DBRS Morningstar Confirms Ratings on Pearl Finance 2020 DAC with Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of commercial mortgage-backed security (CMBS) notes issued by Pearl Finance 2020 DAC (the Issuer):

-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)

The trend on all ratings remains Stable.

The rating confirmations follow the transaction’s stable performance over the last 12 months, with no significant performance changes since the last annual review and no cash trap covenant breaches recorded to date.

The transaction is a securitisation of a EUR 316.6 million (EUR 335.4 million at issuance) senior commercial real estate loan backed by a pan-European portfolio of light-industrial and logistics assets collectively managed by Mileway, M7 Real Estate Ltd., and Normandie Capital but owned by Blackstone Real Estate Partners (the Sponsor). At closing, Bank of America Europe DAC (BofA or the loan seller) advanced the senior loan to the borrowers and then the Issuer purchased the senior loan from BofA using the CMBS note issuance proceeds and an issuer loan provided by the loan seller. The issuer loan represents 5% of the total senior loan amount. BNP Paribas, Société Générale, and Merrill Lynch International acted as joint arrangers.

The securitised portfolio comprises 60 assets (61 at issuance) spread across six different European countries, namely France, Finland, Denmark, Germany, Ireland, and the Netherlands. On 31 October 2021, Jones Lang LaSalle (JLL) revalued the portfolio at EUR 717.5 million, including a 5% portfolio premium. The previous portfolio’s valuation was provided by Cushman & Wakefield (C&W) in July 2020, and was equal to EUR 576.9 million, including a 3% portfolio premium. As a result, the portfolio’s market value has increased by 22% on a like-for-like basis since previous valuation, excluding portfolio premiums applied by the two valuers.

On 30 November 2021, the Pantin 31 Chem asset located in France was sold. As a result of the property sale, the senior loan deleveraged by EUR 18.8 million down to EUR 316.6 million at the August 2022 IPD, which translates into a 5.6% decrease since issuance. As a result, based on JLL’s portfolio valuation of EUR 690.9 million for the remaining 60 properties outstanding in the pool, the senior loan’s reported loan-to-value (LTV) ratio was 45.8% at the August 2022 interest payment date (IPD), compared to 58.1% at issuance, thus remaining well below the current cash-trap covenant of 68.42%.

Net rental income was reported as EUR 35.8 million in August 2022, resulting in a debt yield of 11.30%, which is well above the current cash trap covenant of 9.53%. Vacancy rate decreased to 2.95% in August 2022, compared to 3.31% and 4.69% as at last annual review and issuance, respectively.

The senior loan carries a floating interest rate with a Euribor benchmark plus a margin which directly mirrors the weighted-average coupon on all the issued notes, but will not exceed 3.95%; therefore, there is no excess spread in the transaction and the borrowers bear the Issuer’s costs. The senior loan pays interest quarterly in arrears and there is no scheduled amortisation before the completion of a permitted change of control (CoC), at which time the borrowers must repay the aggregate outstanding principal amount of the senior loan in quarterly instalments equal to 0.25% of the outstanding principal amount as at the date of the permitted CoC (i.e., 1% per annum).

The senior loan had the initial maturity date on 15 November 2022, but can be extended three times for one year each until the fully extended maturity date on 15 November 2025. The borrowers exercised the first extension option, thus extending the senior loan up to the first extended repayment date scheduled on 15 November 2023.

At issuance, the borrowers purchased an interest cap agreement to hedge against increases in the interest payable under the senior loan. The initial cap agreement was provided by BNP Paribas and covered 95% of the outstanding senior loan balance, with a strike rate of 1.25%. The initial cap agreement expired on 17 November 2022.

In order to extend the senior loan for a further one year, the borrowers entered into a new cap agreement with BNP Paribas expiring on 17 November 2023. The newly-signed cap agreement covers 95% of the outstanding senior loan balance, with a strike rate equal to 3.26%. The agreed strike rate ensures that the hedged interest coverage ratio is not less than 2.00:1, in compliance with the hedging conditions required for the senior loan extension. After the expected note maturity date (17 November 2025), the Euribor rate payable at note level will be capped at 4.0%.

The senior loan is denominated in euros whereas the Danish assets and income are denominated in Danish kroner (DKK). In the absence of a currency swap, United Denmark 2019 Holdco S.à r.l. (the Danish Holdco) is making monthly currency spot trades to convert DKK into euros, thus ensuring that the Danish net rental income is in euros when it reaches the relevant rental income account. As the Sponsor did not arrange any hedging between DKK and euro income, DBRS Morningstar applied an exchange rate of DKK 7.6282 per euro, 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 DKK 12.1086 per euro in the AAA (sf) stress scenario.

DBRS Morningstar updated its net cash flow (NCF) assumption to EUR 26.1 million from EUR 27.5 million at issuance to reflect the property sale. In addition, DBRS Morningstar maintained its cap rate assumption at 6.7%, as at issuance, which translates to a DBRS Morningstar value of EUR 390.6 million, representing a 43.5% haircut to JLL’s most recent valuation.

The final legal maturity of the CMBS notes is in November 2032, seven years after the fully extended senior 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 and properties.

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 euros unless otherwise noted.

The principal methodology applicable to the ratings 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 ratings 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 these ratings include servicer reports and quarterly data provided by CBRE Loan Servicing Limited 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 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 11 November 2021, when DBRS Morningstar confirmed its ratings on the notes with Stable trends.

The lead analyst responsibilities for this transaction have been transferred to Andrea Selvarolo.

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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

Class A1 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A1 notes to AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A1 notes to AA (high) (sf)

Class A2 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A2 notes to AA (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A2 notes to AA (low) (sf)

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

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

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

Class E 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).

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: Andrea Selvarolo, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 October 2020

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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.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/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 (17 May 2022), https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
-- Currency Stresses for Global Structured Finance Transactions (4 February 2022), https://www.dbrsmorningstar.com/research/391916/currency-stresses-for-global-structured-finance-transactions.

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.