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

DBRS Ratings GmbH (Morningstar DBRS) confirmed the following credit ratings on the Commercial Mortgage-Backed Floating-Rate Notes Due April 2033 (the notes) issued by Berg Finance 2021 DAC (the Issuer):

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

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

CREDIT RATING RATIONALE
The credit rating confirmations reflect the stable performance of the transaction over the last 12 months with further loan deleveraging. However, Morningstar DBRS updated its capitalisation rate (cap rate) assumption and changed the trends on the credit ratings to Negative from Stable.

The transaction is a EUR 295.3 million securitisation of two senior commercial real estate loans: Big Mountain (EUR 148.3 million) and Sirocco (EUR 150.8 million), originated by Goldman Sachs Bank Europe SE in March and April 2021, respectively. At issuance, the loans in aggregate were secured against 29 predominantly office assets located in the Netherlands, France, Austria, Finland, and Germany.

The purpose of the Big Mountain loan was for the sponsor, Fortress Investment Group LLC, to finance the acquisition of certain target companies in the Stena AB group, which owned 25 office assets in the Netherlands and France. In addition, the loan refinanced the existing intragroup indebtedness.

The purpose of the Sirocco loan was for the sponsors, Ares European Real Estate Fund V SCSp and Ares European Real Estate Fund V (Dollar) SCSp, to refinance existing indebtedness and to finance permitted capital expenditure projects.

The Big Mountain loan prepaid fully in July 2022, and the Sirocco loan remains with only one property left in the portfolio and a loan balance of EUR 49.0 million as of the July 2024 Interest Payment Date (IPD).

The Sirocco loan is a three-year floating-rate loan with two one-year extension options. One extension option has been exercised and the loan maturity is now on 15 April 2025 with the longest extended maturity date on 15 April 2026. The loan interest is based on the three-month Euribor rate plus a margin of 3.75% per annum. The loan is fully hedged with an interest rate cap that has a 0.8% strike rate. In accordance with the loan provisions, the borrower amortised the loan by 0.25% of the outstanding loan balance over the first two quarters of 2023. From the April 2023 IPD, the amortisation repayment stepped up to 0.5% per quarter. After the third anniversary of the loan utilisation date and until the fourth anniversary date, the quarterly repayments stepped up to 0.75% of the outstanding loan amount. While the deleveraging of the loan is driving the improvements in the debt yield (DY) and the performance of the transaction, an operating advisor has been appointed by the controlling class E and a new valuation has been instructed to assess the current market value of the only remaining property in the portfolio.

Based on the latest available valuation of EUR 108.7 million prepared by Jones Lang LaSalle SE (JLL) and dated 11 September 2022, the loan-to-value was 45.1% in July 2024, down from 63.5% at origination. The servicer reported the net cash flow (NCF) at EUR 5.1 million and the DY at 10.5% on the July 2024 IPD, up from 7.7% at origination and 9.4% as of the last review. The metrics have improved since origination, although the vacancy has increased to 22.0% from 16.9% at origination.

The collateral consists of the Peak Vienna property located in Vienna, Austria, east of the Danube river. The property is a modern 31-storey BREEAM-certified office tower built in 2001 and refurbished in 2020, spanning over 40,246 square metres. As of the July 2024 IPD, the gross rental income generated from 38 tenants stood at EUR 5.8 million, resulting in a net rent of EUR 5.1 million. The top five tenants contribute 51.3% of the contractual rent with the weighted-average unexpired lease to break and expiry of 3.5 years. The asset was 22.0% vacant as of the July 2024 IPD, down from 23.2% at the last review. Compared with issuance, the property shows a slight increase in rental level and a modest increase in vacancy rate. Morningstar DBRS believes that the persistent high vacancy and over-rented asset profile, with the second-largest tenant's expiry date coming up within the next year, might worsen the property's cash flow. In addition, the property is situated in a secondary location for the office market where yields are moving upward. The uncertainty of the office market and the relatively illiquid investment market are a concern for a refinancing via property disposal, albeit the final loan maturity is not due until April 2026.

Morningstar DBRS estimates the NCF at EUR 4.0 million. Based on the assumption of a 6.5% cap rate, Morningstar DBRS arrived at a property value of EUR 62.4 million, a 42.6% haircut to the latest available valuation.

The transaction benefits from a liquidity reserve facility, 95.0% of which was funded by the Class A notes at closing. The current outstanding balance of the facility is EUR 1.9 million and it covers the interest payments on the Class A to Class D notes. The Class D and the Class E notes are subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes. Based on a cap strike rate of 0.8%, Morningstar DBRS estimates that the liquidity reserve would cover 19 months of interest payments, or eight months of interest payments based on the Euribor cap of 5.0% after loan maturity.

The maturity of the notes is on 22 April 2033, providing seven years of tail period after the Sirocco loan's fully extended maturity.

Morningstar DBRS' credit ratings on the Class A to E notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' credit ratings do not address nonpayment 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 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 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/436000.

The sources of data and information used for these credit ratings include quarterly investor reports provided by Mount Street Mortgage Servicing Limited, as well as European Investor Reporting Package (EIRP) files, the latest available tenancy schedules, transaction notices, the cash manager report by U.S. Bank Global Corporate Trust, and the valuation reports provided by JLL dated 11 September 2022.

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

At the time of the initial credit rating, 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 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 17 May 2023, when Morningstar DBRS confirmed Class A at AAA (sf) and upgraded Classes B, C, D, and E to AA (sf), A (sf), BBB (sf), and BBB (low) (sf), from AA (low) (sf), A (low) (sf), BBB (low) (sf), and BB (high) (sf), respectively, all with Stable trends.

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):

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

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

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

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

Class E Notes Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating of Class E notes of BB (high) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating of Class E notes of 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: Christian Aufsatz, Managing Director
Initial Rating Date: 27 April 2021

DBRS Ratings GmbH
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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.

-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165
-- Derivative Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435260
-- Interest Rate Stresses for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435278
-- 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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.