DBRS Morningstar Confirms Rating on Logicor 2019-1 UK PLC with 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 confirmation reflects the transaction’s continued stable performance over the last year, with the loan performing in line with the terms outlined in the facility agreement.

The transaction is a 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 are in turn ultimately owned by an investment group that includes China Investment Corporation and the Blackstone Group. The loan, with a loan-to-value (LTV) ratio of 42.7% at issuance, is backed by a portfolio of 64 logistics units located throughout England and a single asset in Scotland.

Based on the most recent valuation dated December 2021, the majority of the assets are in the East Midlands (33.0%), West Midlands (21.9%), and South East (18.7%) areas. The portfolio’s asset quality is strong with a number of properties located in the Golden Triangle area of the East Midlands, which is considered a prime logistics location because of its accessibility. There has been no release of assets from the portfolio.

The top 10 tenants remain unchanged with respect to issuance and contribute approximately 52% of in-place rent, with the top two tenants contributing 18%, according to the latest available servicer report. The two largest assets by value, representing 7.58% of the total market value (MV), are located in Andover and Tamworth.

As of August 2022, the transaction portfolio had a net lettable area of 19.28 million square feet, an in-place rent of GBP 107.0 million, and a weighted-average lease term of 4.87 years. In-place rent at issuance was GBP 102.3 million. The portfolio’s current occupancy rate is currently 95.8% by total area versus an occupancy rate of 95.5% at closing.

The portfolio continued to exhibit strong performance over the last 12 months, with no material deviation from issuance. The CBRE Group revalued the portfolio at GBP 2,453.7 million in December 2021. As a consequence, the loan’s LTV reduced to 36.68% at the August 2022 interest payment date, far below the cash trap threshold of 60%. The loan’s debt yield (DY) stood at 11.36% as of August 2022, in line with the DY of 11.20% at issuance. The transaction’s DY has been consistently above the cash trap level of 8.5%.

DBRS Morningstar maintained its net cash flow (NCF) assumption at GBP 85.8 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 1,362 million, representing a 44.5% haircut to the most updated MV.

The loan is nonamortising with bullet repayment at the maturity date. The final legal maturity of the Notes is expected to be on 17 November 2031, five years after loan maturity on 15 November 2026. DBRS Morningstar believes that the underlying loan’s security structure and jurisdiction provide 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.

The Issuer entered into a liquidity facility with an initial commitment of GBP 14,100,000 with BNP Paribas SA at closing. The size of the liquidity facility will decrease based on the principal amount outstanding on 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 (PCOC), after which the default covenants are based on the LTV and DY. The LTV covenant is set at the lower of an LTV of 70.0% and the LTV at the date of the PCOC plus 25.0%. The DY covenant is set at the higher of 75% of the DY on the PCOC date and 7.5%. The cash trap covenants are set at an LTV of 60% while the DY cash trap covenants are set at 8.5%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

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 (17 December 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/401817/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 data from the servicer report published by CBRE Loan Services Limited and the cash management report published by U.S. Bank Global Corporate Trust.

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 22 October 2021, when DBRS Morningstar confirmed its AA (sf) rating on the Notes.

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):

Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of A (low) (sf) on the Notes and
-- 20% decline in DBRS Morningstar NCF, expected rating of BBB (low) (sf) on the Notes.

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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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 (17 December 2021),
https://www.dbrsmorningstar.com/research/389947/european-cmbs-rating-and-surveillance-methodology.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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.