DBRS Morningstar Confirms Rating on Logicor 2019-1 UK PLC

DBRS Ratings Limited (DBRS Morningstar) confirmed its AA (sf) rating on the Notes issued by Logicor 2019-1 UK PLC. The trend on the rating is Stable.

Logicor 2019-1 UK PLC is the secured corporate bond issuance of a GBP 900 million fixed-rate loan secured by 64 logistics properties advanced to UK Logistics Holdco I S.a.r.l. (the Borrower). The Borrower is controlled by Eurocor II S.à r.l. and Eurocor III S.à r.l. (together, the Sponsors), which, in turn, are ultimately owned by an investment group that includes China Investment Corporation (CIC) and Blackstone Group (Blackstone). The senior loan (42.7% loan-to-value (LTV) ratio) is backed by a portfolio of 64 logistics units located throughout England and a single asset in Scotland. By market value (MV), the majority of the assets are in the East Midlands (33.6%), the West Midlands (22.3%), and the South East (16.8%) of England. The asset quality of the portfolio is strong with a number of properties located in the Golden Triangle area of the East Midlands.

The transaction portfolio has a net lettable area of 19.32 million square feet, as of August 2020, an in-place rent of GBP 105.6 million, and a weighted-average-lease-length (WALL) of 6.2 years. The portfolio currently is 97.5% occupied by total area versus an occupancy rate of 95.5% at closing. The CBRE Group (CBRE) valued the portfolio at GBP 2,109.2 million with a net initial yield of 4.67% on 30 June 2019. The top ten tenants contribute to 51.1% of in-place rent, with the top two tenants contributing 18.2%. The two largest assets by value (7.7% of the total MV) are located in Andover and Doncaster. The performance of the portfolio over recent months has shown that it has not been significantly affected by the Coronavirus Disease (COVID-19The borrower indicated that some tenants deferred their rental payments; however, the debt yield of 10.46% has not deviated materially since issuance, and the borrower anticipates that that any deferred rental payments will be collected by the end of the year or early 2021.

The senior loan is interest-only with no amortisation and bears interest at a fixed rate of 1.875% per year.
In DBRS Morningstar’s view, the senior facility represents moderate-to-low leverage financing with a 42.7% LTV based on CBRE’s valuation of GBP 2,109.2 million on 30 June 2019. DBRS Morningstar’s calculated LTV is 66.1% based on its value of GBP 1,362 million.

The loan structure does not include any default financial covenants prior to a permitted change of control, after which the default covenants are based on the LTV and DY. The LTV covenant is set at the lower of 70.0% LTV and LTV at the date of the permitted change of control plus 25.0%. The DY covenant is set at the higher of 75% of the DY on the permitted change of control date and 7.5%. The cash trap covenants are set at an LTV of 60% while the DY cash trap covenants are at 8.5%.

COVID-19 CONSIDERATIONS
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.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar 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.

ESG CONSIDERATIONS

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.

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

The principal methodology applicable to the rating 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 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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include Morgan Stanley & Co. International PLC, Goldman Sachs International, and CBRE Loan Services Limited.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

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 this rating 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 23 October 2019 when DBRS Morningstar finalised its provisional ratings on the notes issued by Logicor 2019-1 UK PLC.

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.dbrsmorningstar.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):

Class A Notes Risk Sensitivity:
--10% decline in DBRS Morningstar net cash flow (NCF), expected rating of Class A Notes to A (low) (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class A Notes to BBB (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.

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: Christian Aufsatz, Managing Director
Initial Rating Date: 23 October 2019

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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 (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 (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.

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.