DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating Rate Notes due August 2029 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)
DBRS Morningstar maintains the Stable trends.
Cold Finance PLC is the securitisation of a GBP 282.8 million floating-rate senior commercial real estate loan (the senior loan) advanced by the Issuer to four borrowers: Wisbech Propco Ltd, Real Estate Gloucester Limited, Harley International Properties Limited, and Yearsley Group Limited (Yearsley Group). All four borrowers are ultimately owned by Lineage Logistics Holdings LLC (Lineage or the Sponsor). The loan refinanced an initial bridge facility provided by Goldman Sachs International for the acquisition of Yearsley Group, a large cold storage logistics service provider, and further refinanced two existing cold storage assets in the UK. Loan proceeds were also used for general operational purposes. To maintain compliance with applicable regulatory requirements, the Sponsor holds a 5.0% interest in the transaction through the issuance of nonrated Class R notes.
The senior loan – 68.6% loan-to-value (LTV) – is backed by a portfolio of 14 temperature-controlled and ambient storage industrial properties strategically located near its customers’ distribution centres as well as their target markets throughout the UK, including one property in Scotland. The two largest assets by market value are located in Gloucester and Wisbech, Cambridgeshire.
Since issuance, the overall performance of the portfolio has been stable. As of May 2020, 77% of the portfolio’s capacity in terms of pallet space was occupied and generated a quarterly EBITDA of GBP 8.7 million and a trailing 12-month EBITDA of GBP 35.4 million, which is in line with the budget. The debt yield (DY) of 11% is comfortably above the cash trap and default covenants of 9.6% and 8.6%, respectively.
About 61% of the portfolio’s storage space is allocated to retail supermarkets and operators who supply to supermarkets. DBRS Morningstar understands that this segment of the business is performing strongly amidst the Coronavirus Disease (COVID-19) pandemic. The remaining occupied storage space is utilised by restaurants, which are also still showing a solid performance. However, as restaurants are generally closed, there is only a small turnover of inventory and DBRS Morningstar believes there could potentially be a build-up of arrears from this area of the business. In DBRS Morningstar’s opinion, the transaction is still able to generate sufficient cash flow to comfortably meet its obligations under the senior loan term.
The loan structure includes financial default covenants such that the borrower must ensure that the LTV ratio is less than 83.6% and that the DY on each interest payment date must be above 8.6%. Other standard events of default include: (1) any missing payment, including failure to repay the loan at the maturity date; (2) borrower insolvency; and (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 provided by Crédit Agricole Corporate and Investment Bank. 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. According to DBRS Morningstar’s analysis, the liquidity reserve amount will be equal to approximately 12 months on the covered notes, based on the interest rate cap strike rate of 3.0% per year, and approximately nine months of coverage, based on the Libor cap after loan maturity of 5.0% per year.
The legal final maturity of the notes is expected to be in August 2029, five years after the maturity of the fully extended loan term. The first loan maturity date is in August 2020, but considering two one-yearly extension options, which are conditional upon the loan being fully hedged and with no continuing loan event of default, the latest expected loan maturity date is 15 August 2024. Given the security structure and jurisdiction of the underlying loan, DBRS Morningstar believes that this provides sufficient time to enforce on the loan collateral, if necessary, and repay the bondholders.
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many tenants and borrowers. DBRS Morningstar anticipates that vacancy rate increases and cash flow reductions may arise for many CMBS borrowers, some meaningfully. In addition, commercial real estate values will be negatively affected, at least in the short-term, impacting refinancing prospects for maturing loans and expected recoveries for defaulted loans. The ratings are based on additional analysis as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar did not adjust its net cash flow (NCF) or cap rate assumptions because of the current performance of the portfolio.
On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 1 June 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/361867/global-macroeconomic-scenarios-june-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings.
For more information on DBRS Morningstar considerations for European CMBS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/362693.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in British pound sterling unless otherwise noted.
The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology” (13 December 2019).
DBRS Morningstar 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 at: https://www.dbrsmorningstar.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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for these ratings include servicer reports provided by CBRE Loan Services Ltd since issuance (last 12 months).
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 9 July 2019 when DBRS Morningstar finalised its provisional ratings on the notes issued by Cold Finance PLC.
The lead analyst responsibilities for this transaction have been transferred to Dinesh Thapar.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at www.dbrsmorningstar.com.
To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):
Class A Notes Risk Sensitivity:
-- a 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at AA (high) (sf)
-- a 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at A (high) (sf)
Class B Notes Risk Sensitivity:
-- a 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at A (sf)
-- a 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at BBB (high) (sf)
Class C Notes Risk Sensitivity:
-- a 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BBB (sf)
-- a 20% decline in DBRS Morningstar 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 Morningstar NCF would lead to an expected rating of the Class D notes at BB (high) (sf)
-- a 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class D notes at BB (sf)
Class E Notes Risk Sensitivity:
-- a 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class E notes at BB (low) (sf)
-- a 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class E notes at BB (low) (sf)
For further information on DBRS Morningstar’s historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.
Lead Analyst: Dinesh Thapar, Assistant 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: https://www.dbrsmorningstar.com/about/methodologies.
-- European CMBS Rating and Surveillance Methodology (13 December 2019), https://www.dbrsmorningstar.com/research/354637/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.