Morningstar DBRS Confirms Credit Ratings on Stark Financing 2023-1 DAC

DBRS Ratings Limited (Morningstar DBRS) confirmed the credit ratings on the notes issued by Stark Financing 2023-1 DAC (the Issuer) as follows:

-- Class A confirmed at AAA (sf)
-- Class B confirmed at AA (low) (sf)
-- Class C confirmed at A (low) (sf)

The trend on all classes remains Stable.

CREDIT RATING RATIONALE

The credit rating confirmations reflect 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 one-loan conduit securitisation arranged by Merrill Lynch International (Bofa Securities) and Deutsche Bank AG, London Branch (Deutsche Bank) and issued in November 2023. The commercial real estate senior loan was advanced to Sussex Bidco LP, ultimately owned by The Blackstone Group Inc. (the Sponsor), in connection with the acquisition of Industrials Real Estate Investment Trust Limited (Industrials REIT; the Target Group). In December 2023, the Sponsor completed the permitted reorganisation of the Target Group by establishing the new holding structure (still within the UK REIT regime), along with the transfer of the securitised properties to new PropCos, to streamline the operations and rationalise the intragroup debt.

The securitisation represents 85.3% of the senior loan, totalling GBP 339.5 million as of the securitisation date, backed by 103 logistics and light-industrial properties located across the UK. In July 2023, Cushman & Wakefield Limited (C&W) appraised the properties' aggregate market value at GBP 617.4 million, and at GBP 679.1 million after attributing a premium of 10% for the portfolio as a single lot. However, the loan-to-value ratio (LTV) of 52.4%, as of August 2024, is calculated on the portfolio value capped at 5% premium and equivalent to GBP 648.2 million. There has not been any property sale to date and the LTV remained unchanged since issuance.

The senior loan bears interest at a floating rate equal to the three-month Sterling Overnight Index Average (Sonia) (subject to zero floor), plus a securitised loan margin of 2.85% per annum (p.a.). The interest rate risk is hedged on a notional of GBP 322.5 million (95% of the senior loan amount) by a prepaid swap agreement, which includes a strike rate set at 3.25% p.a. until the August 2024 IPD, stepped up to 4.5% p.a. until the 15 August 2026 IPD, the first repayment date of the senior loan. There are two one-year extension options to the loan repayment date, provided certain condition precedents are met, with the final loan repayment date at the August 2028 IPD. After the expected note maturity date, the Sonia component of the rate of interest payable on the notes will be capped at 6.5% p.a., subject to a floor of zero.

As of the August 2024 IPD, the gross rental income increased by 2.1% to GBP 44.3 million, from GBP 43.4 million at cut off (June 2023), although the net operating income has dropped slightly (-1.9%) to GBP 41.2 million from GBP 42.0 million because of the increase in irrecoverable costs over the last quarter. Consequently, the debt yield has marginally decreased to 12.1%, from 12.4% at cut off. The vacancy rate has marginally increased to 7.7%, from 6.2% at cut off, while the weighted-average lease term has increased slightly to 4.5 years from 4.4 years.

Morningstar DBRS maintained the Morningstar DBRS net cash flow (NCF) at GBP 34.99 million and cap rate at 7.0%, unchanged from initial underwriting. This resulted in a Morningstar DBRS value of GBP 493.23 million, equivalent to a 23.9% haircut on the last available valuation of the portfolio.

As of August 2024, capex works are ongoing with the refurbishment of Coningsby Business Park and Queenway Business Park (70% vacant). This is in line with the initial business plan.

The loan is current with no breach of the cash trap covenants. The senior loan has LTV and debt yield cash-trap covenant ratios set at 62.5% and 10.0%, respectively, until the August 2026 IPD, and at 60.0% and 12.0%, respectively, until the final repayment date if the senior loan repayment date is extended.

If the senior loan extension options are exercised, the final repayment date of the senior loan is 15 August 2028. The final legal maturity of the Notes falls on 17 August 2033, five years after the final maturity of the loan.

At closing, the transaction benefitted from a liquidity reserve of EUR 20.4 million, unchanged since origination. The liquidity reserve is funded through the issuance of the Class A notes and can be used to cover interest shortfalls on the Class A, Class B, and Class C notes. The entire amount of the Deutsche Bank liquidity commitment is drawn and paid into the Issuer's transaction account and credited to the Deutsche Bank liquidity facility ledger. The liquidity reserve amount is equivalent to approximately 12 months on the covered notes, based on the interest rate cap strike rate of 4.5% per year and to nine months based on the Sonia cap after the loan maturity of 6.0% per year.

Morningstar DBRS' credit ratings on the applicable classes 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' 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 (13 August, 2024) at https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in British pounds sterling 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 reporting provided by CBRE Loan Services Limited and by US Bank Trustees Limited and the valuation report from C&W.

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 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 issuer took place on 2 November 2023, when Morningstar DBRS finalised its provisional credit ratings.

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

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

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

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 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 November 2023.

DBRS Ratings Limited
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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.

Derivative Criteria for European Structured Finance Transactions (6 September 2024), https://dbrs.morningstar.com/research/439043.

Interest Rate Stresses for European Structured Finance Transactions (24 September 2024) https://dbrs.morningstar.com/research/439913.

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.