DBRS Morningstar Confirms Rating on Class A Issued by Salus (European Loan Conduit No. 33) DAC with Stable Trend; Maintains Under Review with Negative Implications Status on Class B to Class D

DBRS Ratings Limited (DBRS Morningstar) confirmed its rating on the following class of commercial mortgage-backed floating-rate notes due January 2029 issued by Salus (European Loan Conduit No. 33) DAC (the Issuer):

-- Class A at AAA (sf)

The trend on the Class A notes is Stable.

DBRS Morningstar also maintained the Under Review with Negative Implications (UR-Neg.) status on the following classes of notes in the transaction:

-- Class B rated AA (sf)
-- Class C rated A (low) (sf)
-- Class D rated BBB (sf)

RATING RATIONALE
The maintenance of the UR-Neg. status on the Classes B to D notes reflects the persistent uncertainty around the securitised asset’s revaluation. As anticipated in its press release dated 15 December 2022, DBRS Morningstar expects rising interest rates to lead to higher capitalisation rates in the next 12 months, therefore exposing the asset to a potential market value decline since the last valuation dated September 2021.

As a result, DBRS Morningstar will maintain the UR-Neg. status until DBRS Morningstar receives a copy of the new valuation report for the securitised asset. In particular, according to the recently published servicer report as of the January 2023 interest payment date (IPD), the new valuation report is expected to be finalised and publicly released by the April 2023 IPD.

The transaction is a securitisation of a GBP 367.5 million floating-rate senior commercial real estate loan that Morgan Stanley & Co. International plc (Morgan Stanley) advanced in November 2018 to CityPoint Holdings I Ltd., which is controlled by Brookfield Asset Management Inc. (the sponsor). The senior loan is split into two pari passu facilities: Facility A, which totals GBP 354.0 million, and Facility B—the capital expenditure (capex) facility—which totals GBP 13.5 million. Facility A refinanced the borrower’s existing debt whereas the capex facility financed some refurbishment works that the sponsor planned at issuance. Additionally, there is a nonsecuritised mezzanine facility totalling GBP 91.9 million that is contractually and structurally subordinated to the senior facilities.

The senior loan is secured by a single asset known as the Citypoint office building located in the City of London. The asset is a 36-storey office tower that was originally built for British Petroleum Plc in 1967. It is one of the largest office buildings in the City of London, and was subject to a comprehensive reconstruction in 2001 and to several refurbishment works that were completed in 2021. The building offers 704,657 square feet (sf) of office space and more than 60,000 sf of retail space, including several restaurants as well as the largest health club in the square mile, Nuffield Health.

In September 2021, Knight Frank LLP revalued the single asset at GBP 740 million, which is 16.5% higher than the previous valuation of GBP 635 million as of January 2020 and 23.3% higher than the valuation of GBP 600 million in October 2018, both of which Jones Lang LaSalle Inc. conducted. As a result, the senior loan’s loan-to-value ratio decreased to 49.7% in January 2023 from 61.3% at issuance. DBRS Morningstar’s value stands at GBP 486.5 million, resulting in a 34.3% haircut to the latest valuation as of September 2021.

The senior loan was initially scheduled to mature on 20 January 2022 with two one-year conditional extension options available to the borrower. The borrower exercised the first extension option, thus extending the senior loan’s maturity to 20 January 2023 (the first extended senior loan maturity date). According to a notice from the Issuer dated 9 January 2023, the borrower successfully extended the senior loan for another year to 20 January 2024 (the second extended senior loan maturity date) following satisfaction of the required conditions. In particular, the borrower entered into a new interest rate cap agreement with Wells Fargo Bank, N.A. The cap agreement provides for a strike rate of 2.5% and will expire on the second extended senior loan maturity date.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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” (14 December 2022), https://www.dbrsmorningstar.com/research/407379/european-cmbs-rating-and-surveillance-methodology.

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.

DBRS Morningstar is undertaking a review and will remove the rating from this status as soon as it is appropriate.

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/401817/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 data from the servicer report published by Mount Street Mortgage Servicing 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 15 December 2022, when DBRS Morningstar confirmed its rating on Class A with a Stable trend and placed its ratings on Classes B to D UR-Neg.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):

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

The ratings on the Class B to Class D notes are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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.

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: Mark Wilder, Senior Vice President
Initial Rating Date: 11 December 2018

DBRS Ratings Limited
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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 (14 December 2022), https://www.dbrsmorningstar.com/research/407379/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/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 (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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.