Morningstar DBRS Changes Trends on Bruegel 2021 DAC to Negative from Stable, Confirms Credit Ratings

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the following classes of commercial mortgage-backed floating-rate notes due May 2031 (the notes) issued by Bruegel 2021 DAC (the Issuer):

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

Morningstar DBRS also changed the trends on all credit ratings to Negative from Stable.

CREDIT RATING RATIONALE
The credit rating confirmations reflect the transaction's stable performance. The loan is current and the transaction has met its debt obligations over the last 12 months. The loan has been deleveraging through scheduled amortisation and the sale of one property. The collateral's performance has improved slightly since last year, resulting in a higher debt yield (DY), but the loan-to-value (LTV) ratio has deteriorated due to office market uncertainty and property yield widening as reflected in lower asset values, especially for the larger buildings. The trend change reflects the portfolio LTV at the fully extended loan maturity date after scheduled amortisation, which resulted in a higher LTV than at origination.

The transaction is a EUR 220.15 million securitisation of one Dutch senior commercial real estate loan that mainly refinanced the PPF loan once securitised in another Morningstar DBRS-rated commercial mortgage-backed securities (CMBS) transaction, Kantoor Finance 2018 DAC. The senior loan was advanced by Goldman Sachs Europe SE. At origination, the loan was secured against nine Dutch assets, eight of which are office buildings and one of which is a retail asset. Two of the assets were sold: one office building in 2021 and the retail property in 2024. The Issuer applied the disposal proceeds pro rata toward prepayment of the notes. PPF Group N.V. (the sponsor) and NL Asset Management B.V. remain the owner and asset manager of the portfolio, respectively.

The current securitised balance of the transaction decreased to EUR 199.2 million as of May 2024 interest payment date (IPD), from EUR 214.4 million at the last review at May 2023 IPD, because of quarterly amortisation (EUR 0.5 million) and the sale of the retail property (EUR 13.1 million) at the end of March 2024. Based on Savills Limited's (Savills) latest available valuation report dated July 2023, the portfolio's total appraised value was EUR 343.0 million, which is 6.6% lower than the like-for-like basis valuation at origination. This results in a LTV of 58.1% as of the May 2024 IPD, up from last year's LTV of 54.9% and from the cut-off LTV of 55.7%. Based on the most recent valuation, the LTV at the fully extended loan maturity would be 56.1%. The current LTV ratio is below the cash trap covenant of 63% and the default covenant of 75%. The loan carries a floating interest rate equal to three-month Euribor plus a margin of 2.3% and is fully hedged with an interest rate cap strike of 1.5% provided by HSBC Continental Europe.

The expected loan maturity date is on 15 May 2025, but the borrowers have an additional one-year extension option, subject to no event of default and new hedging in place. The loan amortises by 1.0% per annum (p.a.) in years two to four and 2.0% p.a. in year five. A regular quarterly amortisation of EUR 550,375 has been applied since the August 2022 IPD.

As of the May 2024 IPD, the servicer reported an Issuer-adjusted net rent of EUR 24.3 million and a DY of 12.2%, up from 11.9% at the last annual review and 8.9% at the cut-off date. The current DY ratio is above the cash trap covenant of 9.4%, applicable from years three to five, and the default covenant of 7.9%.

Vacancy has been consistently low at under 5% for the whole portfolio. Four of seven properties are fully occupied. As of the May 2024 IPD, the weighted-average (WA) unexpired lease term to expiry date and the WA unexpired lease term to break option also remained relatively long at 5.8 and 5.6 years, respectively.

The tenant profile is fairly granular and diversified, covering a multitude of sectors, both locally and internationally. The gross rental income (GRI) stood at EUR 27.8 million as of the May 2024 IPD. The largest tenant represents 13% of the portfolio GRI while the top 10 tenants represent 67.8% of the portfolio GRI. Rental arrears represent 2.3% of GRI (EUR 651,273), in line with 2.2% at last year's review. Zero- to 30-day arrears represented only 3% of the outstanding arrears while 31- to 90-day arrears stood at 69% and 90+-day arrears stood at 28%, with the majority of arrears to be cleared in the next quarter to August from May 2024.

Morningstar DBRS' assumptions remain unchanged from the last annual review with a net cash flow (NCF) of EUR 16.7 million netted from the income generated by the sold property. The capitalisation rate remains unchanged at 6.5%. The resulting Morningstar DBRS Value of EUR 256.6 million reflects a 25.2% haircut to the Issuer's appraised value.

At closing, the transaction benefited from a liquidity reserve of EUR 9.8 million, which was 4.4% of the total outstanding balance of the notes and the Issuer loan. The liquidity reserve was funded with the issuance of the Class A notes and can be used to cover interest shortfalls on the Class A, Class B, Class C, and Class D notes. Class D is subject to an available funds cap where the shortfall is attributable to an increase in the WA margin of the notes. Currently, the balance of the liquidity facility is EUR 9.0 million. The liquidity reserve amount is equivalent to approximately 18 months of interest payments on the covered notes, based on the interest rate cap strike rate of 1.5% per year and seven months of interest payments based on the Euribor cap of 5.0% per year after the final loan maturity.

The legal final maturity of the notes is in May 2031, providing a tail period of five years after the fully extended loan maturity.

Morningstar DBRS' credit ratings on Bruegel 2021 DAC addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment and the related Class Balances.

Morningstar DBRS' 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, Default Interest Amounts and Prepayment Fees.

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 significant or relevant 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) at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is European CMBS Rating and Surveillance Methodology (17 January 2024), https://dbrs.morningstar.com/research/426818.

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 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 Morningstar DBRS 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 these credit ratings include the valuation reports from Savills and CBRE Valuation & Advisory Service B.V., and quarterly investor reporting from CBRE Loan Services Limited and U.S. Bank Global Trustees Limited from issuance to the May 2024 IPD.

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

At the time of the initial credit ratings, Morningstar DBRS was not 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 these credit ratings 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.

The last credit rating action on this transaction took place on 23 June 2023, when Morningstar DBRS confirmed its credit ratings on the Class A through Class D notes with Stable trends.

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

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

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

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

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

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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.

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: Mark Wilder, Senior Vice President
Initial Rating Date: 4 June 2021

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- European CMBS Rating and Surveillance Methodology (17 January 2024),
https://dbrs.morningstar.com/research/426818.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.