DBRS Morningstar Confirms Credit Ratings on Cassia 2022-1 S.R.L.; Maintains Stable Trends; Removes Under Review with Positive Implications Status of the Ratings

DBRS Ratings GmbH (DBRS Morningstar) confirmed its credit ratings on the following classes of commercial mortgage-backed security (CMBS) notes issued by Cassia 2022-1 S.R.L. (the issuer):

-- Class A notes at AA (low) (sf)
-- Class B notes at BBB (high) (sf)
-- Class C notes at BB (sf)

DBRS Morningstar removed the Under Review with Positive Implications (UR-Pos.) of the ratings, on which they were placed on 13 October 2023. The trends on all credit ratings are Stable.

CREDIT RATING RATIONALE

The rating confirmations reflect the transaction’s stable performance over the last 12 months. The loans securing the transaction are performing in line with the provisions of the facility agreements, and no breach of any of the cash trap covenant thresholds has been reported to date.

The transaction is a two-loans conduit securitisation arranged by Bank of America Europe DAC (Bofa) and Goldman Sachs International and comprises two separate commercial real estate (CRE) senior loans (the Thunder II loan and the Jupiter loan) advanced to borrowing entities ultimately owned by The Blackstone Group Inc. (the sponsor). The transaction was originated in April 2022.

The purpose of the loans was to refinance the existing indebtedness of the related borrowers. In particular, the Thunder II borrower is an Italian close-end fund (REIF), whereas the borrowers of the Jupiter loan were split into an Italian REIF, the Jupiter Fund, and two limited liability companies, Mileway Italy 2021 Bidco S.r.l. and Bracchi Immobiliare Logistica S.r.l. The former merged into the latter with completion occurring in July 2022.

The two loans, totalling EUR 236.4 million as of the November 2023 interest payment date (IPD), are backed by 42 big-box and last-mile logistics properties across Italy. The loans are interest only, and no prepayment has occurred since the loans’ utilisation date. Based on the most recent valuations prepared by CBRE Limited (CBRE), the appraised value of the portfolio under special assumption (which includes 2.7% premium as a single-lot sale) is EUR 400.5 million as of 1 July 2023, up from EUR 396.2 million as of 1 October 2021. This resulted in a weighted average (WA) loan-to-value ratio (LTV) of 57.9%, slightly down from 59.6% at origination.

The WA debt yield (DY) has slightly increased to 10.8% as of August 2023 from 10.1% at last year’s review and 8.6% at cut off. Overall, the net rental income generated by the pool improved to EUR 25.5 million as of August 2023, 6.4% higher than last year (EUR 24 million) and 20.3% higher than at cut off (EUR 21.2 million), mainly reflecting the indexation of the rental income stream. As of the August 2023 IPD, the vacancy rate increased to 4.2% from 2.2% at cut off, driven by the vacancy rate increase of the Thunder II portfolio to 9.6% from full occupancy at cut off, while the vacancy rate of the Jupiter portfolio decreased to nil from 6.8% at cut off.

By loan amount, the larger loan is the Thunder II loan, which accounts for 69.4% of the entire pool and has an outstanding balance of EUR 164.0 million, whereas the Jupiter loan has an outstanding balance of EUR 72.4 million and accounts for 30.6% of the pool.

Each loan bears interest at a floating rate equal to three-month Euribor (subject to zero floor), plus a margin that is a function of the WA of the aggregate interest amounts payable on the notes. As of the last payment date in November 2023, the margin was 3.1763% per annum (p.a.). The interest rate risk is fully hedged by a prepaid cap with a strike rate of 1.0%, which was provided by Merrill Lynch International at issuance. The initial interest rate cap agreements terminate in May 2024, and they are expected to be renewed annually for the remaining term of the loans. Both the senior loans mature in May 2027, which corresponds to five years after the cut-off date with no extension options.

