Morningstar DBRS Confirms Credit Rating on Logicor 2019-1 UK PLC

DBRS Ratings Limited (Morningstar DBRS) confirmed its credit rating on the bonds issued by Logicor 2019-1 UK PLC (the Issuer):

-- The Notes at AA (sf)

The trend is Stable.

CREDIT RATING RATIONALE
The confirmation reflects the transaction's continued stable performance over the last year, with the loan performing in line with the terms outlined in the facility agreement.

The transaction is a secured corporate bond issuance backed by a GBP 900.0 million fixed-rate loan secured by 64 logistics properties advanced to UK Logistics Holdco I S.a.r.l. (the borrower). The borrower is controlled by Eurocor II S.à r.l. and Eurocor III S.à r.l. (together, the sponsors), which are in turn ultimately owned by an investment group that includes China Investment Corporation and the Blackstone Group. The loan, which had a loan-to-value ratio (LTV) of 42.7% at issuance, is backed by a portfolio of 64 logistics units located throughout England and a single asset in Scotland.

Based on the most recent valuation dated December 2023, the LTV stood at 36.0% as of the August 2024 Interest Payment Date (IPD), and the majority of the assets are in the East Midlands (33%), West Midlands (23%), and South East (17%) areas. The portfolio's asset quality is strong with a number of properties located in the Golden Triangle area of the East Midlands, which is considered a prime logistics location because of its accessibility. There has been no release of assets from the portfolio.

As of August 2024, the transaction portfolio had a net lettable area of 19.4 million square feet, a contracted rent of GBP 120.1 million, and a weighted-average lease term to break of 4.49 years and 5.46 years to expiry. In-place rent at issuance was GBP 102.3 million. The portfolio's current occupancy rate is 97.0% by total area versus an occupancy rate of 95.5% at closing and 95.0% as of the August 2023 IPD.

The portfolio continued to exhibit strong performance over the last 12 months and shows improved metrics compared with last year's surveillance. CBRE Limited most recently revalued the portfolio at GBP 2,499.1 million as of December 2023, which indicates a 2.7% increase over the previous valuation of GBP 2,432.9 million dated December 2022. Consequently, the loan's LTV decreased to 36.0% as of the August 2024 IPD from 37.0% in August 2023, far below the cash trap threshold of 60.0%. The loan's debt yield (DY) stood at 11.6% as of August 2024, having increased from 11.0% as of the August 2023 IPD and11.2% at issuance. The transaction's DY has been consistently above the cash trap level of 8.5%.

Over the quarter ended August 2024, the sponsor changed its methodology for tracking concentration across the portfolio. Previously, the sponsor tracked tenant concentration across the collateral with each tenant represented by the same number across the portfolio. The sponsor now uses unique tenant numbers per lease instead of using the same number because of the confidentiality clauses in the leases. According to the August 2024 investor report, the top 10 individual leases contribute 31.8% of in-place rent and the top two individual leases account for 7.2%. According to the May 2024 investor report, which used the previous methodology of tracking tenant concentration, the top 10 tenants accounted for approximately half of the in-place rent.

Morningstar DBRS maintained its net cash flow (NCF) assumption at GBP 85.8 million as at issuance. In addition, Morningstar DBRS maintained its capitalisation rate at 6.30% as at issuance which translates to a Morningstar DBRS stressed value of GBP 1,362 million, representing a 45.5% haircut to the most updated appraised value.

The loan is nonamortising with bullet repayment at the maturity date. The final legal maturity of the Notes is expected to be on 17 November 2031, five years after loan maturity on 15 November 2026. Morningstar DBRS believes that the underlying loan's security structure and jurisdiction provide sufficient time to enforce on the loan collateral, if necessary, and repay the noteholders. The loan bears interest at a fixed rate of 1.875% per year.

The Issuer entered into a liquidity facility with an initial commitment of GBP 14,100,000 with BNP Paribas SA at closing. The size of the liquidity facility will decrease based on the principal amount outstanding on the Notes. No drawings have been made under the liquidity facility.

The loan structure does not include any default financial covenants prior to a permitted change of control (PCOC), after which the default covenants are based on the LTV and DY. The LTV covenant is set at the lower of an LTV of 70.0% and the LTV at the date of the PCOC plus 25.0%. The DY covenant is set at the higher of 75.0% of the DY on the PCOC date and 7.5%. The cash trap covenants are set at an LTV of 60.0%, while the DY cash trap covenants are set at 8.5%.

Morningstar DBRS' credit rating on the applicable class addresses 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' 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 Factors in Credit Ratings at (13 August 2024) https://dbrs.morningstar.com/research/437781.

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

The principal methodology applicable to the credit rating 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 this credit rating include servicer reports published by CBRE Loan Services Limited and the cash management report published by U.S. Bank Global Corporate Trust.

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 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 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.

The last credit rating action on this transaction took place on 20 October 2023, when Morningstar DBRS confirmed its credit rating on the Notes.

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 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 A (low) (sf) on the Notes and
-- 20% decline in Morningstar DBRS NCF, expected credit rating of BBB (low) (sf) on the 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: David Lautier, Senior Vice President
Initial Rating Date: 2 October 2019

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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.

-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165.

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/439604.

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