned or may be discontinued. The assignment of a final credit rating on the above-mentioned security is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalise the credit rating.

This credit rating concerns an expected-to-be-issued new financial instrument. This is the first Morningstar DBRS credit rating on this financial instrument.

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

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

Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating of BBB (sf) on the Class A-2 Notes and
-- 20% decline in Morningstar DBRS NCF, expected credit rating of BB (sf) on the Class A-2 Notes.

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Deniz Gokce, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 30 April 2024

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Rating and Monitoring Data Center Transactions (23 January 2024),
https://dbrs.morningstar.com/research/427033

-- European CMBS Rating and Surveillance Methodology (17 January 2024),
https://dbrs.morningstar.com/research/426818

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030

-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.