Morningstar DBRS Finalises Provisional Credit Ratings on Taurus 2025-1 EU DAC With Stable Trends

DBRS Ratings GmbH (Morningstar DBRS) finalised its provisional credit ratings on the following classes of notes issued by Taurus 2025-1 EU DAC (the Issuer):

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

CREDIT RATING RATIONALE
The transaction is the securitisation of a EUR 259.8 million floating-rate commercial real estate senior loan backed by a portfolio of 37 freehold urban logistics properties spread across Germany and France.

On 13 December 2024, Bank of America Europe DAC (the original lender and/or the loan seller and/or the Issuer lender) entered into (1) a common terms agreement (CTA) with, among others, the borrowers (the Facilities Agreement), and (2) a French law local loan agreement with, among others, the French borrowers (the French Notarised Facility Agreement). The original lender advanced a loan to the borrowers pursuant to the facilities agreement and the French Notarised Facility Agreement (the senior loan). The borrowers are all limited-purpose entities or limited partnership and are all ultimately owned and controlled by The Carlyle Group (Carlyle or the Sponsor).

On 31 October 2024 (the cut-off date), Cushman & Wakefield (C&W) conducted valuations on the 37 properties and appraised their aggregate market value (MV) at EUR 384.4 million. Based on C&W's valuation, this translates into a day-one loan-to-value ratio (LTV) of 67.5%. As of the cut-off date, the property portfolio offered a total of 275,551 square metres (sqm) of gross lettable area (GLA) let to 17 different tenants at an occupancy level of 98.4%. Physical vacancy is concentrated in a single property in Ennery, Île-de-France, which represents 4,319 sqm of lettable area, reflecting 1.6% of the total portfolio's GLA, and is a fully functional, cross-dock logistics building that became vacant in August 2024. In Morningstar DBRS' opinion, the strong demand for logistics properties in the relevant submarket and the property's good state of maintenance will facilitate the letting process.

At cut-off, the property portfolio generated EUR 22.3 million of in-place gross rental income (GRI) and EUR 22.0 million net operating income (NOI), which reflects a day-one debt yield (DY) of 8.5%. When comparing the total in-place GRI with the EUR 24.4 million estimated rental value (ERV) under full occupancy assumption as per the C&W valuation report, the portfolio is 7.0% under-rented. At the cut-off date, the portfolio's weighted-average (WA) lease term to break (WALTB) and to expiry (WALTE) were 4.3 years and 5.5 years, respectively.

The Sponsor aggregated the portfolio through 10 transactions between 2020 and 2021, targeting institutional-grade assets with strong reversionary potential in last-mile, urban locations near primary transport corridors or key gateway cities. The aggregation included the sale-and-leaseback of 25 prime last-mile assets from the portfolio's largest tenant, Kuehne+Nagel International AG (Kuehne+Nagel), one of the largest global providers of logistics services and the number-one sea freight and air freight provider globally. The properties occupied by Kuehne+Nagel are all cross-dock, last-mile distribution warehouses with very strong specifications (average 24% site coverage) and high dock-to-door ratios (average 7.2 doors per 1,000 sqm). Kuehne+Nagel cumulatively contributes EUR 12.2 million to the total portfolio's GRI (54.5%) over 25 leases in Germany and France.

Morningstar DBRS' long-term sustainable net cash flow (NCF) assumption for the property portfolio is EUR 19.2 million per annum (p.a.), which represents a haircut of 12.8% to the in-place portfolio's NOI at cut-off. Based on a Morningstar DBRS' long-term sustainable cap rate assumption of 6.5%, the resulting Morningstar DBRS value is EUR 295.5 million, which reflects a haircut of 23.1% to the C&W valuation.

The senior loan is interest-only and bears interest at a floating rate equal to three-month Euribor plus a 2.8% p.a. margin. It is initially expected to mature on 15 February 2028 (the initial repayment date), with two one-year extension options available to the borrowers, which are conditional to satisfactory hedging being in place and no event of default (EOD) continuing. The final repayment date of the senior loan is 15 February 2030.

