Morningstar DBRS Confirms Credit Ratings on Magritte CMBS NV/SA

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the bonds issued by Magritte CMBS NV/SA (the Issuer) as follows:

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

All trends are Stable

CREDIT RATING RATIONALE
The transaction is the securitisation of a EUR 208.4 million senior commercial real estate (CRE) loan (55.0% Loan-to-Value (LTV)) backed by a portfolio of eight office properties located in Belgium and Luxembourg. The senior loan was advanced by the Issuer to four borrowers (the borrowers) ultimately owned by Brookfield Strategic Real Estate Partners IV (Brookfield or Sponsor) for the purposes of refinancing existing indebtedness of the borrowers and for general corporate purposes. There is a mezzanine facility, which is structurally and contractually subordinated to the senior facility and is not part of the securitisation. The initial maturity date of the loan is 31 December 2025, but the borrower has two one-year extension options, which can be exercised so long as certain conditions are met.

The transaction represents the refinancing of a sub-portfolio of the wider Befimmo's portfolio. Befimmo SA is a Belgian REIT, which was acquired by the Sponsor in 2022 and taken fully private in 2023.

Morningstar DBRS notes that three of the four senior borrowers (apart from the Luxembourg borrower) are incorporated as Belgian institutional investment companies (institutionele bevak naar Belgisch recht/sicaf institutionnelle de droit belge) and registered with the Federal Public Service Finance as specialised real estate investment funds (gespecialiseerd vastgoedbeleggingsfonds - GVBF/fonds d'investissement immobilier spécialisé - FIIS). A FIIS is a public real estate investment trust incorporated as a limited liability company under Belgian law and regulated by the Belgian royal decree of 9 November 2016 (the Royal Decree) with the exclusive purpose of investment in real estate assets.

The collateral securing the loan comprises eight office buildings: seven are in Belgium (92.2% of the portfolio by market value (MV)), and one is in Luxembourg (7.8% of the portfolio by MV). Of the seven properties located in Belgium, two are in Liège, the capital of the Wallonia region, while the other five are located across Brussels, including the Leopold and CBD districts. Valuations prepared for the properties by Savills Advisory Services Limited (Savills or the Valuer) in September 2023 concluded an aggregate market value of the collateral at EUR 378.9 million (the valuation is based on a special assumption of share sale and represents gross present value less 1% transaction costs).

The portfolio is well occupied with an occupancy rate of 98.7% as of October 2024, and vacancy present only in one property. It also benefits from long-term leases, with a weighted-average lease term to break (WALTb) and to expiry (WALTe) of 10.5 years and 10.8 years, respectively, and strong tenant covenant, as 88.7% of the contracted rent is generated by governmental tenants such as the European Parliament, regional government of Wallonia, and Belgian state government entities.

As of 3 October 2024, the properties generated EUR 23.1 million of gross rental income and EUR 21.7 million of projected net operating income, which reflects a projected debt yield (DY) of 10.4%. Morningstar DBRS' long-term sustainable net cash flow (NCF) assumption and the Morningstar DBRS Value for the senior loan are EUR 18.2 million and EUR 303.4 million, respectively, representing a haircut of 20% to the Savills valuation.

There are no financial covenants applicable prior to a permitted change of control (PCC), but cash trap covenants are applicable both prior and post PCC. More precisely, the cash trap covenants are set at 65.0% LTV, and at 9.5% DY prior to a PCC; and at 60.0% LTV and at 9.50% DY following a PCC. After a PCC, the financial default covenants on the LTV and the DY will be applicable; they are set, respectively, at 65.0% LTV and at 8.44% DY.

The senior loan is interest-only prior to a PCC and carries a floating rate of three-month Euribor (floored at 0%) plus a margin of 3.251%, which is equal to the WA of the aggregate interest amounts payable on the notes. The borrower purchased an interest cap agreement to hedge against increases in the interest payable under the loan, which covers 100% of the outstanding loan balance with a strike rate of 3.25% until the initial termination date, in December 2025 and, thereafter, the higher of 3.25% and the strike rate required to ensure a hedged interest coverage ratio of not less than 1.5 times (x). After the expected note maturity, the Euribor rate will be capped at 4.5%.

To satisfy the applicable risk retention requirements, Morgan Stanley Principal Funding, Inc. advanced a EUR 11.2 million loan to the Issuer (the Issuer Loan), representing 5% of the total securitised balance.

On the closing date, EUR 14.0 million of the proceeds from the issuance of the Class A notes and EUR 0.7 million of the Issuer Loan were used to fund the issuer liquidity reserve. The liquidity reserve covers the Class A, Class B, and the relevant portion of the Issuer loan. Morningstar DBRS estimates that the commitment amount at closing is equivalent to approximately 18 months of coverage based on the hedging terms mentioned above or approximately 15 months of coverage based on the 4.5% Euribor cap. The liquidity reserve will be reduced based on note amortisation, if any, and in the event of a substantial MV decline of the property portfolio (appraisal reduction).

The Class C and Class D notes are subject to an available funds cap, where the shortfall is attributable to the increase in WA margin on the notes due to sequential allocation of principal payments.

The two-year senior loan has two one-year extension options, which can be exercised so long as (i) the relevant obligors have entered into hedging agreements in respect of the extended period and in accordance with the senior facility agreement, (ii) no material event of default is continuing or would result from the proposed extension, (iii) no declared default is continuing; and (iv) if, the mezzanine loan has not been repaid or prepaid in full then; (a) the mezzanine loan will be repaid in full; or (b) the mezzanine loan will be extended to the mezzanine extended termination date in accordance with the mezzanine facility agreement.

The tenant profile is highly concentrated, with the largest two tenants, Régie des Bâtiments and Régie der Gebouwen, accounting for 69.6% of the portfolio GRI and occupying space in five assets. Leases to these tenants representing 29% of the portfolio contracted rent, will expire just before the final loan repayment date in December 2027, increasing refinancing risk; however, the transaction documentation requires the Sponsor to partially prepay the loan if the leases are not renewed, or if the properties are not let to a new tenant before December 2026. More precisely, if at the first extended senior loan termination date in December 2026, the leases have not been renewed, or a new tenant has not entered a lease for the vacated space, in each case with the first break option or lease expiration date in respect of such extension or new lease falling not earlier than the date falling three years after the second extended senior loan termination date in December 2027, the Sponsor is required to obtain a vacant-possession valuation for the relevant property. If such valuation results in relevant property LTV (calculated based on the allocated loan amount and vacant-possession value) that is greater than 55%, the Sponsor is required to apply an amount that would decrease property LTV to or less than 55% towards pro rata prepayment of the senior loan (or portion thereof) in respect of the relevant property.

The legal final maturity of the notes is in January 2033, five years after the fully extended loan maturity date. Morningstar DBRS believes that this provides sufficient time to enforce the loan collateral and repay the bondholders, given the security structure and jurisdiction of the underlying loan.

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) 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 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 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 servicer reports provided by Mount Street Mortgage Servicing Limited.

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

At the time of the initial credit ratings, 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 28 November 2023 when Morningstar DBRS finalised its provisional credit ratings of AAA (sf), AA (low) (sf), A (low) (sf), and BBB (high) (sf) on the Class A, Class B, Class C and Class D notes, respectively, 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 ratings, 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 AAA (sf)

Class B Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class B notes of A (low) (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 BBB (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on the Class D notes of BB (high) (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: Violetta Volovich, Assistant Vice President,
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 15 November 2023

DBRS Ratings GmbH
Neue Mainzer Straße 75
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 (19 Nov 2024) https://dbrs.morningstar.com/research/443196

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.