DBRS Morningstar Confirms Ratings on Oranje (European Loan Conduit No. 32) DAC with Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage-Backed Floating Rate Notes due November 2028 issued by Oranje (European Loan Conduit No. 32) DAC (the Issuer) as follows:

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

All trends are Stable.

The rating confirmations reflect the transaction’s stable performance over the past 12 months, which has been not materially affected by the Coronavirus Disease (COVID-19) pandemic, despite the underlying loans’ exposure to the office and retail sectors.

At issuance, the transaction comprised five Dutch commercial real estate loans (i.e., the Cygnet, Cheetah, Phoenix, Desert, and Legion loans) advanced by Morgan Stanley Bank N.A., which totaled EUR 207.4 million. The Cygnet, Cheetah, and Phoenix loans were advanced as refinancing facilities whereas the Desert and Legion loans were advanced as acquisition facilities.

The Desert loan was already prepaid in full in November 2019. The Cygnet loan was prepaid in February this year, with the payment applied pro rata to the notes on the February interest payment date (IPD). In October 2021, the Legion loan was also prepaid in full, with the proceeds applied pro rata to the notes on the November 2021 IPD.

As a result, only the EUR 84.35 million Phoenix and EUR 44.45 million Cheetah loans are still outstanding. Both are performing and not in cash trap, with stable performance since issuance. In accordance with the Facility Agreement, Bryant Park Netherlands Acquisition I B.V. (the Phoenix Borrower) has extended the Phoenix loan for a further year to 15 August 2022, with another one-yar extension option available. The Cheetah loan’s maturity date is 15 February 2023, with no extension options available.

The Phoenix loan was and, following loan prepayments, remains the largest loan in the transaction. It represented 51.5% of the total portfolio’s market value (MV) as at issuance, and now accounts for 65.6% of the outstanding portfolio’s MV. Since then, four properties have been sold, resulting in an overall 15.2% decrease in the outstanding loan balance to EUR 84.35 million as at the August 2021 IPD from an original balance of EUR 99.5 million. In particular, the property sold in August this year is the office building at La Guardiaweg 4–24 in Maincourt, which, with an allocated loan amount of EUR 7.72 million and a valuation of EUR 21.4 million, was the third largest in the loan portfolio. The asset was almost fully occupied by Bouwinvest REIM B.V., a Dutch property investment fund/portfolio manager with a lease contract expiring in December 2030 and no breaks, contributing to almost 7.89% of the total portfolio’s rent. As a result of the property sale, the Phoenix loan was prepaid by EUR 8.49 million at the August IPD and is currently backed by 14 properties, which Savills Advisory Services Limited (Savills) valued at EUR 173.61 million in March 2021. The Phoenix loan's debt yield (DY) increased slightly to 12.73% as at the August IPD , well above the cash trap covenant of 10.50%. The current LTV is 48.59%, well below the cash trap covenant of 61.15%. Vacancy across the portfolio increased to 20.79% (from 16.07% last year), while contractual rent fell to EUR 12.93 million (from EUR 14.10 million last year), as shown in the latest available investor report released in August 2021. The increase in vacancy in the last 12 months was mainly driven by three tenants – with expired leases – vacating the largest property in the Phoenix portfolio, i.e. Zuidtoren, a multi-tenant 21-storey office block situated within the business park of Beukenhorst-Zuid in Hoofddorp, accounting for circa 26.2% of the total portfolio’s MV. According to Savills’ latest available valuation report, the property is in a good state of repair and suitable for use as a multi-tenant office space, with marketable floor areas that can easily be adapted dependent on the tenant’s preferences. It is currently being renovated, which will facilitate the re-letting process of the vacant units and is expected to strengthen occupancy in the upcoming quarters.

The Cheetah loan is backed by a portfolio of 43 properties, of which 26 are retail properties and 17 are multifamily residential properties. The retail part of the portfolio predominantly comprises necessity retail (i.e., supermarket-anchored properties) in cities and towns, and destination retail typically focused on DIY and homeware located in bespoke retail parks on the outskirts of major cities. This facilitated the loan’s stable performance throughout the pandemic, as grocery and DIY retailers were not required to close their stores. Rental income has remained stable since issuance, with EUR 6.46 million reported at the August 2021 IPD. There have been no asset sales and the loan is performing in line with its covenants, with the DY increasing to 10.43% and the LTV declining to 48.8%. A step-down yearly amortisation rate of 1.0% of the original loan balance currently applies to the Cheetah loan, as its LTV had fallen below the 50.0% threshold on the August 2021 IPD. Previously, a 2.0% p.a. amortisation rate applied. Since issuance, the loan has amortised 7.8% to EUR 44.4 million from EUR 48.2 million. Following the latest revaluation in December 2020 conducted by Jones Lang LaSalle Incorporated (JLL), the portfolio’s MV has increased to EUR 91.1 million; this an increase of 29.8% since origination (2017) and 11.1% compared with the pre-pandemic valuation (2019). The increase in value appears to be driven by the retail portion of the portfolio, amid improvements in vacancy, as well as good locations and quality of assets.

DBRS Morningstar maintained its underwriting assumptions constant since the last annual review but updated its net cash flow (NCF) assumption for the Phoenix loan, to reflect the disposal of the property in Maincourt. The new DBRS Morningstar NCF for the Phoenix loan is EUR 8.72 million, which, based on a cap rate of 7.25% as at underwriting, translates to a DBRS Morningstar value of EUR 120.3 million, representing a 30.7% haircut to the latest appraised MV of EUR 173.6 million. The DBRS Morningstar value for the Cheetah loan remained constant at EUR 56.4 million, which represents a 38.0% haircut to the latest appraised MV of EUR 91.1 million.

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. In addition, CRE values could be negatively affected, at least in the short term, affecting refinancing prospects for maturing loans and expected recoveries for defaulted loans. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

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.

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: 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 these ratings include servicer reports, updated rent roll and valuation reports provided by Mount Street Mortgage Servicing Limited, as well as investor and 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 4 December 2020, when DBRS Morningstar confirmed its ratings on the notes with Stable trends.

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

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

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

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

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class E notes to BB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class E notes to B (low) (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 Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 6 November 2018

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Geschäftsführer: Detlef Scholz
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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 (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.
-- 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.