On 20 December 2024, each borrower entered into a hedging agreement to hedge against increases in the interest payable under the senior loan because of fluctuations in the three-month Euribor. The initial hedging agreement is in the form of a three-year pre-paid interest rate cap expiring on the initial repayment date. The notional amount is 100% of the senior loan's principal amount, and the strike rate is 3.0% p.a. After the initial three-year term, the borrowers must ensure hedging transactions are in place up until the final maturity date at a strike rate which is not greater than the higher of (1) 3.0% p.a. and (2) the rate that ensures a hedged interest cover ratio (ICR) of 1.4 times (x), and in both cases for swaps, if lower, the market prevailing rate. Failure to comply with any of the required hedging conditions outlined above will constitute a loan EOD.

The senior loan features cash trap covenants based on DY and LTV. In particular, a cash trap event will occur if the senior loan's LTV is greater than 75.0% and/or the senior loan's DY is less than 7.4%. The senior loan also features financial default covenants. In particular, at each interest payment date (IPD) the borrowers must ensure that the senior loan's LTV does not exceed 80.0%. The DY, conversely, must not fall below 6.3% until the initial repayment date, and below 7.0% thereafter.

The Sponsor can dispose of any assets securing the senior loan by repaying a release price of 115% of the allocated loan amount (ALA) of that property. There is no permitted change of control.

On the closing date, the Issuer acquired the whole interest in the senior loan pursuant to the loan sale documents. For the purpose of satisfying the applicable risk retention requirements, the Issuer lender advanced a EUR 13.0 million loan (the Issuer loan) to the Issuer. The Issuer used the proceeds of the issuance of the notes, together with the amount borrowed under the Issuer loan, to acquire the senior loan from the loan seller.

The transaction benefits from a liquidity facility with a total commitment of EUR 14.0 million provided by Bank of America, N.A., London Branch (the liquidity facility provider). The liquidity facility can be used to cover interest shortfalls on the Class A, Class B and Class C notes (the covered notes) and certain proportionate payments under the Issuer Loan. Morningstar DBRS estimated that the Issuer liquidity reserve will cover approximately 21 months of interest payments on the covered notes, based on a maximum cap strike rate of 3.0%, and approximately 15 months based on the Euribor cap of 5.0% after the notes expected maturity date.

The Class E notes are subject to an available funds cap where the shortfall is attributable to an increase in the WA margin of the notes arising from the allocation of sequential note principal (i.e. principal proceeds originated from loan-level cash trap amounts) or as a result of a final recovery determination of the senior loan.

The transaction includes a Class X interest diversion trigger event, meaning that if the Class X interest diversion triggers, set at 7.4% for DY and 75% for LTV, respectively, are breached, any interest due to the Class X noteholders will instead be paid directly to the Issuer transaction account and credited to the Class X diversion ledger. However, such funds can potentially be used to amortise the notes only following a sequential payment trigger event or the delivery of a note acceleration notice.

The final legal maturity of the notes is 17 February 2035, seven years after the senior loan initial repayment date. The final legal maturity of the notes must be automatically extended where the final loan repayment date is extended so that the final note maturity date always falls seven years after the latest senior loan repayment date. Morningstar DBRS is of the opinion that, if necessary, this would provide sufficient time to enforce on the senior loan collateral and ultimately repay the noteholders, given the security structure and the relevant jurisdictions involved in this transaction.

Morningstar DBRS' credit ratings on Class A, Class B, Class C, Class D, and Class E notes 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, and pro rata default interest 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 factor(s) 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 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 October 2024; a valuation report prepared by C&W with a valuation date of 31 October 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 financial instrument. These are the first Morningstar DBRS credit ratings on this financial instrument.

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

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

Class C 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 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 Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class E notes of B (high) (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: Violetta Volovich, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 7 February 2025

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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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.

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.