DBRS Morningstar Confirms Ratings on BAMS CMBS 2018-1 DAC; Trends Remain Stable

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating Rate Notes due May 2028 issued by BAMS CMBS 2018-1 DAC (the Issuer):

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

The trend on all ratings remains Stable.

The rating confirmations follow the transaction’s stable performance over the last 12 months and against the backdrop of the Coronavirus Disease (COVID-19) pandemic, as the logistics assets securing the loan have largely been sheltered from the main economic impact.

The borrower advised that during the lockdown period 8% of the tenants requested some form of rent relief, which resulted in 3% of the total portfolio either receiving rental deferrals or switching to monthly payments. However, as of Q2 2021 the number of tenants on coronavirus-related payment plans has fallen. The borrower has also added 21 new tenants in the latest quarter, achieving a total annual contracted rent of GBP 29,468,522 and a passing rent of GBP 26,655,962, up 4.2% and 0.8%, respectively, compared with the previous quarter.

As of May 2021, the portfolio was 87.6% occupied with a weighted-average lease-to-break of 4.01 years, a slight decrease from 4.07 years in Q4 2020. The weighted-average lease term (WALT) increased from 6.2 to 6.3 years during the last quarter. DBRS Morningstar notes that there is no significant deviation in performance of the portfolio since underwriting, with rental income remaining in line with issuance and occupancy improving in the latest quarter following the marginal pandemic-related decline. The vacancy rate is currently at 12.4%, with DBRS Morningstar assuming a vacancy of 12.5% in its underwriting. DBRS Morningstar understands that the business model adopted by the sponsor is to increase the headline rents of each scheme by implementing improvement capex, and as such there has been some tenant churn to improve the rental profile. This is highlighted by the fact that the rental income has not declined as a result of the increase in vacancy since issuance.

The initial senior loan maturity date was 15 May 2020. However, the borrower has exercised two (of the three) extension options, extending the loan maturity to 15 May 2022. If the third 12-month extension option is exercised, the loan maturity would be extended to May 2023. The legal final maturity of the notes is expected to be in May 2028, five years after the maturity of the fully extended loan term. Given the security structure and jurisdiction of the underlying loan, DBRS Morningstar believes that this provides sufficient time to enforce on the loan collateral, if necessary, and repay the bondholders.

Following a market revaluation in November 2019, there was a small 1.5% drop in value, showing that the portfolio metrics have not significantly deteriorated since issuance. The LTV is still below the cash trap threshold of 75%, but following the second anniversary of the utilisation date, the debt yield (DY) threshold increased to 8.5% from 8% previously. The current DY of 8.29% is below the cash trap floor and, therefore, a cash sweep event is now in place. As of Q2 2021, the amount held in the cash trap account is nil because of payments made toward corporate expenses, capex, and irrecoverable costs. The loan has no default covenants until a permitted change of control event is triggered, after which the default covenants will be based on the LTV and DY. The LTV covenant is set at 77.5% and the DY covenant is set at 7.4%.

BAMS CMBS 2018-1 DAC is the securitisation of a GBP 315.3 million (67.5% loan-to-value or LTV at issuance) floating-rate senior commercial real estate loan advanced by Morgan Stanley Principal Funding, Inc. (novated from Morgan Stanley Bank N.A.) and Bank of America Merrill Lynch International Limited to borrowers sponsored by Blackstone Group L.P. (Blackstone or the Sponsor). The acquisition financing was also accompanied by a GBP 58.4 million (80% LTV) mezzanine loan granted by LaSalle Investment Management and Blackstone Real Estate Debt Strategies (BREDS), each holding 51% and 49% interest of the mezzanine loan, respectively. BREDS, however, is disenfranchised and thus cannot exercise any voting rights so long as Blackstone holds equity interest in the portfolio. The mezzanine loan is structurally and contractually subordinated to the senior facility and is not part of the transaction.

The senior loan is secured by 59 urban logistic and multi-let industrial properties. The majority of the assets are located along the M6 motorway between Birmingham and Manchester, just outside of the “Golden Triangle” of the UK logistics market (for more information regarding the portfolio, please refer to the related DBRS Morningstar rating report). As of May 2021, the portfolio is let to 311 unique tenants for a total annual contracted rent of GBP 29,468,522. The five main tenants account for 14.13% of the total gross rent across the portfolio.

The transaction benefits from a liquidity support facility of GBP 7 million, which is provided by Bank of America N.A., London Branch. The liquidity facility can be used by the Issuer to fund expense shortfalls (including any amounts owed to third-party creditors and service providers that rank senior to the notes), property protection shortfalls, and interest shortfalls (including with respect to deferred interest, but excluding default interest and exit payment amounts) in connection with interest due on the Class A and Class B notes and, after Class A and Class B notes have been paid down, the Class C notes in accordance with the relevant waterfall. DBRS Morningstar estimated the 12-month coverage based on a stressed Libor of 2.32%. The loan hedge has a cap strike rate of 2% but DBRS Morningstar has stressed this as the loan is 95% hedged. The coverage based on a Libor margin cap of 5% is seven months.DBRS Morningstar notes the cessation of LIBOR will occur at the end of the year and acknowledges the Servicer, has determined that a LIBOR replacement event has occurred and is requesting consultation with the Noteholders to determine a suitable replacement base rate in respect of the Notes.

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, 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 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-tocredit-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-coronaviruscovid-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 British pound sterling 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: 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.

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/381451/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include servicer reports provided by Mountstreet Mortgage Servicing Limited since issuance, as well as cash management reports provided by U.S. Bank Global Corporate Trust 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 21 July 2020 when DBRS Morningstar confirmed its ratings on the notes issued by BAMS 2018-1 DAC.

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

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

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

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

These ratings are endorsed by DBRS GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: Mirco Iacobucci, Senior Vice President
Initial Rating Date: 27 June 2018

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600

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 (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: 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.