DBRS Confirms Ratings of Taurus 2016-2 DEU Designated Activity Company

DBRS Ratings Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage-Backed Floating-Rate Notes Due January 2027 issued by Taurus 2016-2 DEU Designated Activity Company (Taurus 2016-2), as follows:

• Class A Notes at AAA (sf)
• Class B Notes at AA (sf)
• Class C Notes at A (low) (sf)
• Class D Notes at BBB (low) (sf)

All trends are Stable. The rating confirmations reflect the stable performance of the transaction since issuance.

Taurus 2016-2 is a securitisation of one floating-rate senior commercial real estate loan (Project Europa loan) that was advanced by Bank of America Merrill Lynch International Limited to refinance 178 office properties in Germany by Dream Global Real Estate Investment Trust. The properties are located in various parts of Germany and are primarily leased to Deutsche Post AG. Deutsche Post AG is the parent company of Deutsche Post and DHL Express, one of the leading logistics companies globally. The Project Europa loan is 95% hedged with an interest rate cap that has a strike rate of 1.0%. The cap is provided by Bank of America, N.A.

According to the most recent investor report from April 2017, the outstanding securitised balance was EUR 186.3 million, which represents a 19.6% collateral reduction since issuance. The reduction is attributed to the repayment of EUR 47.9 million following the sale of 43 properties since issuance, resulting in a current portfolio composition of 135 properties. The sold assets were spread across Germany and represented 17.5% of the total intial market value of the securitised portfolio. More than 50% of the sold properties had a market value of less than EUR 1.0 million. The property portfolio is currently 82.7% occupied.

The portfolio has significant rollover during the loan term that is concentrated in June 2018, when tenants accounting for approximately EUR 19.1 million (58.6% of the portfolio annual rent) have lease expiries or break options. As of the latest rent roll from May 2017, the loan has a weighted-average lease term of 3.08 years, whereas the remaining time to loan maturity is 3.81 years. The loan is structured with a debt service reserve during the period with the most lease expiries and break options, which would trap up to 1.88% of the loan amount if the projected interest coverage ratio is below 2.35 times. As part of the original sale-and-leaseback transaction in 2008 (Caroline Portfolio), Deutsche Post AG is required to extend EUR 8.0 million of rent for a minimum of two years upon lease expiry in June 2018, subject to 12 months’ notice. This required extension may be spread over the entire Caroline Portfolio that includes properties leased by Deutsche Post AG that are not part of the Taurus 2016-2 loan collateral. For the property portfolio securing the loan, the implied minimum extension obligation is EUR 2.9 million of rental income. As the majority of the leases require a 12-month notice period, the tenant must notify the sponsor of its plans to either renew or vacate by June 2017. Therefore, DBRS will continue to monitor the transaction closely within the next few weeks in order to asses the rollover risk once this information is available.

According to the most recent investor report from April 2017, the current gross rental income of the portolio is EUR 32.5 million, which represents an 8.7% decline from the EUR 35.6 figure at issuance. The decline in revenue has been caused by the aforementioned disposal of 43 properties. The DBRS stabilised net cash flow for the portfolio, after removing assets solds, is EUR 18.2 million and represents a 29.8% discount to the reported net rent. CBRE Group, Inc. (CBRE) originally valued the portfolio in August 2015 and estimated a market value of EUR 493.1 million. According to the servicer, no new valuations have been performed since issuance. Excluding the assets sold and using CBRE’s valuation, the current portfolio value, as of April 2017, is EUR 410.6 million, which results in a 47.7 % loan-to-value (LTV) ratio. Based on the stressed DBRS value of EUR 291.6 million, which represents a 29.0% value haircut to the current value, the DBRS LTV is 67.2%.

The loan matures on 31 December 2020 and carries a floating interest rate equal to the three-month Euribor (subject to a zero floor) plus a margin of 2.25%. The transaction is supported by a liquidity facility that is provided by Bank of America Merrill Lynch N.A. According to the most recent Quarterly Payment Report of April 2017, the current outstanding amount of the liquidity facility is EUR 15.2 million, which has been reduced proportionally after the partial note redemption since issuance. The liquidity facility can be used to cover interest shortfalls on Classes A, B and C.

The final legal maturity of the Notes is in January 2027, six 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 collateral on the loan and repay bondholders.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “European CMBS Rating and Surveillance Methodology.

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

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

These 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 data and information used for this rating include Situs Asset Management Limited as Servicer and Wells Fargo Bank International (Ireland) as Trustee.

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

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

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

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

This is the first rating action since the Initial Rating Date.

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

To assess the impact of 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 Net Cash Flow, derived by looking at comparable properties, market rents, market occupancies in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to a downgrade in the transaction, as noted below:

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

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B at A (sf)
-- 20% decline in DBRS NCF, expected rating of Class B at BBB (low) (sf)

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

Class F Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class F at B (sf) BB (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class F at CC (sf) B (high) (sf)

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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: Jorge Lopez Herguido, Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 4 May 2016

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

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

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