DBRS confirmed the ratings on all classes of Commercial Mortgage-Backed Floating-Rate Notes Due November 2027 (the Notes) issued by FROSN-2018 DAC as follows:
-- Class RFN at AAA (sf)
-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
All trends are Stable.
The rating confirmations reflect the transaction’s overall stable performance since issuance.
FROSN-2018 DAC is the securitisation of one Finnish commercial real estate (CRE) loan jointly advanced by Citibank N.A., London Branch; Morgan Stanley Bank, N.A.; and Morgan Stanley Principal Funding Inc. to the borrowers owned entirely by Sponda Plc, which was acquired by The Blackstone Group L.P. (the Sponsor). As of the February 2019 interest payment date (IPD), the aggregate loan balance is EUR 590.9 million, as the loan is interest-only throughout its loan term. The loan is split between a EUR 577.0 million senior term facility and a EUR 13.9 million senior capex facility (66.6% loan-to-value (LTV)). Additionally, there is a EUR 103.8 million mezzanine facility, split into a EUR 101.7 million mezzanine term loan and a EUR 2.1 million mezzanine capex facility (together, with the senior facilities, 78.3% LTV). The mezzanine facilities are structurally and contractually subordinated to the senior loan and are not part of the contemplated transaction. The difference between the securitised senior loan balance totalling EUR 540.87 million and the total note balance (excluding the Class X notes) of EUR 558.44 million is represented by the reserve fund notes, which are deposited into the transaction’s liquidity reserve account and works similar to a typical liquidity facility.
The collateral consists of 63 CRE properties with approximately 73% of gross leasable area as office space, 17% as retail space, 5.0% as storage space and the remaining 5.0% as other. The assets have a large concentration in the Helsinki, Finland, metropolitan area, where 45 of the assets (46% of the market value) are located.
The projected annual gross rental income (GRI) as of the February 2019 IPD report for the past 12 months was approximately EUR 81.4 million, in line with the GRI reported at issuance of EUR 81.9 million. There was a slight decrease between the Q4 2018 quarterly income reported and the Q1 2019 quarterly income reported, down to EUR 12.8 million from EUR 14.7 million, due to the second-largest tenant, Sweco Finland Oy, agreeing to a lease extension from December 2025 to December 2030 and currently being in a rent-free period.
The loans benefit from a granular income stream with a total of 823 tenants, with the top five tenants contributing 28.5% of the GRI. The largest tenant is HOK-Elanto Liiketoiminta Oy (operating as Prisma), which is a national Finnish hyper-market chain with 64 properties in Finland (two in the subject portfolio); the tenant has a scheduled lease expiration date in February 2021. The second-largest tenant is the aforementioned Sweco Finland Oy, which is a Finnish engineering consulting firm and the largest tenant at the Ilmalanrinne office property (contributing to approximately 96.4% of the property’s GRI) and which has recently extended its lease expiration date from December 2025 to December 2030 with no scheduled break option before expiration. The portfolio suffers from an overall high vacancy rate, which has been largely unchanged since cut-off, decreasing to 28.9% as of the latest IPD from 29.3% at cut-off. DBRS believes that the Sponsor’s business plan and the total capex of approximately EUR 16.0 million between the senior and mezzanine facilities should help to bring down the vacancy rate throughout the portfolio.
At issuance, DBRS noted the low weighted-average lease term (WALT) of 3.3 years as of cut-off and as of the February 2019 IPD; the WALT has remained stable and was reported at 3.2 years. The reason for the low WALT is due to the large number of leases holding over in the portfolio (approximately 19.4% of GRI at cut-off). However, DBRS noted that this practice of tenants holding over into their expiration date is common within the Finnish CRE market, and thus a lower WALT when compared with other European CRE markets is to be expected.
The latest investor report from February 2019 mentions the Sponsor is in negotiations to dispose of the Akerlundinkatu II A-D property, which is the third-largest property by market value with strong underlying performance, having a vacancy rate of 3.0% as well as a granular rent roll with a total of 23 tenants. However, DBRS believes the 110.0% asset disposal premium that would deleverage the loan would be, overall, credit positive for the Notes.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating 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 these ratings include Mount Street Mortgage Servicing Limited.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, 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 this rating to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
This is the first rating action since the Initial Rating Date.
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 rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
Class RFN Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class RFN Notes to AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class RFN Notes to AAA (sf)
Class A1 Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A Notes to AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A Notes to AA (low) (sf)
Class A2 Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B Notes to A (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class B Notes to A (low) (sf)
Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C Notes to A (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class C Notes to BBB (high) (sf)
Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D Notes to BBB (sf)
-- 20% decline in DBRS NCF, expected rating of Class D Notes to BB (high) (sf)
Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D Notes to BB (sf)
-- 20% decline in DBRS NCF, expected rating of Class D Notes to B (sf)
Class E Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D Notes to B (sf)
-- 20% decline in DBRS NCF, expected rating of Class D Notes to CCC (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: Erin Stafford, Managing Director
Initial Rating Date: 22 March 2018
DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
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
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses 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.