DBRS Ratings GmbH (DBRS) upgraded the ratings on the Commercial Mortgage-Backed Floating-Rate Notes Due January 2027 issued by Taurus 2016-2 DEU Designated Activity Company (Taurus 2016-2) as follows:
-- Class B Notes upgraded to AA (high) (sf) from AA (sf)
-- Class C Notes upgraded to A (high) (sf) from A (sf)
-- Class D Notes upgraded to A (low) (sf) from BBB (high) (sf)
In addition, DBRS confirmed the Class A Notes at AAA (sf).
All trends are Stable.
The rating upgrades on the Class B, C and D Notes come after significant asset disposal since inception. As each disposal is subject to a release premium of 110% of the allocated loan amount, the overall loan-to-value (LTV) of the securitised loan has decreased to 43.7% from 49.5% at issuance.
Taurus 2016-2 is a securitisation of one floating-rate senior commercial real estate loan advanced by the Bank of America Merrill Lynch International Limited to Dream Global REIT for its acquisition of the Deutsche Post AG sales-and-lease-back portfolio, which, at inception, comprised 178 properties. These properties are located in various parts of Germany and are primarily let to Deutsche Post AG.
As of the January 2019 interest payment date (IPD), the whole-loan balance has been reduced to EUR 134.2 million from EUR 224.1 million at issuance, representing a 41.6% balance reduction in three years. Based on the valuation produced by CBRE Group, Inc. (CBRE) in 2017, the market value of the remaining 87 properties amounts to EUR 323.6 million, reflecting a 43.7% LTV.
In its 2017 annual review, DBRS highlighted that the portfolio had significant lease-break/expiry risk concentrated in June 2018, when tenants accounting for approximately EUR 19.1 million had lease expiries or break options. As such, the vacancy rate of the portfolio has increased to 22.0% in Q4 2018 from 18.0% in Q4 2017, and the weighted-average unexpired lease term has increased to 5.07 years from 4.97 years in Q4 2017.
As required by the sale-and-lease-back agreement, Deutsche Post AG was required to extend a minimum of EUR 2.9 million gross rent for a minimum of two years upon lease expiry in June 2018, subject to 12 months’ notice. DBRS notes that the gross rental income from Deutsche Post AG has decreased to EUR 14.0 million in Q4 2018 from EUR 18.2 million in Q4 2017.
According to the most recent investor report from Q4 2018, the current gross rental income of the portfolio is EUR 23.7 million, which represents a 33.4% decline from EUR 35.6 million at issuance, which is relatively in line with the scale of property disposals. The DBRS stabilised net cash flow for the portfolio, after removing assets sold, is EUR 16.1 million and represents a 14.0% discount to the reported net rent (calculated as gross rent minus non-recoverable costs). CBRE has revalued the portfolio in July 2017, and the aggregate market value of the remaining assets currently stands at EUR 323.6 million, translating into an LTV of 43.7%, which has reduced from 49.5% at issuance.
The loan matures on 31 December 2020 and carries a floating interest rate equal to three-month Euribor (subject to a zero floor), plus a margin of 2.25%. The transaction is supported by a liquidity facility provided by Bank of America Merrill Lynch N.A. According to the most recent IPD in January 2019, the current outstanding amount of the liquidity facility is EUR 10.2 million, which has been reduced proportionally after partial note redemption since issuance. The liquidity facility can be used to cover interest shortfalls on the Class A, B and C Notes.
The final legal maturity of the notes is in January 2027, six years after the maturity of the loan. If necessary, this is believed to be sufficient time, given the security structure and jurisdiction of the underlying loans, to enforce collateral on the loan and repay bondholders.
The ratings assigned to the Class C and D Notes are lower than the rating stress levels that the notes can withstand, according to DBRS’s direct sizing hurdles outlined in the “European CMBS Rating and Surveillance Methodology”. In this transaction, the assigned ratings reflect that these classes, at a higher rating level, would not pass the additional cash flow stress DBRS undertakes for potential upgrades, as described in DBRS’s “European CMBS Rating and Surveillance Methodology”.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is European CMBS Rating and Surveillance Methodology.
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 rating action.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found on www.dbrs.com at http://www.dbrs.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at https://www.dbrs.com/research/333487/rating-sovereign-governments.
The sources of data and information used for the ratings include Situs Asset Management LLC, Wells Fargo Bank International Unlimited Company and CBRE.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing the ratings to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 13 March 2018, when DBRS confirmed the ratings on the Class A and B Notes and upgraded the ratings on the Class C and D Notes.
The lead analyst responsibilities for this transaction have been transferred to Christopher Horst.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
To assess the impact of changing the transaction parameters on the ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
A decrease of 10% and 20% in the DBRS Net Cash Flow (NCF), derived by looking at comparable properties, market rents, market occupancies in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to a downgrade in the transaction, as noted below for each class, respectively:
Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A at AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A at AAA (sf)
Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B at AA (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class B at AA (sf)
Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C at A (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class C at A (sf)
Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class F at A (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class F at BBB (high) (sf)
For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.
Lead Analyst: Christopher Horst, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 April 2016
DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
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The rating methodologies used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies.
-- European CMBS Rating and Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at http://www.dbrs.com/research/278375.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at firstname.lastname@example.org.