Morningstar DBRS Confirms Credit Ratings on Frost CMBS 2021-1 DAC

DBRS Ratings Limited (Morningstar DBRS) confirmed its credit ratings on the following classes of notes issued by Frost CMBS 2021-1 DAC (the Issuer) due in November 2033:

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

The trends on all ratings are Stable.

The credit rating confirmations follow the underlying loan's stable performance, which has been in line with the terms of the facilities agreement and above its cash trap covenants that are based on debt yield (DY) and loan-to-value ratio (LTV).

CREDIT RATING RATIONALE
The transaction is a securitisation of two commercial real estate facilities advanced by Goldman Sachs Bank Europe SE (Goldman Sachs) to entities owned and managed by NewCold European Holding B.V., which is ultimately owned by NewCold Holdings LLC, a temperature-controlled logistics company based in the Netherlands. One facility is denominated in British pounds sterling and is secured by a single cold-storage property in Wakefield, UK. The other is denominated in euros and is secured against a cold-storage asset in Rheine, Germany, and an asset in Argentan, France. Together, the GBP facility of GBP 112.4 million and the EUR facility of EUR 92.0 million formed the loan under the facilities agreement at issuance. The purpose of the loan was to refinance existing indebtedness or, in respect of the Argentan property, to finance the purchase; to pay related financing costs; and for the NewCold Group's general corporate purposes.

The facilities are cross-defaulting and cross-collateralised. They started amortising from the second year in accordance with the facilities agreement and, as of August 2024, the outstanding principal balances were GBP 109.5 million and EUR 89.7 million for the GBP and the EUR facilities, respectively. The loan is expected to keep amortizing by 0.50% on each Interest Payment Date (IPD) going forward as long as the DY remains below 10.31%.

The facilities bear interest equal to the sterling overnight index average (Sonia) plus a margin of 3.25% in respect of the GBP facility and three-month Euribor plus a margin of 2.8% in respect of the EUR facility. The interest rate risk was initially fully hedged with a prepaid cap with a strike rate of 2.0% provided by Goldman Sachs, which was co-terminus with the initial loan maturity of November 2024. The first extension option of the loan was recently exercised, extending the loan maturity to November 2025. To exercise such extension the borrowers are required to meet several conditions, including extending the hedging agreements up to the new maturity date in accordance with the facilities agreement. Morningstar DBRS infers the borrowers made compliant hedging arrangements as the first extension option was exercised.

The financial cash trap covenants are set at an LTV of 68.77% and a DY of 8.74% for the initial loan term, while the default covenants are such that the LTV must always be less than or equal to 76.27% and the DY on each loan IPD must be higher than 7.71%.

The reported DY at the August 2024 IPD was 9.66% (up from 9.12% as of August 2023 IPD) based on an adjusted net operating income (NOI) of EUR 22.6 million, which is 8.0% higher than the adjusted NOI reported as of the August 2023 IPD (EUR 21.0 million). The increase in DY was driven by the increase in NOI as well as the deleveraging of the facilities over the past four quarters. The outstanding balances of the GBP and EUR facilities both declined by 1.75% of their respective initial commitment amounts between the August 2023 and August 2024 IPDs. The LTV stands at 63.51% as of August 2024, based on the loan balance as of August 2024 and appraised values of the assets as of December 2022.

