DBRS Morningstar Confirms Ratings on Taurus 2021-1 UK DAC with Stable Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes due May 2031 issued by Taurus 2021-1 UK DAC (the Issuer):

-- Class A notes at AAA (sf)
-- Class B notes at AA (low) (sf)
-- Class C notes at A (low) (sf)
-- Class D notes at BBB (low) (sf)
-- Class E notes at BB (low) (sf)

The trends on all ratings are Stable.

The rating confirmations reflect the transaction’s stable performance over the last 12 months. The ratings are based on information provided to DBRS Morningstar by the servicer as of the date of this press release.

Taurus 2021-1 UK DAC is the securitisation of a GBP 340.1 million senior commercial real estate (CRE) loan secured by 45 light-industrial and logistics assets in the United Kingdom with a large concentration in London and the South East. The transaction is arranged by Merrill Lynch International and jointly managed by Barclays Bank Plc for the benefit of funds managed by Blackstone Group Inc. (Blackstone or the Sponsor). At issuance, the Issuer purchased the senior loan from the loan seller, Bank of America Europe DAC, using the proceeds from the note issuance and the issuer loan provided by the loan seller. The issuer loan was sized at 5% of the senior loan amount in order to satisfy risk retention requirements. The senior loan margin directly mirrors the weighted-average coupon on the notes; therefore, there is no excess spread in the transaction. In conjunction with the senior loan, AustralianSuper Pty Ltd advanced a GBP 85.0 million mezzanine facility, which is fully subordinated to the securitised senior loan.

The senior loan refinanced Blackstone's acquisitions since Q1 2020. In particular, it refinanced 38 assets (the original portfolio or United IV subportfolio) that were acquired before October 2020 and seven assets that were acquired between November and December 2020 (the add-on portfolio). The entire 45-asset pool is known as the United V portfolio and was integrated into Blackstone's logistics platform Mileway.

The United V portfolio is characterised by its strong presence of light-industrial assets in and surrounding the Greater London area with 27 of its 45 assets located in London, the South East, and East of England, covering 46.9% of total lettable area and 59.8% of total gross rental income (GRI). CBRE Limited (CBRE) valued the United IV subportfolio at GBP 442.8 million including a 4.9% portfolio premium. The aggregated property values amounted to GBP 422.0 million as of 30 September 2020. Similarly, Cushman & Wakefield (U.K.) LTD (C&W) valued the add-on portfolio and concluded an aggregated market value (MV) of GBP 103.9 million and a portfolio value of GBP 114.3 million. For the purpose of covenant calculations, the portfolio premium was capped at 5%, bringing the whole transaction's portfolio value to GBP 551.8 million.

According to a notice from the issuer dated 17 September 2021, the facility agreement for the senior loan has been amended to allow the partial sale of a property (i.e., Sheffield Business Park, Building 3 which was fully vacant). As a result, the allocated loan amount for the Sheffield Business Park property has been changed from GBP 7,761,380 to GBP 6,394,822.77 and disposal proceeds of GBP 3.1 million were applied to the senior and mezzanine loans in the amounts of GBP 2.48 million and GBP 620,000, respectively. The GBP 2.48 million were then applied pro-rata against the notes (95%) and against the issuer loan (5%) at the February 2022 interest payment date (IPD). Upon completion of the property partial sale, the total portfolio’s MV decreased to GBP 549.6 million.

The senior loan’s performance has been quite stable since issuance. In particular, the latest available servicer report as of the November 2021 IPD reported annual contracted rent at around GBP 26.0 million which, although slightly below the GBP 26.5 million at issuance, represents a 4.5% increase over the GBP 24.8 million recorded in August 2021. The vacancy rate decreased to 5.83% from 8.4% at issuance, with a 10 percentage point (p.p.) increase in occupancy with respect to the previous quarter in August 2021. The senior loan’s debt yield increased slightly to 7.75% from 7.4% at issuance, remaining substantially above the year-one cash trap covenant of 6.1%. Furthermore, as a result of the partial property sale, the senior loan’s loan-to-value (LTV) decreased by 0.2 p.p. to 61.4% in November 2021 from 61.6% at issuance, remaining far below the cash trap covenant of 71.6%.

DBRS Morningstar did not change its underwriting assumptions as at issuance. In particular, DBRS Morningstar maintained its net cash flow (NCF) assumption at GBP 22.7 million which, based on a capitalisation rate of 6.3%, translates to a DBRS Morningstar value of GBP 362.8 million, representing a 34.0% haircut to the most recent portfolio’s MV of GBP 549.6 million.

Similarly to other Blackstone loans, there are no financial default covenants applicable prior to a permitted change of control. The two-year senior loan has three one-year extension options available and is fully hedged with a cap agreement that has a cap strike rate of 1.5% provided by BNP Paribas. To cover potential interest payment shortfalls, Bank of America, N.A. London Branch provided the Issuer with a liquidity facility of GBP 11.4 million at issuance. The liquidity facility covers the Class A, Class B, and Class C notes as well as the corresponding portion of the issuer loan.

The final legal maturity of the notes is in May 2031, five years after the fully extended loan maturity date. DBRS Morningstar believes that this provides sufficient time to eventually enforce the loan collateral and repay the bondholders, given the security structure and jurisdiction of the underlying loan.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many tenants and borrowers. DBRS Morningstar anticipates that vacancy rate increases and cash flow reductions may continue to arise for many CMBS borrowers. In addition, commercial real estate values could be negatively affected, at least in the short term, affecting refinancing prospects for maturing loans and expected recoveries for defaulted loans. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology” (17 December 2021).

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.

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.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include servicer reports provided by CBRE Loan Services Limited, as well as investor and cash management reports provided by U.S. Bank Global Corporate Trust Limited.

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 2 March 2021, when DBRS Morningstar finalised its provisional ratings on the Class A, Class B, Class C, Class D, and Class E notes with Stable trends.

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 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A notes to AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A notes to AA (low) (sf)

Class B Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class B notes to A (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class B notes to BBB (high) (sf)

Class C Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class C notes to BBB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class C notes to BBB (low) (sf)

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class D notes to BB (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class D notes to B (sf)

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class E notes to B (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class E notes to CCC (high) (sf)

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 10 February 2021

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 (17 December 2021),
https://www.dbrsmorningstar.com/research/389947/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 info@dbrsmorningstar.com.