DBRS Ratings Limited (DBRS) assigned provisional ratings to the following classes of commercial mortgage-backed floating-rate notes to be issued by Cold Finance PLC (the Issuer):
-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
All trends are Stable.
Cold Finance PLC is the securitisation of a GBP 282.8 million floating-rate senior commercial real estate loan (the senior loan) advanced by Cold Finance PLC (the Issuer) to four borrowers: Wisbech Propco Ltd., Real Estate Gloucester Limited, Harley International Properties Limited and Yearsley Group Limited. All four borrowers are ultimately owned by Lineage Logistics Holdings, LLC (Lineage or the Sponsor). The purpose of the loan is to refinance an initial bridge facility provided by Goldman Sachs for the acquisition of the Yearsley Group, a large cold storage logistics service provider, and a further refinancing of two existing UK cold storage assets. Loan proceeds will also be used for general operation purposes, while 5.0% interest in the transaction is held by the Sponsor through the issuance of non-rated Class R notes to maintain compliance with the applicable regulatory requirements.
The senior loan (68.6% loan-to-value, LTV) is backed by a portfolio of 14 temperature-controlled and ambient storage industrial properties located throughout the UK. In November 2018, Lineage acquired Yearsley Group, which included 12 temperature-controlled storage facilities and its operational platform. The portfolio offers largely frozen storage facilities, with five of the assets providing a mixture of chilled and ambient storage options. The ongoing management of the portfolio will be brought within Lineage’s operations, which is part of a wider European platform established in 2017.
The portfolio’s net lettable area (NLA) of 2.6 million square feet (sq. ft.) offering temperature-controlled and ambient storage facilities was 77.8% utilised by over 1000 customers over a 12-month period ending in December 2018. The top ten customers contributed 49.0% of the total sum invoiced in 2018 (GBP 87.0 million). The top two customers, Brakes and Unilever, account for approximately 22% of the total sum invoiced in 2018. The portfolio is located strategically close to customers’ distribution centres as well as their target market throughout the UK, including one property in Scotland. The two largest assets by market value are located in Gloucester and Wisbech, Cambridgeshire.
In DBRS’s view, the senior facility represents moderate leverage financing with a 68.6% LTV, based on CBRE’s valuation of GBP 412.1 million dated 31 March 2019. The relatively high DBRS LTV of 93.8% (whole loan) calculated off DBRS’s value of GBP 301.5 million is mitigated by cash trap covenants set at 76.1% LTV and at a debt yield (DY) of 9.6% for the initial loan term. Based on a reported cash flow of GBP 30.26 million, the DY at the cut-off date 31 March 2019 was 11.3% and 10.7% for the whole loan, including the subordinated Class R amount. DBRS’s DY at the cut off was 10.0% and 9.5% for the whole loan based off a net cash flow (NCF) of GBP 26.9 million. The senior loan bears interest at a floating rate equal to three-month LIBOR (subject to a zero floor) plus a margin that is a function of the weighted-average (WA) of the aggregate interest amounts payable on the notes. As such, there is no excess spread in the transaction and ongoing costs will be ultimately borne directly by the borrowers. The loan is fully hedged with an interest rate cap strike of 3% purchased from a hedge counterparty whose holding company is rated by DBRS and is commensurate with the highest rating assigned to the notes. The borrowers are expected to amortise the loan according to the amortisation schedule commencing after year one. The expected maturity of the loan is three years; however, the borrower can exercise two one-year extensions subject to certain conditions.
The loan structure includes financial default covenants such that the borrower must ensure that the LTV ratio is less than 83.6% and the DY on each interest payment date must not be equal to or less than 8.6%. Other standard events of default include (1) any missing payment, including failure to repay the loan at maturity date; (2) borrower insolvency; (3) a loan default arising as a result of any creditor’s process or cross-default.
The transaction benefits from a liquidity support facility of GBP 13 million is provided by Credit Agricole. The liquidity facility may be used to cover shortfalls on the payment of certain amounts of interest due by the issuer to the holders of the Class A to Class D notes and no more than 20% of the outstanding Class E notes (no more than 20% of those notes with a rating below BBB (sf)). According to DBRS’s analysis, the liquidity reserve amount will be equivalent to approximately 12 months on the covered notes, based on the interest rate cap strike rate of 3.0% per annum and approximately nine months of coverage based on the LIBOR cap after loan maturity of 5.0% per annum, respectively.
The final legal maturity of the notes is expected to be in August 2029, five years after the fully extended loan term. The expected note maturity date is 20 August 2024, two days after the fully extended senior loan term. Given the security structure and jurisdiction of the underlying loan, DBRS believes this provides sufficient time to enforce, if necessary, on the loan collateral and repay the bondholders.
To satisfy risk retention requirements, Lineage Logistics Holdings, LLC, will retain, through its majority-owned affiliate, a residual interest consisting of no less than 5% by subscribing the unrated and junior-ranking GBP 14.2 million Class R Notes. This retention note ranks junior in relation to interest and principal payments to all rated notes in the transaction.
All figures are in British pound sterling 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 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.
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:
-- a 10% decline in DBRS NCF would lead to an expected rating of the Class A notes at AAA (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class A notes at AAA (high) (sf)
Class B Notes Risk Sensitivity:
-- a 10% decline in DBRS NCF would lead to an expected rating of the Class B notes at A (high) (sf)
--a 20% decline in DBRS NCF would lead to an expected rating of the Class B notes at A (low) (sf)
Class C Notes Risk Sensitivity:
-- a 10% decline in DBRS NCF would lead to an expected rating of the Class C notes at BBB (high) (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class C notes at BBB (low) (sf)
Class D Notes Risk Sensitivity:
-- a 10% decline in DBRS NCF would lead to an expected rating of the Class C notes at BB (high) (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class C notes at BB (sf)
Class E Notes Risk Sensitivity:
-- a 10% decline in DBRS NCF would lead to an expected rating of the Class C notes at BB (low) (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class C notes at B (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 Limited are subject to EU and US regulations only.
Lead Analyst: Mirco Iacobucci, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 31 May 2019
DBRS Ratings Limited
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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.
Please note the press release was amended on 3 June 2019 to align the sensitivities analysis with the updated transaction capital stack.