CBRE Limited (CBRE) most recently revalued the portfolio as of July 2024, although the most recent servicer report dated August 2024 does not reflect this valuation. The value of the Wakefield asset went up by 9.5% to GBP 185.7 million from the previous valuation of GBP 169.6 million dated December 2022. The value of the Rheine asset, inclusive of the extension that is expected to deliver 34,000 additional pallets in 2025, declined by 11.3% to EUR 98.8 million from EUR 111.4 million, and the value of the Argentan asset increased by 13.3% to EUR 39.6 million from EUR 34.9 million. The decline in the value of the Rheine asset is primarily driven by a long-term decline in EBITDA at the facility. According to information provided in the appraisal report, the downward trend in the Rheine asset's EBITDA was due to several factors such as production shortages of some of the facility's key tenants (which affected storage volumes and thereby revenue) and the closing of the meat centre in 2023. Management forecasts revenue in 2024 to be slightly lower than 2023, but broadly stable, and intends to grow revenue back to historic levels through increases in rates on existing customer contracts and by recycling less profitable contracts in place of new ones that provide higher stock turns and, in turn, revenue. The opening of the extension at the facility is also expected to contribute to higher activity at the asset as a whole.

The initial loan maturity date was in November 2024 with two one-year extension options available thereafter. If fully extended, the transaction is expected to repay in full by November 2026. If the loan is not repaid by then, the transaction will have a seven-year tail period to allow the special servicer to work out the loan by November 2033 at the latest, which is the legal final maturity date.

Morningstar DBRS maintained its initial underwriting assumptions of a cap rate at 7.5% for both facilities and net cash flow (NCF) of GBP 10.7 million for the GBP facility and EUR 8.5 million for the EUR facility. Adjusted NOI for the GBP facility increased by 4.8% to GBP 11.8 million as of August 2024 from GBP 11.3 million as of August 2023 despite a decline in occupancy to 83% from 86% over the same time frame. According to the servicer report, occupancy can fluctuate depending on customer production rates and it is possible for revenue to remain strong independent of occupancy as a result of agreed minimum revenue and high handling income. Meanwhile, adjusted NOI for the EUR facility increased by 11.0% to EUR 8.9 million as of August 2024 from EUR 8.0 million as of August 2023 and occupancy remained stable (73.0% as of August 2024 versus 72.0% as of August 2023). Morningstar DBRS' current haircut to the NCF for the GBP facility and the EUR facility is -9.5% and -4.2%, respectively. Morningstar DBRS' haircut to the most recent appraised property values stand at -23% and -18% for the GBP and EUR facilities, respectively.

To maintain compliance with applicable regulatory requirements, Goldman Sachs Bank USA retained an ongoing material economic interest of no less than 5% of the securitisation via an Issuer loan, which Goldman Sachs Bank USA advanced on the closing date (30 November 2021).

The Issuer also established two separate reserves, one for the GBP notes (the Issuer GBP liquidity reserve) and one for the EUR notes (the Issuer EUR liquidity reserve). The liquidity reserve in respect of both the GBP and EUR notes covers the interest payments on Class A to Class D. The Class GBP E, Class EUR E, and Class GBP F notes are subjected to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin on the notes. Based on a cap strike rate of 2%, Morningstar DBRS estimates that the liquidity reserve will cover 10 months of interest payments in respect of the covered GBP notes and 16 months of interest payments in respect of the covered EUR notes, assuming the Issuer does not receive any revenue. After the expected note maturity date in November 2026, the interest rates on the notes will be capped at 4.0% plus their respective margins. Based on a Sonia and a Euribor cap of 4.0%, Morningstar DBRS estimates that the liquidity reserve will cover seven months of interest payments in respect of the covered GBP notes and 11 months of interest payments in respect of the covered EUR notes, assuming the Issuer does not receive any revenue.

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 British pound 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 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 quarterly reports by Mounts Street Mortgage Servicing Limited, and valuation report by CBRE Limited.

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 1 December 2023. when Morningstar DBRS confirmed its credit ratings on the notes with Stable Trends.

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):

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

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

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

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

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

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

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

Class D (EUR) 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 BB (sf)

Class E (EUR) Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class E notes of BB (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit ratings on the Class E notes of B (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 GmbH for use in the European Union.

Lead Analyst: Deniz Gokce, Senior Analyst
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 1 November 2021

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.

-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024) https://dbrs.morningstar.com/research/439913
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024) https://dbrs.morningstar.com/research/443196
-- 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/439604.

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