DBRS Ratings Limited (DBRS) finalised its provisional ratings to the following classes of commercial mortgage-backed floating-rate notes issued by Scorpio (European Loan Conduit No.34) DAC (the Issuer):
-- Class RFN at AAA (sf)
-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
All trends are Stable.
Scorpio (European Loan Conduit No.34) DAC is the securitisation of 82.5% (GBP 236.4 million) of a GBP 286.4 million floating-rate senior commercial real estate loan (the senior loan) advanced by Morgan Stanley Bank N.A. (the Loan Seller) to borrowers sponsored by Blackstone Group L.P. (Blackstone or the Sponsor). The remaining 17.5% of the senior loan will be retained by the original senior lender and is ranked pari passu with the securitised senior loan. The refinancing of historical acquisitions is also accompanied by a GBP 57.3 million (80% loan-to-value or LTV) mezzanine loan granted by BSRECP III Joint International S.à r.l. and Broad Street Credit Holdings S.à r.l. The mezzanine loan is structurally and contractually subordinated to the senior facility and is not part of the transaction.
The senior loan (66.8% LTV) is backed by a portfolio of 112 multi-let, last-mile industrial properties located throughout the United Kingdom. Blackstone acquired the assets through 16 sub-portfolio transactions between Q2 2018 and Q1 2019. The ongoing management of the portfolio will be provided by Blackstone and M7 Real Estate Ltd. (M7), leveraging their asset and investment management platforms.
As of 10 March 2019 (the cut-off date), 90.7% of the portfolio’s net lettable area (NLA) was occupied by approximately 850 tenants. The top ten tenants contribute 13.1% of the gross rental income (GRI) with no tenant lease in the portfolio representing more than 2.5% of GRI. Investment-grade tenants comprise 8.5% of the GRI, adding further support to a highly granular tenant base. The assets are geographically concentrated across the U.K. in Scotland (22.3% market value or MV), Northern England (26.5% MV) and the Midlands (26.1% MV). Properties accounting for a combined 25.1% of the portfolio MV are located in Southern England and Wales. The assets’ locations are a good addition to Blackstone’s pan-European logistics platform, complementing the geographic dispersion of properties in BAMS CMBS 2018-1 DAC, which was securitised in July 2018.
In DBRS’s view, the senior facility represents a moderate leverage financing with a 66.8% LTV, based on a Jones Lang LaSalle Inc. (JLL) valuation of GBP 428.6 million in February 2019. The relatively high DBRS LTV of 92.1% is mitigated by cash trap covenants set at 75% LTV and at a debt yield (DY) of 9.24% for the initial loan term. The DY at the cut-off date was 10.1%.
Moreover, the portfolio is 8.0% under-rented according to the market rent assessed by JLL, providing opportunity for the Sponsor to increase rent while maintaining the integrity of the weighted-average unexpired lease term (WAULE) of 4.7 years. The senior loan is interest only and has a two-year maturity with three one-year extension options subject to certain conditions, including hedging.
The loan structure does not include financial default covenants prior to a permitted change of control, but provides other standard events of default including: (1) any missing payment, including failure to repay the loan by the maturity date; (2) borrower insolvency; (3) a loan default arising as a result of any creditors’ process or cross-default. In DBRS’s view, potential performance deteriorations would be captured and mitigated by the presence of cash trap covenants: (1) an LTV cash trap covenant set at 75% and (2) a DY cash trap covenant detailed above.
The transaction includes a Reserve Fund Note (RFN), which will fund 95% of the liquidity reserve (i.e., the note share part). After issuance, the GBP 10.4 million RFN proceeds and the GBP 0.5 million Vertical Risk Retention (VRR) loan contribution will be deposited into the transaction’s liquidity reserve, which works similarly to a typical liquidity facility by providing liquidity to pay property protection advances, senior costs and interest shortfalls (if any) in relation to the corresponding VRR loan, Class A1, Class A2, Class B, Class C and Class D notes (for further details, please see the section “Liquidity Support” in DBRS’s presale report for this transaction).
According to DBRS’s analysis, the liquidity reserve amount will be equivalent to approximately 15 months on the covered notes, based on the interest rate cap strike rate of 2.0% per annum and nine months based on the LIBOR cap after the loan maturity of 5.0% per annum.
The final legal maturity of the notes is expected to be in May 2029, five years after the fully extended loan term. The latest loan maturity date, considering potential extensions, is 15 May 2024,. 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.
Class E 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 Class X diversion triggers, set at 7.75% for DY and 80% for LTV, were breached, any interest and prepayment fees 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, only following a sequential payment trigger event or the delivery of a note acceleration notice can such funds can potentially be used to amortise the notes.
To maintain compliance with applicable regulatory requirements, the Loan Sellers will retain an ongoing material economic interest of not less than 5% of the securitisation via a VRR loan that is to be advanced by the Loan Sellers to the Issuer at closing.
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 Morgan Stanley & Co. International plc 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 concern 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 A1 Notes Risk Sensitivity:
-- a 10% decline in DBRS NCF would lead to an expected rating of the Class A1 notes at AAA (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class A1 notes at AA (low) (sf)
Class A2 Notes Risk Sensitivity:
-- a 10% decline in DBRS NCF would lead to an expected rating of the Class A1 notes at AA(low) (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class A1 notes at A(low) (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 (low) (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class B notes at BBB (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 (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class C notes at BB (high) (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 (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class C notes at B (sf)
Class E Notes Risk Sensitivity:
-- a 10% decline in DBRS NCF would lead to an expected rating of the Class C notes at B (low) (sf)
-- a 20% decline in DBRS NCF would lead to an expected rating of the Class C notes at 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 Limited are subject to EU and US regulations only.
Lead Analyst: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: Erin Stafford, Managing Director
Initial Rating Date: 17 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.
On 30 October 2019, this press release was modified to specify that Dinesh Thapar is the lead analyst for this transaction.