DBRS Morningstar Finalises Provisional Ratings on Last Mile Logistics Pan Euro Finance DAC

DBRS Ratings GMBH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Last Mile Logistics Pan Euro Finance DAC (the Issuer):

-- Class A notes at AAA (sf)
-- Class B notes at AA (sf)
-- Class C notes at A (sf)
-- Class D notes at BBB (low) (sf)
-- Class E notes at BB (sf)
-- Class F notes at B (high) (sf)

All trends are Stable.

Last Mile Logistics Pan Euro Finance DAC is a securitisation of a EUR 510.2 million senior commercial real estate (CRE) loan backed by a pan-European portfolio of light industrial and logistics assets managed collectively by Mileway and owned by Blackstone Real Estate Partners (Blackstone or the Sponsor). The senior loan is divided into two term facilities—term A and term B—with term facility A being advanced to non-Irish borrowers and term facility B only to Irish borrowers. On 15 June 2021, Barclays Bank Ireland Plc, Goldman Sachs Bank Europe SE, and GS EMI Ireland DAC (the loan sellers) advanced the senior loan to the borrowers. Then, at transaction closing, the Issuer purchased the loan from the loan sellers using the 95% of the note issuance proceeds and an issuer loan. The issuer loan is sized to represent at least 5% of the securitised interests to comply with the applicable regulatory requirements. Barclays Bank Plc and Goldman Sachs International are joint arrangers of the issuance.

Unlike some of the recently issued Mileway securitisations, the Issuer also issued Class X1 and Class X2 notes. As such, the excess spread is distributed to the Class X noteholders. Furthermore, there is a EUR 102.0 million mezzanine facility, representing 76.4% mezzanine loan-to-value (LTV), that is contractually and structurally subordinated to the securitised senior loan.

The senior facility is denominated in euros (EUR) whereas the Danish assets and income, which amounts to approximately 6.9% of the portfolio aggregated market value (MV), are denominated in Danish kroner (DKK). In the absence of a currency swap, the borrower takes on the foreign exchange risk between the two currencies. However, the Danish central bank has pegged the DKK exchange rate to EUR and historical data showed little fluctuation in the DKK/EUR exchange rate.

The senior loan is backed by 113 predominately light industrial or logistics assets across seven European countries and was accumulated through four portfolio acquisitions and one single-asset acquisition by Blackstone in the past 18 months. However, as of the date of this press release, the acquisition of the Choisy asset was not completed and its corresponding allocated loan amount will either be held by the facility agent until the completion of the acquisitions or be used to prepay the senior loan after the delayed completion property longstop date. As such, the general purpose of the senior loan is to refinance the acquisition debts of the borrowers.

Jones Lang LaSalle Limited and its affiliates (JLL) valued the portfolio on 13 May 2021 for a total MV of EUR 801.4 million, including a 5% portfolio premium, or EUR 763.2 million based on the aggregated MV of each property. Most of the MV is concentrated in Germany (29.7% of aggregated MV), France (20.8%), and the Netherlands (17.5%). DBRS Morningstar also noted that although the Danish part of the portfolio is limited to 6.9% of the aggregated MV, it is concentrated in two Danish assets. As per the May 2021valuation, these two assets generate a gross rental income (GRI) of DKK 26.1 million or EUR 3.5 million (7.6% of the portfolio GRI) per annum. As the income from and value of these Danish assets are denominated in DKK, whose exchange rate is pegged to the euro, and there is absence of any currency hedging between DKK and EUR, DBRS Morningstar has applied an exchange rate of DKK 7.6282 per EUR, the highest exchange rate allowed by the Danish central bank, for all non-AAA (sf)-rated investment-grade stress scenarios and a higher exchange rate of 12.1086 DKK per EUR in the AAA (sf) stress scenario.

Although the outbreak of the Coronavirus Disease (COVID-19) has negatively affected all CRE sectors, the light industrial/logistics assets seem to fare better than the other asset types. Based on the collection data provided by the Sponsor, for 57 out of the 113 assets that were already under management by Mileway, 95.3% of the rent was collected as of Q1 2021.

The two-year senior loan (the initial loan term) has three one-year extension options, which can be exercised if certain conditions are met. Within three months following the transaction closing, the borrower will purchase an interest cap agreement to hedge against increases in the interest payable under the loan. The cap agreement will cover 100% of the outstanding loan balance with a strike rate of 1.25%. The strike rate is also required to ensure a senior hedged interest coverage ratio of not less than two times. After the expected note maturity, the Euribor rate will be capped at 4%.