The Thunder II loan is secured by 20 logistics assets let to 20 tenants as of the August 2023 IPD. The properties are in the Northern and Central regions of Italy. In July 2023, CBRE’s updated valuation increased to EUR 276.6 million, up from EUR 275.3 million in October 2021. As of the August 2023 IPD, the top five tenants represent 52.3% of the Thunder II portfolio net rental income of EUR 15.5 million. DBRS Morningstar maintains its cut-off underwriting assumptions of net cash flow (NCF) at EUR 11.7 million and cap rate of 6.5%, equating to a DBRS Morningstar value of EUR 178.9 million, which represents a haircut of 35.0% to the CBRE appraised value. DBRS Morningstar LTV and DY are 91.7% and 7.1%, respectively.

The Jupiter loan is secured by 22 logistics assets let to 36 tenants as of the August 2023 IPD. The properties are mainly in the area of Milan. The assets were revalued in July 2023. The values increased marginally to EUR 124.9 million from EUR 120.9 million. As of the August 2023 IPD, the top five tenants represent 68.6% of the Jupiter portfolio rental income of EUR 10 million. DBRS Morningstar maintains its cut-off underwriting assumption of NCF of EUR 5.7 million and cap rate of 6.7%, equating to a DBRS Morningstar value of EUR 85.8 million, which represents a haircut of 31.2% to the CBRE appraised value. DBRS Morningstar LTV and DY are 84.3% and 7.9%, respectively.

The sponsor can dispose of any assets securing the loans by repaying a release price of 100% of the allocated loan amount (ALA) up to the first-release price threshold, which equals 10% of the portfolio valuation. Once the first-release price threshold is met, the release price will be 105% of the ALA up to the second release price threshold, which equals 20% of the portfolio valuation. The release price will be 110% of the ALA thereafter. Following a permitted structural change, the release price will be 115% of the ALA.

For the purpose of satisfying the applicable risk retention requirements, Bofa (the VRR Lender) advanced a EUR 6.2 million loan (the VRR Loan) to the issuer on the closing date, and Goldman Sachs Bank Europe SE (the VRR noteholder) subscribed for EUR 6.2 million in the notes (the VRR notes and, together with the VRR Loan, the VRR Instruments) issued by the issuer on the closing date. As at the closing date, the aggregate principal amount of the VRR Instruments was EUR 12.4 million.

At issuance, the liquidity reserve stood at EUR 11.5 million. Following the erroneous release of EUR 1.8 million occurring at the August 2022 IPD, the issuer transaction documents were amended to allow the rebalancing of the required liquidity reserve amount. The amendment includes (i) surplus in the interest paid on the senior loans to be applied on each IPD to top up the issuer liquidity reserve to the corrected required amount (rebalanced amount), and, where a (voluntary or mandatory) prepayment on a senior loan occurs, (ii) an amount equal to the then remaining rebalancing amount to be deducted from note principal receipts and also applied to top up the issuer liquidity reserve.

At the November 2023 IPD, the outstanding balance of the liquidity reserve amount stood at EUR 9.97 million providing for 17.7 months of interest shortfall coverage based on 1.0% cap strike rate and approximately 9.9 months based on the 4.0% Euribor cap after the scheduled notes’ maturity.

The final legal maturity of the notes falls in May 2034, providing a tail period of seven years from the loans’ maturity. If necessary, 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.

DBRS Morningstar’s credit rating on the notes issued by Cassia 2022-1 S.R.L. addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the interest payments and principal amounts.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Euribor Excess Amounts, Pro Rata Default Interest Amounts and Note Exit Fees.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, Governance factors that had a relevant or significant 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is:
European CMBS Rating and Surveillance Methodology (19 October 2023)
https://www.dbrsmorningstar.com/research/422173/european-cmbs-rating-and-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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/421590.

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

The sources of data and information used for these credit ratings include valuation reports prepared by CBRE Limited, and servicer reports and quarterly data provided by Situs Asset Management Limited, Banca Finint S.p.A., and The Bank of New York Mellon since issuance.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 13 October 2023, when DBRS Morningstar placed its credit ratings on the notes Under Review with Positive Implications.

Information regarding DBRS Morningstar credit 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 credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

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

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

Class C Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected credit rating on the Class C notes of B (sf)
-- 20% decline in DBRS Morningstar NCF, expected credit rating on the Class C notes of below 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://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Patrizia Catanese, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 18 March 2022

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The credit 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 (19 October 2023)
https://www.dbrsmorningstar.com/research/422173/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023)
https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023)
https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023)
https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/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.