DBRS Morningstar Takes Rating Actions on Taurus 2019-1 FR DAC

DBRS Rating GmbH (DBRS Morningstar) took the following rating actions on the Commercial Mortgage-Backed Floating-Rate Notes Due February 2031 (the notes) issued by Taurus 2019-1 FR DAC (the Issuer):

-- Class A notes confirmed at AAA (sf)
-- Class B notes upgraded to AA (high) (sf) from AA (low) (sf)
-- Class C notes upgraded to A (sf) from A (low) (sf)
-- Class D notes upgraded to BBB (high) (sf) from BBB (low) (sf)
-- Class E notes upgraded to BBB (low) (sf) from BB (sf)

The trends on the Class A through Class D notes remain Stable, while the trend on Class E notes has changed to Stable from Positive.

The rating upgrades follow the improved performance of the transaction due to the deleveraging of the underlying loan and a stable rental cash flow.

The transaction is a securitisation of 95% interest of an original EUR 249.6 million floating rate five-year senior loan. The loan was originated in April 2019 and advanced by Bank of America Merril Lynch International DAC (BofAML) to the sponsor in the context of a sale-and-lease-back operation between the sponsor and Électricité de France (EDF). BofAML also provided a co-terminus EUR 53.3 million mezzanine term loan, which is structurally and contractually subordinated to the senior loan, hence not part of the transaction.

Colony Capital, the original sponsor, was rebranded as DigitalBridge Group Inc. in June 2021 and subsequently acquired by Fortress Investment Group (Fortress), with the acquisition completing in December 2021. The new sponsor agreed to a customary transition services agreement in which Colony’s asset management division would continue to provide certain services to Fortress for a period of six months until June 2022. The servicer consented to the proposed change of control and waived the borrowers’ obligation to prepay the loan in full. The senior and the mezzanine facilities with the intercreditor agreement were amended. DBRS Morningstar considers Fortress as a strong sponsor and hence did not change the large loan sizing hurdles in its analysis.

The outstanding whole loan amount decreased to EUR 142.0 million, from EUR 194.8 million at the last annual review and EUR 249.6 million at inception. The portfolio currently comprises 161 properties, down from 206 initially. The aggregate value of the properties in the portfolio is EUR 259.5 million according to latest available valuation prepared by CBRE in October 2020. Thus, the resulting loan-to-value ratio (LTV) of 54.7% is down from 63.7% in April 2021. According to the servicer, a new valuation report is currently being prepared and not yet available.

The portfolio mainly comprises office properties (27.9% of the gross lettable area or GLA), light-industrial assets (0.1% of GLA), and a mix of both (71.9%). EDF and its subsidiary Enedis are the main tenants, currently representing 97.2% of the gross rental income (GRI). The remaining 2.8% of the GRI is generated by other public sector tenants. The assets are located across France with the highest concentration in south eastern France, where the top property in the portfolio is located (Marseille).

The servicer reported the issuer net rent at EUR 20.02 million and the debt yield (DY) at 14.1%, up from 12.6% in 2021 and 11.2% at issuance. Metrics have improved considerably from last year, despite the increased vacancy, which stands at 15.6%, up from 9.9% at the last annual review and 4.6% initially. The vacancy has increased mainly due to Enedis terminating a number of leases at expiry. Based on the current lease expiry profile, the vacancy can reach 16.4% by the end of the year and then will remain stable until loan maturity. The weighted-average unexpired lease term (WAULT) stands at 6.2 years, down from 7.3 years in February 2021.

At inception, the strategy was to consolidate a platform of core properties, by investing at least EUR 10.0 million on capital expenditure (capex) and maintenance of assets. Additional capex has also been used in relation to the disposal of assets to add value and facilitate the sale. In the original pool, there were 53 less-liquid assets (liquidation pool). Only 27 properties of the liquidation pool currently remain. Their value is EUR 11.6 million, i.e., 4.5% of the portfolio’s market value. The asset sales take place on a targeted or opportunistic basis, with the majority of the properties sold on an individual basis in the local market. The layout of the properties is particularly attractive to property developers.

The loan deleveraging is in compliance with the target loan amount set for the first three years. The amortisation of the portfolio has occurred mainly through the application of the release amount from the property disposals, but also via cash swept. In May 2021, the surplus cash flow, trapped on the January and on the April 2021 interest payment dates, was applied to the notes. The funds from the surplus cash flow were applied sequentially to the Class A notes, while the release amount from the property disposals was applied on a pro rata basis to the notes.

The loan is a five-year floating rate loan, with interest based on the three-month Euribor rate (subject to a zero floor) plus a margin of 2.16% p.a. The default margin is 2% p.a. The loan is hedged with an interest rate cap strike rate of 1.5% p.a. and the hedging covers 95% of the loan amount. The loan is performing in line with the terms of the facility agreement. During the life of the loan there are tightening financial covenants and cash trap covenants. About 1% of the portfolio is scheduled for amortisation in the fourth and fifth year. The loan’s maturity is in February 2024 with no extension option. The maturity of the notes is in February 2031, providing seven years of tail period after loan maturity.

DBRS Morningstar updated its underwritten net cash flow (NCF) to EUR 17.0 million. This results in a 15.4% haircut to the issuer NCF. DBRS Morningstar’s NCF stability depends on the financial strength of the tenant and DBRS Morningstar changed its assumption in terms of cap rate, increasing it by 50 bps to 8.75% from 8.25% used at the time of initial underwriting. The current DBRS Morningstar value is EUR 193.6 million. The DBRS Morningstar haircut to the latest available valuation increased to 25.4% from 16.4% at the last annual review.

The transaction benefits from a liquidity reserve facility of EUR 6.7 million available through Classes A to Class C notes. Based on the interest hedge rate of 1.6%, DBRS Morningstar estimated that the liquidity reserve would cover 21 months, or 14 months if based on the Euribor cap of 5% after loan maturity.

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 euros unless otherwise noted.

The principal methodology applicable to the rating 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 principal methodology.

A review of the transaction legal documents was not conducted since the most recent rating action. DBRS Morningstar reviewed transaction notices outlining amendments of the loan level legal documents.

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 sources of data and information used for this rating include quarterly investor reports provided by Situs Asset Management Limited, as well as EIRP files and latest available tenancy schedules.

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 April 2021, when DBRS Morningstar confirmed its ratings on Class A through Class E notes, and maintained the Stable trend through Class A to D notes and the Positive trend on the Class E notes.

The lead analyst responsibilities for this transaction have been transferred to Patrizia Catanese.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

Class A notes 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 AAA (sf)

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

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

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

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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 Limited for use in the United Kingdom.

Lead Analyst: Patrizia Catanese, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date:25 March 2019

DBRS Ratings GmbH
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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 (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.