DBRS Morningstar Confirms All Classes of Salus European Loan Conduit No. 33 DAC

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of the following classes of notes due May 2030 issued by Salus (European Loan Conduit No. 33) DAC (the Issuer):

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

All trends are Stable.

Salus (European Loan Conduit No. 33) DAC is a securitisation of GBP 367.5 million floating-rate senior commercial real estate loan advanced by Morgan Stanley & Co. International plc (Morgan Stanley), which was originated in November 2018. To maintain compliance with regulatory requirements, the loan seller holds approximately 5.0% of the senior loan. The loan is secured by a single asset located in Londonthat is known as the Citypoint office building. The asset is a 35-storey office tower totalling 709,236 sf of lettable area. The senior loan is split between two facilities: Facility A, which totals GBP 354.0 million and Facility B (the capex facility), which totals GBP 13.5 million (61.3% LTV). Additionally, there is also a nonsecuritised mezzanine facility, which is contractually and structurally subordinated to the senior facilities and totals GBP 91.9 million (76.6% LTV).

The senior loan refinanced the existing indebtedness of CityPoint Holdings I Limited (the borrower) and provided funding for planned capital expenditures (capex) and tenant incentives. The building is owned and operated by Brookfield Asset Management Inc. (Brookfield), which is a large and experienced commercial real estate operator. The sponsor’s (Brookfield Asset Management) business plan is to use the capex facility to refurbish three floors that former tenants (i.e., Ebiquity Associates Ltd., Morrison & Foerster Ltd., and Mimecast) all vacated on 1 December 2019. The tenants were expected to vacate at the loan’s and DBRS Morningstar treated the tenants’ rented space as vacant in its original underwriting of the property. The loss of the three tenants will lead to depressed cash flows going forward until the sponsor is able to replace the tenants, this may cause the loan to breach the cash trap trigger, which is at 6.75% debt yield, with the current debt yield at 6.88%. If the trigger is breached, this would allow for all excess cash to be trapped and sequentially pay down the notes. There are no financial covenants in place until a permitted change of control so the depressed cash flow from the loss of the three tenants will not cause the loan to breach any financial covenants.

Overall, the property is performing in line with DBRS Morningstar’s expectations at issuance with net rent as of the latest October 2019 servicer report at GBP 25.3 million, which is consistent with the net rent at closing. Additionally, vacancy (excluding the tenants that left on 1 December 2019) was 3.0%, which is slightly lower than the 3.7% vacancy at closing.

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”.

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 on www.dbrs.com at: http://www.dbrs.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.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include Mount Street Global Limited.

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.

This is the first rating action since the Initial Rating Date.

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 on www.dbrs.com.

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

A decrease of 10% and 20% in the DBRS Morningstar net cash flow (NCF), derived by looking at comparable market rents, market occupancies in addition to expense ratios, and capex, would lead to a downgrade in the transaction, as noted below for each class, respectively.

Class A Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class A1 Notes to AA (high) (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class A1 Notes to AA (low) (sf)

Class B Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class A2 Notes to BBB (high) (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class A2 Notes to BBB (sf)

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

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

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 11 December 2018

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.