Similar to other Blackstone-sponsored loans, there are no financial covenants applicable prior to a permitted change of control (CoC) but cash trap covenants are applicable both prior and post a permitted CoC. The cash trap covenants are set at 73.67% LTV while the debt yield (DY) covenant is set at 7.55% for the first and second year and will step up to 7.93% on and from year three. After a permitted CoC, the financial default covenants on the LTV and the DY will be applicable; they are set, respectively, at 10% above the LTV at the time of permitted CoC and the higher of 85% of the DY at the time of permitted CoC and 7.34%. The loan will also start to amortise at 1% per year after a permitted CoC. However, it should be noted that to be qualified as a permitted CoC, the LTV should not exceed 63.67% and the new owner needs to be a qualifying transferee.
 
Meanwhile, DBRS Morningstar noted that the asset under management (AUM) criteria for a qualifying transferee has been lowered compared with previous DBRS Morningstar-rated Mileway securitisations. The worldwide CRE AUM limit has been lowered to EUR 2 billion from EUR 5 billion and the European CRE AUM limitation was removed completely. DBRS Morningstar believes that the current requirement is weaker than the previous transactions and may lead to higher rating sensitivity should a permitted CoC occur. The rating impact, however, is partially mitigated by the qualified asset manager requirement, which remains unchanged except the payment to an affiliated qualifying asset manager is no longer subordinated to the secured liability.

In addition, DBRS Morningstar noted that the facility agent has a weaker control on the cash trap account as compared with previous CMBS transactions rated by DBRS Morningstar. In this transaction, the facility agent will only have sole signing right on the cash trap account after a permitted CoC or a loan event of default has occurred whereas, normally, the facility agent will have sole signing right on the cash trap account from day one. The senior facility agreement features a new permitted return concept, which effectively allows the sponsor to withdraw the equity it has injected since the start of a cash trap event from the cash trap account. DBRS Morningstar views these new features to be credit negative and has adjusted its hurdles accordingly.

To cover any potential interest payment shortfalls, the Issuer overissued EUR 11.4 million Class A notes to fund the issuer liquidity reserve. In parallel, the issuer loan is upsized by EUR 0.6 million to fund the issuer loan share of liquidity reserve. The liquidity reserve covers the Class A, Class B, and the relevant portion of the issuer loan. DBRS Morningstar estimates that the commitment amount at closing is equivalent to approximately 20 months of coverage based on the hedging terms mentioned above or approximately nine months of coverage based on the 4% Euribor cap. The liquidity reserve will be reduced based on note amortisation, if any, and in the event of a substantial MV decline of the property portfolio.

The Class E to Class F notes are subject to an available funds cap where the shortfall is attributable to a reduction in the interest-bearing balance of the senior loan that results from prepayments or by a final recovery determination of the senior loan.

The legal final maturity of the notes is in August 2033, seven years after the fully extended loan maturity date. DBRS Morningstar believes that this provides sufficient time to enforce the loan collateral and repay the bondholders, given the security structure and jurisdiction of the underlying loan.

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 continue to arise for many CMBS borrowers, some meaningfully. In addition, commercial real estate values will be negatively affected, at least in the short term, affecting refinancing prospects for maturing loans and expected recoveries for defaulted loans.

On 16 April 2020, DBRS Morningstar published a set of macroeconomic scenarios for the 2020–22 period in select economies. These scenarios were last updated on 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-2021-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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 ratings is: “European CMBS Rating and Surveillance Methodology” (26 February 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://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.

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 these ratings include the data tape as of May 28 2021 provided by the arrangers, various technical due-diligence reports provided by Arcadis and Hollis, a valuation report prepared by JLL, additional reports prepared by the sponsor and/or its delegates, and legal documents prepared by Clifford Chance LLP.

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

DBRS Morningstar was 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.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

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

The lead analyst responsibilities for this transaction have been transferred to Daniel Rakhamimov.

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 NCF, expected rating of Class A notes at AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A notes at AA (high) (sf)

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

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

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

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

Class F Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class F notes at CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class F notes at 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: http://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 Limited for use in the United Kingdom.

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Mirco Iacobucci, Senior Vice President
Initial Rating Date: 21 June 2021

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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: http://www.dbrsmorningstar.com/about/methodologies.

-- European CMBS Rating and Surveillance Methodology (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021), https://www.dbrsmorningstar.com/research/376314/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.
-- Currency Stresses for Global Structured Finance Transactions (18 February 2021), https://www.dbrsmorningstar.com/research/373856/currency-stresses-for-global-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: http://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.