DBRS Morningstar Confirms Ratings on Usil European Loan Conduit No. 36 DAC

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by Usil European Loan Conduit No. 36 Designated Activity Company (Usil Eloc No. 36 DAC, or the Issuer):

--Class RFN Notes at AAA (sf)
--Class A-1 Notes at AAA (sf)
--Class A-2 Notes at AAA (sf)
--Class B Notes at AA (low) (sf)
--Class C Notes at A (low) (sf)
--Class D Notes at BBB (sf)
--Class E Notes at BB (high) (sf)
--Class F Notes at B (high) (sf)

All notes carry Stable trends.

Usil ELoC 36 DAC is the securitisation of a EUR 723.3 million (EUR 723.9 million at issuance), floating-rate senior commercial real estate loan (the senior loan) advanced by both Morgan Stanley Principal Funding, Inc. and Morgan Stanley Bank, N.A. to borrowers sponsored by Blackstone Group L.P. (Blackstone, or the Sponsor). The senior loan is backed by a portfolio of 99 German assets (100 at inception) that are predominantly light-industrial and warehouse properties, which are part of the Mileway logistics platform. The loan refinanced the original acquisition loan and funded a progressive capital expenditure (capex) programme. In addition to the senior loan, the transaction includes a EUR 105.6 million mezzanine loan, which is structurally and contractually subordinated to the securitised senior loan.

As part of the senior loan, there is a EUR 44.8 million capex facility and a further EUR 6.9 million from the mezzanine loan to support Blackstone’s EUR 66 million capex budget over the initial term of the loan. Despite the current outbreak of the Coronavirus Disease (COVID-19) pandemic, the borrower has reported a total EUR 5.5 million capex spending in Q2 2020. As of the August 2020 interest payment date (IPD), DBRS Morningstar estimated that approximately EUR 10 million of the senior capex facility has been used.

The portfolio has been performing relatively steadily since issuance with contracted gross rent remaining above EUR 62.0 million and the weighted-average unexpired lease term remaining above three years. Meanwhile, the vacancy has decreased slightly from 15.6% at issuance to 13.9% in August. DBRS Morningstar has noted a stronger performance improvement in Q2 2020 with higher rental income and lower vacancy. Nevertheless, a couple of disruptive factors have brought the performance level down compared with the issuance level in Q3 2020.

In April 2020, there was a fire incident at the Louis-Krages-Str 30 asset, the largest asset by gross rental income (GRI). The fire destroyed units D9-D18, totalling circa 30,000 square metres, and damaged units C7-C12. This resulted in rental losses as well as reinstatement costs, which are expected to be covered by the insurance. DBRS Morningstar noted that at issuance the Sponsor had already planned to build more warehouse units at the eastern end of the asset, so it remains to be seen whether the development and the rebuild plans will interfere with each other.

The current coronavirus pandemic has also drove various tenants to ask for rental relief. Per the August 2020 investor report, a total EUR 569,261 in rent relief has been granted covering 26 out of 74 requests. This represents less than 1% of the GRI.

As a result, DBRS Morningstar noted that the net rental income has declined to EUR 56.9 million at Q3 2020 IPD from EUR 62.1 million at Q2 2020 IPD. The drop can be partially explained by an increase in rent arrears to EUR 4.0 million from EUR 2.4 million during this period. DBRS Morningstar is waiting for the borrowers to provide some clarifications on the arrears and the drop in net rent. As such, only the income and costs associated with the disposed Carolus-Magnus Str 40-60 asset were removed, whereas the other underwriting assumptions remained the same as issuance The updated DBRS Morningstar net cash flow is EUR 49.1 million, which resulted in an updated stressed value of EUR 744.4 million..

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, CRE values will be negatively affected, at least in the short term, impacting refinancing prospects for maturing loans and expected recoveries for defaulted loans.

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 euros unless otherwise noted.

The principal methodology applicable to the ratings 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 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 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 these ratings include investor reports since issuance from MountStreet Global 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 1 November 2019, when DBRS Morningstar finalised its provisional ratings on the notes

The lead analyst responsibilities for this transaction have been transferred to Rick Shi.

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 to the parameters used to determine the ratings (the Base Case):

Class RFN Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class RFN rating of AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class RFN rating of AAA (sf)

Class A-1 Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class A-1 rating of AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class A-1 rating of AAA (sf)

Class A-2 Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class A-2 rating of AA (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class A-2 rating of A (sf)

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

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

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

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

Class F Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected Class F rating of CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected Class F rating of CCC (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 GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 21 October 2019

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259]

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.