Morningstar DBRS Confirms Vault DI Issuer LLC at BBB, Changes Trend to Stable from Negative

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the credit rating of the Series 2021 Class A-1 $25 million variable funding notes (Class A-1 Notes) and the $225 million Series 2021 Class A-2 term notes (Class A-2 Notes, and together with the Class A-1 Notes, the Senior Notes), issued by Vault DI Issuer LLC (Vault or the Issuer), at BBB. At the same time, Morningstar DBRS changed the trend to Stable from Negative because of 1) a higher lease rate from a new tenant active in the Artificial Intelligence space replacing an existing tenant in one of the portfolio's data centers, which exercised an early termination option, combined with 2) a stabilizing interest rate environment and the likelihood of interest rate cuts in 2025 and 2026, resulting in resiliency to rates that may be high enough at the 2026 Anticipated Repayment Date of the Senior Notes to affect Morningstar DBRS' assessment of the credit rating level of the refinance.

KEY CREDIT RATING CONSIDERATIONS
The Senior Notes are fully amortizing with a 25-year legal maturity, and are backed by a portfolio of seven data centers--located in strong national data center markets and with generally attractive power and redundancy configurations--and the long-term leases in place with the tenants of the data centers. Performance of the portfolio was largely according to expectations, achieving an average debt service coverage ratio (DSCR) of 3.22 times (x) and no performance penalties were incurred; although, some rent abatements and tenant improvements were given to renewing tenants. Because of the debt structure, where a significant portion of credit risk is deferred to the refinance period in 2026, the credit rating of the current debt is constrained by Morningstar DBRS' view of the credit rating level that the refinance could achieve, the soft nature of this refinance notwithstanding. This, in turn, is highly sensitive to the forecast prevailing interest rates at the time of the refinance. The combination of incremental revenue from the higher lease rate from the newly signed lease replacing an existing tenant, combined with the stabilizing interest rate environment and higher possibility of interest rate reductions in 2025 and 2026, has significantly reduced the chance that the ascribed refinance credit rating could be deteriorated from the rating case. Morningstar DBRS views the new tenant to have a good operating track record in its industry area, which helps offset risks associated with the emerging nature of its technology area, and the relative speed with which the Issuer was able to secure this new tenant as confirming the credit rating thesis that the data center portfolio continues to be attractive and essential in nature. Current market consensus and forward curves appears to suggest that the interest rates have peaked in the current cycle as inflation as cooled, and the U.S. Federal Reserve has indicated that rate cuts will not necessarily have to wait until inflation lowers to 2%.

CREDIT RATING DRIVERS
The BBB credit rating continues to be underpinned by the following: (1) expected stable cash flow deriving from lease payments to the data centers; (2) the resiliency and sticky nature of the revenue stream owing to the critical and strategic nature of the data center assets to the tenants' business operations; (3) strong and favourable debt package to noteholders; and (4) material upside revenue potential from unleased portions of the largest site in the portfolio. The debt and security package offers protections to noteholders typical of that expected of a well-structured project finance transaction. The primary constraints on the credit rating include (1) the current interest rate environment and its impact on refinance credit level, which has a significant effect on the credit rating of the current debt; (2) re-leasing risk of each lease at various intervals, subjecting the Issuer to the risk of tenants either opting out of their leases or obliging the Issuer to grant concessions as an inducement for tenants to remain; (3) lower or nonrated tenants; and (4) risks related to technical obsolescence or deterioration of competitive position.

FINANCIAL OUTLOOK
The financing structure features DSCR profiles, as calculated based on Morningstar DBRS' rating-case assumptions and revenue haircuts, with a minimum and average DSCR of 2.56x/2.78x (effectively an interest coverage ratio), respectively, and a refinance DSCR at the five and a half year mark of 1.36x (minimum)/1.61x (average) based on Morningstar DBRS' rating case at the time of initial credit rating, which incorporates the constraints and challenges of the project and the refinance interest rate as assumed at financial close.

CREDIT RATING RATIONALE
The refinance metrics, together with consideration for the minimum/average DSCRs in the first five interest-only years, are consistent with a BBB (low) credit rating. Morningstar DBRS has applied a one-notch uplift to account for the soft refinance nature of the debt, in which a failure to refinance does not lead to a default but rather to a cash sweep where all cash after expenses and interest payments are swept to principal. Higher refinance base rates at a level consistent with consensus forecasts would result in minimum refinance DSCRs in the 1.16x to 1.20x range, commensurate with a credit rating at the low end of the current credit rating level. Given the stabilizing interest rate environment, Morningstar DBRS has returned the trend to Stable. Should the interest rate environment show signs of deteriorating beyond 2025, Morningstar DBRS may take a negative credit rating action, while a credit ratings upgrade may be possible if projections of financial performance significantly exceeds the expectations of the rating case.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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), https://dbrs.morningstar.com/research/427030.

RATING DRIVERS ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
-- In the analysis of Vault DI Issuer LLC, the Rating Driver factors listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
-- In the analysis of Vault DI Issuer LLC , the following FRA factor listed in the methodology was considered more important: DSCR.

(C) Weighting of the BRA and the FRA
-- In the analysis of Vault DI Issuer LLC, the FRA carries greater weight than the BRA.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Essential Digital Infrastructure (April 15, 2024), https://dbrs.morningstar.com/research/431172
-- Morningstar DBRS Global Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186

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

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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