DBRS Finalises Provisional Ratings on Taurus 2015-3 EU Designated Activity Company

DBRS Ratings Limited (DBRS) has today finalised its provisional ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes due April 2028 (collectively, the Notes) to be issued by Taurus 2015-3 EU (the Issuer):

-- Class A Notes rated AAA (sf)
-- Class B Notes rated AAA (sf)
-- Class C Notes rated AA (sf)
-- Class D Notes rated A (sf)
-- Class E Notes rated BBB (sf)
-- Class F Notes rated BB (sf)

All trends are Stable.

Taurus 2015-3 EU designated Activity Company is a securitisation of two floating-rate commercial real estate loans made by Bank of America Merrill Lynch International Limited. The two loans, BiLux Loan and TEIF Loan, have a trust loan balance of €145.8 million and are hedged with borrower-level interest rate caps. Both loans are sponsored by Starwood Capital Group L.P. (Starwood Capital) and M7 Real Estate Limited serves as the asset manager. Starwood Capital invested approximately €92.2 million of cash equity into the original acquisition of the two portfolios. The loans are fully hedged with a 1.0% interest rate cap, which increases to 2.0% in years three through five of the loan term, which is provided by Bank of America, N.A.

The TEIF Whole Loan has a cut-off date balance of €91.0 million and served to refinance the recent acquisition of 31 light industrial properties located in France, Germany and the Netherlands in December 2014. The whole loan senior cut-off balance is €82.2 million, as the loan has a €8.8 million b-note, which is not part of the securitisation. The Issuer is securitising approximately 78% of the a-note. The properties were acquired through the sponsor’s acquisition of the Tamar European Industrial Fund in September 2014. As of April 2015, the properties were 85.4% occupied by 125 tenants.

The BiLux Loan has a whole loan cut-off date balance of €103.8 million and served to fund the acquisition of 31 light industrial properties located in Germany and the Netherlands in May 2015. The Issuer is securitising approximately 78% of the whole loan. The properties were acquired from various smaller vendors, generally through bank enforced sales, liquidation of funds and local investors. As of April 2015, the properties were 85.3% occupied by 204 tenants.

The loans represent low leverage financing in comparison to the appraiser’s concluded vacant possession value and historical sales of comparable properties within France, Germany and the Netherlands. The whole loan amount of the BiLux Loan is €296 per square metre (psm), which compares to the vacant possession value of €297 psm. The whole loan amount of the TEIF Loan is €433 psm, which compares to the vacant possession value of €450 psm. According to Real Capital Analytics, industrial properties within Western Europe have traded for an average sales price of €960 psm. However, tenants representing 55.8% of the DBRS UW rent expire during the loan term, increasing cash flow volatility during the loan term. Additionally, the largest tenant at Rontgenstrasse 3/7, OHG Transgourmet GmbH & Co., representing 4.1 % of the in-place revenue of the BiLux Loan, is known to be vacating upon lease expiry on 31 January 2019. DBRS marked the rent associated with OHG Transgourmet GmbH & Co. to a market level and applied a 50% vacancy factor to the tenant’s rent. The sponsor has also demonstrated leasing momentum and recently executed 12 new and renewal leases across both portfolios totaling 6.2% of the total in-place rent.

Starwood Capital has a detailed business plan for each property, which generally includes investing capital expenditures to improve occupancy, increase rental rates and reposition the properties within their respective markets. The business plan contemplates €20.4 million in improvements during the loan term, which will be reserved via the capex reserve accounts at each interest payment date. Both loans are structured with an ongoing cash trap during the loan term to fund the capital expenditure plans detailed in the business plans. The DBRS net cash flow (NCF) does not give credit to the upside potential associated with rental rate increases and occupancy stabilisation if the sponsors execute their business plan.

The aggregate DBRS NCF for the two loans was €17,286,768. DBRS applied a blended capitalisation rate of 8.1% to the aggregate NCF to arrive at a DBRS stressed value of €213,804,748, which represents a 22.2% discount to the market value provided by the valuations. The DBRS stressed value is 7.6% above the dark value provided by the valuations.

The transaction is supported by a €8.25 million liquidity facility, which is provided by Bank of America Merrill Lynch N.A. The Liquidity Facility can be used by the Issuer to fund expense shortfalls (including any amounts owing to third-party creditors and service providers that rank senior to the Notes), property protection shortfalls and interest shortfalls (including with respect to Deferred Interest, but excluding default interest) in connection with interest due on the Class A, Class B and Class C Notes in accordance with the relevant waterfall. The Liquidity Facility cannot be used to fund shortfalls due to the Class X Notes.

The final legal maturity of the Notes is in April 2028, eight years beyond the maturity of the latest maturing loan. If necessary, this is believed to be sufficient time, given the security structure and jurisdiction of the underlying loans, to enforce on the loan collateral and repay bondholders.

Bank of America Merrill Lynch International Limited will retain an ongoing material economic interest of not less than 5% of the loan to maintain compliance with Article 405(1) of the European Union Capital Requirements Regulation and also with Article 51 of the Commission Delegated Regulation (EU).

The ratings assigned by DBRS to the Notes are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: European CMBS Rating Methodology which can be found on our website under Methologies.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.
This may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include Taurus 2015-3 EU Designated Activity Company, Bank of America Merrill Lynch International Limited, Cushman & Wakefield, Tagis Bouw & Vastgoed, Gleeds Deutchland GbR, Malcom Hollis, Ambiente International LLP and CBRE Valuation Advisory B.V.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; however, Agreed upon Procedures (AUP) are included in the requested documentation.

-- DBRS was supplied with AUP documents. However, this did not impact the rating analysis. Data checks were performed and DBRS did apply additional cash flow stresses in its scenarios.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

A decrease of 10% and 20% in the DBRS NCF, derived by looking at comparable properties, market rents, market occupancies in addition to expense ratios, and capital expenditures, would lead to a downgrade in the transaction, as noted below for each class respectively.

Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A Notes to AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A Notes to AAA (sf)

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B Notes to AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class B Notes to AAA (sf)

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C Notes to AA (sf)
-- 20% decline in DBRS NCF, expected rating of Class C Notes to AA (low) (sf)

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

Class E Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class E Notes to BBB (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class E Notes to BB (low) (sf)

Class F Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class E Notes to B (sf)
-- 20% decline in DBRS NCF, expected rating of Class E Notes to NR (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elizabeth Lovett, Assistant Vice President, EU CMBS
Initial Rating Date: 5 August 2015
Initial Rating Committee Chair: Erin Stafford, Managing Director, Global CMBS

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- European CMBS Rating Methodology

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375