Morningstar DBRS Finalises Provisional Credit Ratings on Thunder Logistics 2024-1 DAC With Stable Trends

DBRS Ratings GmbH (Morningstar DBRS) finalised its provisional credit ratings on the following classes of notes issued by Thunder Logistics 2024-1 DAC (the Issuer):

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

The trends on all classes are Stable.

CREDIT RATING RATIONALE
Thunder Logistics 2024-1 DAC is the securitisation of a EUR 250 million floating-rate commercial real estate loan backed by a pan-European portfolio of 22 big box logistics properties spread across Spain, France, Germany, and the Netherlands, which are collectively managed by Logicor (the asset manager).

The loan is regulated by a common terms agreement, and it is divided into four term facilities¿term A to term D¿with term facility A being advanced only to the French borrowers, and the other three facilities being advanced, respectively, to the Spanish borrowers, the German and Luxembourg borrowers, and the Dutch borrower (each a borrower and, together, the borrowers). The borrowers are limited-purpose entities established for the purposes of owning and managing the properties (in the case of the Propcos) and acting as holding companies (in the case of the Holdcos). They are all ultimately owned and controlled by The Blackstone Group Inc. (the Sponsor).

On 20 August 2024, Goldman Sachs Bank Europe SE and Société Générale S.A. (the loan sellers) advanced the loan to the borrowers. The purpose of the loan was (1) to refinance the existing indebtedness of members of the group (including, without limitation, accrued interest, hedge termination costs, break costs, prepayment fees and any other fees, costs, and expenses in relation thereto); (2) general corporate purposes (including making permitted distributions); and (3) financing or refinancing the financing costs.

On 1 June 2024, CBRE Limited (CBRE) conducted valuations on the 22 properties and appraised their aggregate market value (MV) at EUR 381.9 million. CBRE also valued the property portfolio at EUR 398.13 million (the portfolio MV) on the assumption that the assets transact as part of a corporate sale and, as such, incur lower transaction costs. This translates into a day-one loan-to-value ratio (LTV) of 65.4% and 62.8% based on the aggregate MV and the portfolio MV, respectively. As of 31 May 2024 (the cut-off date), the property portfolio offered a total of 462,828 square metres (sqm) of gross lettable area (GLA) let to 23 different tenants at an occupancy level of 80.8%. Physical vacancy is concentrated in three assets which are situated in locations with strong supply and demand dynamics. Two of them, namely the Pla de Santa Maria asset in Spain and the Rouen 2 asset in France, were fully vacant on the cut-off date. In Morningstar DBRS' opinion, the strong fundamentals of the relevant submarkets and good state of maintenance of the properties will facilitate the letting process.

At cut-off, the property portfolio generated EUR 19.5 million in-place gross rental income (GRI) and EUR 18.6 million net operating income (NOI), which reflects a day-one debt yield (DY) of 7.4%. When comparing the total in-place GRI with EUR 26.3 million estimated rental value under full occupancy assumption as per the CBRE valuation report, the portfolio is 26.0% under-rented. The properties are spread across four different European countries, namely Spain (37.4% by MV), France (36.1% by MV), Germany (17.8% by MV), and the Netherlands (8.7% by MV). The Sponsor acquired the properties through 13 separate transactions between 2019 and 2020. During the Sponsor's ownership, occupancy improved to 80.8% from 65.0% in 2020.

The properties are all well-located in major distribution hubs and benefit from a well-diversified tenant base in the food retail, e-commerce, third-party logistics and manufacturing sectors, with strong tenants' commitment to the properties (majority of the properties were originally built-to-suit developments for them). At the cut-off date, the portfolio's weighted-average lease term to break and to expiry were 3.2 years and 4.4 years, respectively.

Morningstar DBRS' long-term sustainable net cash flow (NCF) assumption for the property portfolio is EUR 16.9 million per annum (p.a.), representing a haircut of 9.0% to the in-place portfolio's NOI at cut-off. Based on a Morningstar DBRS' long-term sustainable cap rate assumption of 6.54%, the resulting Morningstar DBRS value is EUR 258.3 million, which represents a haircut of 32.4% to the CBRE valuation.

The loan is interest-only and it is structured with a five-year fixed loan term. The loan margin reflects the WA margin payable on the notes at each IPD (excluding the class A liquidity reserve portion of the class A notes). On the closing date the loan margin was set at 2.42% p.a. However, this margin is subject to a contractual cap (the loan margin cap) which is set at 3.25% p.a. or 4.25% p.a. during a servicer extension period. Pursuant to an ongoing issuer costs letter entered into between the borrowers and the Issuer, the transaction's senior costs will be borne entirely by the borrowers.

