DBRS Morningstar Confirms Rating on Logicor 2019-1 UK PLC; Maintains Stable Trend

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

The rating confirmation follows the transaction’s stable performance in spite of the Coronavirus Disease (COVID-19) pandemic, which has had no impact on rent collections based on the latest servicer report for the August 2021 interest payment date (IPD).

Logicor 2019-1 UK PLC is the secured corporate bond issuance backed by 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 loan (42.7% loan-to-value (LTV) ratio at issuance) 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 top 10 tenants contribute to 50.6% of in-place rent, with the top two tenants contributing 18.3%, according to the latest available servicer report. The two largest assets by value (7.7% of the total MV) are located in Andover and Doncaster.

The transaction portfolio has a net lettable area of 19.28 million square feet, as of August 2021, an in-place rent of GBP 108.6 million, and a weighted-average-lease-length (WALL) of 5.7 years. The portfolio currently is 96.9% occupied by total area versus an occupancy rate of 95.5% at closing.

The performance of the portfolio has been strong over the last 12 months, with no material deviation from issuance and no significant impact from the pandemic outbreak. The CBRE Group (CBRE) revalued the portfolio at GBP 2,179.6 million in December 2020. As a consequence, the loan LTV reduced slightly to 41.29% at the August 2021 IPD, far below the cash trap threshold of 60%. The loan debt yield (DY) increased to 11.55%, being consistently above the cash trap level of 8.5%.

DBRS Morningstar kept its net cash flow (NCF) assumption constant at GBP 85.7 million as at underwriting. In addition, DBRS Morningstar maintained its cap rate at 6.30% as at underwriting, which translates to a DBRS Morningstar stressed value of GBP 1,361 million, representing a 37.5% haircut on the most updated market value.

The loan is non-amortising with bullet repayment at maturity date. The final legal maturity of the notes is expected to be on 17 November 2031, five years after the loan maturity (15 November 2026). Given the security structure and jurisdiction of the underlying loan, DBRS Morningstar believes this provides sufficient time to enforce on the loan collateral, if necessary, and repay the noteholders. The loan bears interest at a fixed rate of 1.875% per year.

A liquidity facility with an initial commitment of GBP 14,100,000 was entered into by the Issuer at closing with BNP Paribas. The size of the liquidity facility will decrease based on the principal amount outstanding of the notes. No drawings have been made under the liquidity facility.

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%.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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 rating 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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include servicer reports provided by CBRE Loan Services Ltd and U.S. Bank Global Corporate Trust Limited since issuance.

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 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 2020 when DBRS Morningstar confirmed its rating on The Notes and maintained the Stable trend.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at 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):

Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar net cash flow (NCF), expected rating of The Notes to A (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of The 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. 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 GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 2 October 2019

DBRS Ratings Limited
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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 (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/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.