DBRS Ratings GmbH (DBRS) finalised the following ratings of the Commercial Mortgage-Backed Floating-Rate Notes issued by Kanaal CMBS Finance 2019 DAC (the Issuer):
-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
All trends are Stable.
The Issuer is a EUR 278.4 million securitisation (the Transaction) of two Dutch senior commercial real estate loans: the Maxima loan and the Big Six loan advanced by Goldman Sachs Bank U.S.A. (together with Goldman Sachs International, GS). The loans are secured against 17 predominantly office and retail assets located in the Netherlands (the Portfolio) owned by Marathon Asset Management and Castlelake, L.P. (the Sponsors), respectively.
The Big Six loan financed the acquisition of six predominantly retail properties located in the Netherlands. Five of the six assets are retail-only assets comprising galleries, shopping centres and high street retail units while the Deventer asset is a mixed-use asset with retail and office elements. GS initially provided the sponsor with a EUR 153.5 million facility which is (1) EUR 109.6 million Tranche A for the initial acquisition of five retail assets and (2) EUR 44.0 million Tranche B for the add-on acquisition of the Deventer asset. However, since the acquisition of the Deventer asset, the sponsor has sold the car park associated with it and paid down Tranche B to EUR 30.8 million. As such, the outstanding balance of the Big Six loan is EUR 140.3 million. Based on this balance, the loan-to-value (LTV) of the Big Six is 56.5%, derived from Savills’ valuation of EUR 248.2 million, dated June 2018; the appraiser has also concluded a net operating income (NOI) of EUR 18.9 million, this implies a net initial yield (NIY) of 7.6% and a day-one debt yield (DY) of 13.5%. As at 31 December 2018 (the Big Six loan cut-off date), the properties were 80.5% occupied by 196 tenants, with the largest five tenants accounting for 23.3% of the EUR 20.1 million in place gross rental income. DBRS’s net cash flow assumption for the portfolio is EUR 14.8 million.
The retail loan bears interest at a floating interest rate equal to the three-month Euribor (subject to zero floor) plus a margin of 3.38%. The transaction is also fully hedged with an interest rate cap strike of 2.0% to be provided by BNP Paribas. The loan structure includes amortisation of 2.0% per annum (p.a.) in Years 2 to 4 and 3.0% p.a. in Years 4 to 5.
The Maxima loan served to refinance an existing portfolio of 11 offices and mixed-use properties, of which 78% of the total area is office space, 10% logistics warehouses and 12% other (retail, hotel and data centre). The total loan amount of the portfolio is EUR 138.0 million, which results in a day-one LTV of 58.9% according to JLL’s valuation of EUR 234.3 million, dated January 2019. JLL also reported a NOI of EUR 15.6 million, which implies a NIY of 6.6% and a day-one debt yield (DY) of 11.3%. As at 1 January 2019 (the Maxima cut-off date), the properties were 84.4% occupied by 29 tenants, with the largest five tenants accounting for 60.4% of the EUR 17.2 million in place gross rental income. DBRS’s net cash flow assumption is EUR 11.9 million.
The office loan carries a floating interest rate equal to the three-month Euribor (subject to zero floor) plus a margin of 1.95% and is fully hedged with an interest rate cap strike of 2.5% purchased from SMBC Derivative Products Ltd. The loan is interest only.
The Maxima loan will mature on 15 February 2023 while the Big Six loan has its initial termination date on 15 August 2021 but has, subject to certain conditions being satisfied, two one-year extension options. As such, if the Big Six loan were not fully extended, the Transaction is expected to repay by 22 May 2023; otherwise the expected note maturity will be on 22 August 2023, seven days after the fully extended Big Six maturity. Should the notes fail to be repaid by then, the Transaction will have five years to allow the special servicer to work out the loan(s) by August 2028 at the latest, which is the legal final maturity of the notes.
Goldman Sachs Bank USA provided the Issuer with a EUR 13.0 million liquidity facility, which equals 4.7% of the total outstanding balance of the notes and issuer loan. The liquidity facility can be used to cover interest shortfalls on the issuer loan, and the Class A, Class B, Class C and Class D notes. According to DBRS’s analysis, the commitment amount, as at closing, will be equivalent to approximately 14 months and eight months’ coverage for the covered notes, based on the weighted-average interest rate cap strike rate of 2.24% p.a. and the Euribor cap after loan maturity of 5% p.a., respectively.
Class D is subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes.
The Transaction includes a Class X diversion trigger event, meaning that if the respective loan’s financial covenants are breached, any interest and prepayment fees due to the Class X noteholders will instead be paid directly into the Issuer’s transaction account and credited to the Class X diversion ledger. However, only following the expected note maturity or the delivery of a note acceleration notice can such funds be potentially used to amortise the notes.
To maintain compliance with applicable regulatory requirements, GS will retain an ongoing material economic interest of not less than 5% of the securitisation via an issuer loan that is advanced by Goldman Sachs Bank USA.
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 principal methodology.
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 these ratings include Goldman Sachs International and its delegates.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
DBRS was not 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 these 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.
These ratings concerns a newly issued financial instrument. These are the first DBRS ratings on this financial instrument.
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”):
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 AA (high) (sf)
Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B at A (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class B at A (low) (sf)
Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C at BBB (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class C at BBB (sf)
Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D at BB (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class D at BB (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: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 19 March 2019
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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 email@example.com.