By the first loan interest payment date (IPD), each borrower is required to enter into a hedging agreement (either cap or swap) to hedge against increases in the interest payable under the loan due to fluctuations in the three-month Euribor. The hedging agreement is expected to be in the form of a cap to be entered into with HSBC Bank plc, providing coverage during the whole loan term. The notional amount will be equal to not less than 95.0% of the outstanding principal amount of the loan, and the strike rate must be set at no more than the higher of 4.0% p.a. and the level required to ensure a hedged interest cover ratio (ICR) of not less than 1.25 times (x). As per the CTA, failure to comply with any of the required hedging conditions outlined above will constitute a loan event of default (EoD).

The loan features cash trap covenants based on DY and LTV. In particular, a cash trap event will occur if (i) the loan's LTV is greater than 72.79% and/or (ii) the loan's DY is less than 6.2%. The loan does not feature any financial default covenants prior to the occurrence of a permitted change of control (CoC). After the occurrence of a permitted CoC, at each IPD the borrowers must ensure that the loan's LTV does not exceed the lower of (i) the LTV at the date of the permitted CoC + 15% (on an absolute basis) and (ii) 80.0%. The DY, instead, must not fall below 85.0% of the DY on the date of the occurrence of the permitted CoC.

The Sponsor can dispose of any assets securing the loan by repaying a release price of 100% of the allocated loan amount (ALA) up to the first-release price threshold (i.e. no release premium), which is 10% of the initial portfolio valuation. Once the first-release price threshold is met, the release price will be 105% of the ALA up to the second-release price threshold, which is 20% of the initial portfolio valuation. The release price will be 110% of the ALA thereafter. On or after the occurrence of a permitted CoC, the release price applicable on the disposal of a property will be 115% of the ALA of that property.

On the closing date, the Issuer acquired the whole interest in the loan pursuant to the loan sale documents. For the purpose of satisfying the applicable risk retention requirements, Goldman Sachs Bank USA and Société Générale S.A., as the Issuer lenders, advanced a EUR 13.1 million loan (the Issuer loan) to the Issuer. The proceeds of the issuance of the notes were used by the Issuer, together with the amount borrowed under the Issuer loan, to acquire the loan from the loan sellers. A portion of the proceeds of the issuance of the Class A notes in an amount equal to EUR 11.4 million together with EUR 0.6 million of the amount drawn under the Issuer loan were used to fund a EUR 12.0 million liquidity reserve (the Issuer liquidity reserve) to provide liquidity support to, among other things, the interest payments to Class A and Class B (the covered notes). Morningstar DBRS estimated that the Issuer liquidity reserve will cover approximately 18 months of interest payments on the covered notes, based on a cap strike rate of 4.0% and a Euribor cap of 4.0% after the notes' expected maturity date in 2029, respectively.

The Class E notes are subject to an available funds cap where the shortfall is attributable to an increase on the WA margin payable on the notes (however arising) or to a final recovery determination of the loan.

The loan matures on 15 November 2029, which is approximately five years after the utilisation date. There are no extension options. The final legal maturity of the notes is 17 November 2036, thus seven years after the loan maturity date. Morningstar DBRS is of the opinion that, if necessary, this would provide sufficient time to enforce on the loan collateral and ultimately repay the noteholders, given the security structure and the relevant jurisdictions involved in this transaction.

Morningstar DBRS' credit ratings on the Class A, Class B, Class C, Class D, and Class E notes to be issued by the Issuer address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the initial principal amounts and the interest amounts.

Morningstar DBRS' credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, Euribor Excess Amounts, Exit Payment Amounts, Pro Rata Default Interest Amounts, and Pro Rata Extension Step-Up Amounts payable to the noteholders.

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 https://dbrs.morningstar.com/research/437781.

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 principal methodology.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to "Appendix C: The Impact of Sovereign Credit 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 a data tape with cut-off date of 31 May 2024; a valuation report prepared by CBRE with a valuation date of 1 June 2024; and technical and environmental due-diligence reports prepared by CBRE, with issue dates throughout 2024.

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

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.

These credit ratings concern newly issued new financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

This is the first credit ratings action since the Initial Rating Date.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on http://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 ratings (the base case):

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

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

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

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

Class E Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class E notes of B (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on the Class E notes of below B (low) (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 Limited for use in the United Kingdom.

Lead Analyst: Andrea Selvarolo, Senior Analyst, European Commercial Real Estate Ratings
Rating Committee Chair: Mirco Iacobucci, Senior Vice President, Sector Lead
Initial Rating Date: 27 September 2024

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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.

-- European CMBS Rating and Surveillance Methodology (17 January 2024),
https://dbrs.morningstar.com/research/426818
-- Legal Criteria for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435165
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024), https://dbrs.morningstar.com/research/439913
-- Derivative Criteria for European Structured Finance Transactions (6 September 2024),
https://dbrs.morningstar.com/research/439043
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

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.