Morningstar DBRS Confirms Credit Rating on Senior Commercial Real Estate Loan Advanced to Entities Owned and Managed by Blackstone; Trend Remains Stable

DBRS Ratings Limited (Morningstar DBRS) confirmed its credit rating on the senior commercial real estate loan (the Senior Loan) advanced by BNP Paribas (the Senior Lender) to several entities (the Senior Borrowers) ultimately owned and managed by The Blackstone Group Inc. (Blackstone or the Sponsor) at A (low). The trend on the Senior Loan is Stable.

CREDIT RATING RATIONALE
The rating confirmation results from the stable performance of the Senior Loan over the last 12 months, in line with Morningstar DBRS' expectations since 30 December 2022 (the Initial Rating Date), when Morningstar DBRS initially assigned the credit rating to the Senior Loan.

The GBP 141.9 million Senior Loan was advanced by the Senior Lender to the Senior Borrowers to finance and refinance (1) the acquisition of a portfolio of 41 mostly urban logistics single-let and multi-let properties, (2) the indebtedness of the Senior Borrowers' group, and (3) general corporate expenses. In addition to the Senior Loan, there is also a GBP 109.3 million mezzanine loan, which is structurally and contractually subordinated to the Senior Loan.

The Senior Loan has a five-year fixed term with no extension options available to the Senior Borrowers. The maturity date is scheduled on 15 May 2027. The Senior Loan is interest only and accrues interest at Sonia plus a margin of 1.81% per annum. As at the November 2024 interest payment date (IPD), quarterly accrued interest has always been paid in full.

On 31 May 2024, Jones Lang LaSalle (JLL) revalued the underlying portfolio at GBP 312.6 million, including a 5.0% portfolio premium over the aggregated property values. This translates into a modest 5.0% increase from JLL's previous valuation of GBP 297.6 million dated 31 May 2023, and it is only 2.0% below the valuer's initial valuation of GBP 318.7 million dated 22 February 2022, also both of them including a 5.0% portfolio premium.

As a result, the Senior Loan's loan-to-value ratio (LTV) decreased to 45.4% at the November 2024 IPD from 47.7% at the November 2023 IPD. At issuance, the Senior Loan's LTV was 44.5%.

The underlying portfolio is geographically diversified across the UK. In particular, the largest concentration of the portfolio's market value, based on the latest available valuation, is in the South East, which represents 26.6%, while the Midlands and the North West represent 21.9% and 20.3%, respectively. The remaining assets are located in Yorkshire and the Humber (11.5%), South West (11.3%), Scotland (6.0%), and Wales (2.4%). Most of the properties are within 20 kilometers of major metropolitan areas.

The portfolio offers a total of 2.9 million square feet, which, according to the November 2024 IPD's quarterly management report that Morningstar DBRS received from the servicer, were 87.8% occupied by more than 250 tenants. The tenant mix is granular in nature with the largest 10 tenants representing 25.7% of the portfolio's in-place contracted rent and no single tenant accounting for more than 6.0%. As at the November 2024 IPD, the portfolio generated a total net rental income (NRI) of GBP 15.9 million, which represents an increase of 7.2% from GBP 15.9 million as at the November 2023 IPD. As a result, the Senior Loan's reported debt yield (DY) also increased to 12.0% in November 2024 from 11.2% in November 2023.

Morningstar DBRS did not change any of its underwriting assumptions since its initial analysis. In particular, Morningstar DBRS' net cash flow (NCF) remained equal to GBP 13.5 million, which, based on a stabilised cap rate assumption of 6.25%, translates to a Morningstar DBRS value of GBP 216.2 million for the property portfolio. In turn, this reflects a haircut of 30.8% to the latest JLL valuation dated 31 May 2024. Morningstar DBRS' LTV and DY are 65.6% and 9.5%, respectively.

The Senior Borrowers are required to hedge interest rate risk during the entire loan term, in compliance with the required hedging conditions under the senior facility agreement. Specifically, the Senior Borrowers are required to enter into prepaid interest rate cap agreements with a strike rate to be set at the higher of 1.5% and the level required to ensure hedged interest coverage ratio of at least 2.0 times. The initial two-year cap agreement expired in April 2024, when the Senior Borrowers entered into new cap agreements with a strike rate of 2.0% on a notional amount equal to the whole outstanding balance of the Senior Loan. The cap expires on 17 May 2025 and the hedge counterparty is BNP Paribas SA.

Following a permitted change of control (COC), the Senior Borrowers are required to repay the aggregate outstanding principal amount of the Senior Loan in quarterly instalments equal to 0.25% of the aggregate outstanding principal amount of the Senior Loan as at the COC date.

The Senior Loan has LTV and DY covenants for cash trap and, following a permitted COC, for events of default. The LTV cash trap covenant is set at 52.0% while the DY cash trap covenant is triggered if the DY is equal to or lower than 9.12%. Following a permitted COC, the LTV financial covenant is triggered if the LTV ratio is higher than the LTV ratio as at the COC date plus 10%, or if the DY is lower than 8.62%.

Morningstar DBRS' credit rating on the Senior Loan 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 (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 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 this credit rating include the Quarterly Management Reports and the Compliance Certificates for the relevant IPDs from CBRE Loan Servicing 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 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 Issuer took place on 14 December 2023 when Morningstar DBRS confirmed its credit rating on the Senior Loan at A low with a Stable trend.

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):

Senior Loan:
-- 10% decline in Morningstar DBRS NCF, expected rating on the Senior Loan of BBB
-- 20% decline in Morningstar DBRS NCF, expected rating on the Senior Loan of BB (high)

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: Dinesh Thapar, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 30 December 2022

DBRS Ratings Limited
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London EC1Y 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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.

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.