DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating Rate Notes due August 2029 issued by BAMS CMBS 2018-1 DAC (the Issuer):
-- 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)
DBRS Morningstar maintains the Stable trends.
The Issuer is the securitisation of a GBP 315.3 million (67.5% loan-to-value or LTV at issuance) 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 (68.53% LTV) is backed by 59 urban logistic and multi-let industrial properties (for more information regarding the portfolio, please refer to the related DBRS Morningstar rating report). At issuance, 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 10 tenants contributed 28.4% to the gross rental income.
The borrower has exercised the first extension option which extends the loan maturity to May 2021 and there are two further 12-month extension options available, which if exercised would extend the loan maturity date to May 2023. Since issuance, the overall performance of the portfolio has been stable. As of May 2020, the portfolio was 87% occupied with a weighted-average lease-to-break of 4.37 years; the annual rental income achieved was GBP 25.4 million. DBRS Morningstar notes that although rental income remains in line with issuance, the vacancy rate has been increasing and is now at 12.63% versus 7.8% at issuance. DBRS Morningstar underwrote a vacancy of 12.5% at issuance and as such will carefully monitor the occupancy rate of the transaction in the next available investors reporting.
During the Coronavirus Disease (COVID-19) lockdown period, the borrower advised that 8% of the tenants requested some form of rent relief, which resulted in 3% of the total portfolio either receiving rental deferrals or switching to monthly payments. However, given the nature of this portfolio, the borrower is optimistic that the logistics sector will weather the storm better than other asset classes as there is increased demand for e-commerce. DBRS Morningstar also believes that last-mile industrial assets will be relatively less affected, going forward.
Following a market revaluation in November 2019, there was a small drop in value of 1.5%, showing that the portfolio metrics have not significantly deteriorated since issuance. The LTV is still below the cash trap threshold of 75% but since the loan was extended into its third year, the debt yield (DY) threshold has now increased to 8.5% from 8% previously, the current DY of 8.27% resulted in surplus cash being trapped in the cash trap account.
The loan structure does not include financial default covenants unless there is a permitted change of control, after which the default covenants are based on the LTV and DY. The LTV covenant is set at 77.5% LTV and the DY at 7.4%.
The transaction benefits from a liquidity support facility of GBP 7 million, which is provided by Bank of America N.A., London Branch. The liquidity facility can be used by the Issuer to fund expense shortfalls (including any amounts owned to third-party creditors and service providers that rank senior to the notes), property protection shortfalls, and interest shortfalls (including with respect to deferred interest, but excluding default interest and exit payment amounts) in connection with interest due on the Class A and Class B notes and, after Class A and B have been paid down, the Class C notes in accordance with the relevant waterfall. DBRS Morningstar estimated the 12 months’ coverage based on a stressed Libor of 2.32%. The loan hedge has a cap strike rate of 2% but DBRS Morningstar has stressed this as the loan is 95% hedged. The coverage based on a Libor margin cap of 5% is seven months.
The legal final maturity of the notes is expected to be in May 2028, five years after the maturity of the fully extended loan term. Considering two further one-year extension options that are conditional upon the loan being fully hedged, the latest expected loan maturity date is 15 May 2023. 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) and cap rate assumptions due to the current performance of the portfolio.
The DBRS Morningstar Sovereign group released on 16 April 2020 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. DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced reports.
On 16 June 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated CMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/362693/european-cmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.
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 Mountstreet Mortgage Servicing Limited since issuance.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, 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 19 July 2019 when DBRS Morningstar confirmed its ratings on the notes issued by BAMS 2018-1 DAC.
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:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class A notes at AA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class A notes at A (sf)
Class B Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class B notes at BBB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class B notes at BBB (sf)
Class C Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class C notes at BBB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class C notes at BB (high) (sf)
Class D Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class D notes at BB (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class D notes at B (sf)
Class E Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class E notes at CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class E notes at CCC (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: David Lautier, Senior Vice President
Initial Rating Date: 31 May 2019
DBRS Ratings Limited
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Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960
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.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019),
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 firstname.lastname@example.org.