DBRS Ratings Limited (DBRS) confirmed the ratings on all classes of notes issued by BAMS CMBS 2018-1 DAC (the Issuer) as follows:
-- Class A 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.
Since issuance, the transaction has performed strongly with increases in occupancy and gross contracted rent. However, further cash generation potential is undercut by the pending departure of one top tenant in the portfolio, the increasing difficulty in achieving higher occupancy and the uncertain outcome of Brexit — hence, the rating confirmations.
The Issuer is the securitisation of a GBP 315.3 million (67.5% loan-to-value (LTV)) floating-rate senior commercial real estate loan advanced by Morgan Stanley Principal Funding, Inc. (novated from Morgan Stanley Bank N.A.) and Bank of America Merrill Lynch International Limited to borrowers sponsored by Blackstone Group L.P. (Blackstone or the sponsor). The acquisition financing was also accompanied by a GBP 58.4 million (80% LTV) mezzanine loan granted by LaSalle Investment Management and Blackstone Real Estate Debt Strategies (BREDS), each holding 51% and 49% interest of the mezzanine loan, respectively. BREDS, however, is disenfranchised and thus cannot exercise any voting rights so long as Blackstone holds equity interest in the portfolio. The mezzanine loan is structurally and contractually subordinated to the senior facility and is not part of the transaction.
The senior loan is backed by 59 urban logistic and multi-let industrial properties (for more information regarding the portfolio, please refer to the related DBRS rating report). As at inception, 92.2% of the portfolio’s net lettable area was occupied by approximately 300 tenants with long-term leasehold interests in certain estates. The top ten tenants contribute 28.4% to the gross rental income, and the then-largest tenant, Sainsbury’s, is paying rent but not occupying the space.
As at Q2 2019, the occupancy has slightly increased to 94.5% due to leasing up of some vacant units; as such, the contracted gross rent has increased to GBP 30.4 million from GBP 28.2 million at issuance, while the weighted-average-unexpired-lease-to-break has remained at 4.9 years. However, the uplift on net rent will take effect only after the rent-free period granted under the new lease agreements. In DBRS’s opinion, the current portfolio is performing near peak occupancy, and it will become increasingly difficult to reach higher occupancy, especially considering the confirmed departure of Sainsbury’s at its lease expiry on 13 September 2019. Although the sponsor has claimed a large amount of dilapidation compensation that is expected to help the re-letting process (via refurbishment and/or free rent to the new tenant), which will take approximately 18 months to 24 months, the departure of the second-largest tenant (MWUK Limited, now the current largest tenant in the portfolio) will decrease the contracted gross rent by 4.1% and the physical occupancy by 3.8%. DBRS has underwritten a higher vacancy level at issuance to reflect such vacancy risk.
There has been no property disposal since issuance.
Overall, the strong performance of the portfolio in the past year has demonstrated the sponsor’s management ability; however, it remains unclear whether the Sainsbury’s property would find a new occupier any time soon. Moreover, the increased likelihood of a no-deal Brexit may affect the portfolio’s performance. As such, DBRS has maintained its current ratings.
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 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 Global Limited and Elavon Financial Services DAC.
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 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.
This is the first rating action since the Initial Rating Date.
The lead analyst responsibilities for this transaction have been transferred to Dinesh Thapar.
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):
A decrease of 10% and 20% in the DBRS net cash flow (NCF), derived by looking at comparable market rents, market occupancies in addition to expense ratios, and capital expenditure, 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 the Class B Notes at AA (sf)
-- 20% decline in DBRS NCF, expected rating of the Class B Notes at A (sf)
Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of the Class C Notes at BBB (high) (sf)
-- 20% decline in DBRS NCF, expected rating of the Class C Notes at BBB (sf)
Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of the Class D Notes at BBB (low) (sf)
-- 20% decline in DBRS NCF, expected rating of the Class D Notes at BB (high) (sf)
Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of the Class D Notes at BB (sf)
-- 20% decline in DBRS NCF, expected rating of the Class D Notes at B (sf)
Class E Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of the Class D Notes at CCC (sf)
-- 20% decline in DBRS NCF, expected rating of the Class D 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: Christian Aufsatz, Managing Director
Initial Rating Date: 19 July 2018
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.
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology
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.