DBRS Confirms Taurus CMBS UK 2014-1 Ratings

DBRS Ratings Limited (DBRS) has today confirmed the ratings on the following classes of the Commercial Mortgage-Backed Floating-Rate Notes Due May 2022 (the Notes) issued by Taurus CMBS UK 2014-1 Limited:

-- Class A at A (sf)
-- Class B at BBB (sf)
-- Class C at BB (sf)

The Class A trend is Stable. Classes B and C have had their trends changed to Stable from Negative.

The rating confirmations reflect the broadly stable performance of the transaction since issuance in July 2014, also considering the deleveraging of the loan due to property sales and voluntary prepayment. As part of this review, as the deleveraging offsets deteriorating cash flow performance, DBRS has changed the trend to Stable from Negative for Classes B and C. In July 2016, DBRS had assigned a Negative Trend to Classes B and C as a result of the potential decline in commercial real estate (CRE) property values and the slowdown of investments in the United Kingdom following the EU Referendum vote in June 2016.

The transaction consists of one interest-only, floating-rate loan with an initial securitised balance of GBP 211.5 million, which was secured by 132 properties located throughout the U.K. The loan represents the 95% pari passu interest of the whole loan that was granted to 13 affiliated borrowing entities, all of which are cross-defaulted and cross-collateralised. The sponsor’s business plan is to fully dispose of the property portfolio before the fully extended loan maturity of May 2019. As of the most recent investor report from May 2017, the loan had a current whole loan balance of GBP 90.2 million and a current securitised loan balance of GBP 85.7 million. This represents a total 59.5% loan collateral reduction since issuance. The reduction is due to the disposal of 83 assets leading to GBP 38.2 million of principal prepayments and a voluntary prepayment of GBP 5.8 million made by the sponsor in May 2017. A combined 32.8% of collateral reduction occurred during the last 12 months.

The sponsor is an affiliate of Apollo Global Management, which purchased the portfolio through various loan foreclosures. The collateral primarily consists of retail properties, including shopping centres, which account for 77.7% of the allocated loan amount and 34.9% of the total annual rent. The markets for the assets are a mix of city centre and suburban real estate locations spread across the U.K. in secondary locations. The current portfolio, following the 59.5% collateral reduction, is mainly concentrated in the northwestern areas of the U.K. and accounts for approximately 35.1% of the current portfolio market value. The properties were classified as either Tier 1 or Tier 2 properties based on location and all the sold assets are subject to 20% (Tier 1) or 10% (Tier 2) repayment premiums. As of May 2017, the Tier 1 and Tier 2 concentration ratios were 75.9% and 24.0%, respectively. The most recent reported vacancy rate increased slightly to 26.2% from 25.1% at last review in 2016. The largest ten tenants account for 19.2% of the portfolio’s annual rental income; however, all of them present a current weighted-average lease length below 12 months. The largest tenant in the portfolio, Sheffield Hallam University, which accounts for 3.7% of the total income in the portfolio, already gave notice to vacate and will be departing in June 2017. In total, the portfolio shows a high lease rollover with an aggregated 29.7% of the total contracted rent expiring within the following 12 months. DBRS will continue to monitor the lease rollover and subsequent leasing activity.

The servicer’s 12-month projected net operating income (NOI) is GBP 10.6 million, but based on actual performance, the portfolio shows declining performance with higher operational costs resulting in lower NOI. High street retail properties show a current vacancy rate of 34.3%, compared with the 8.5% at issuance, and operational expenses of approximately 78.4% of the total contractual rent for this property type. DBRS has updated its underwritten cash flows to reflect the higher operational expenses and estimated a long-term stabilised NOI of GBP 11.9 million for the entire portfolio. According to the investor report from May 2017, the reported interest coverage ratio is 3.31x.

The sponsor’s business plan is to fully dispose of the property portfolio before the fully extended loan maturity in May 2019. Per the loan documents, the loan has a target whole loan amount in each quarter. The maximum target whole loan amount for February 2018 is GBP 56.4 million, which represents a 37.5% of collateral reduction needed from the current loan balance. During the last 12 months, 32.8% of principal was repaid, of which 28.4% was due to asset disposals and 4.3% due to to voluntary prepayments in order to meet the maximum target whole loan balance. DBRS foresees that the borrower will potentially exercise the second of its one-year extension to complete the full liquidation of the assets until its final fully-extended maturity in May 2019.

In October 2016, CBRE revalued the portfolio and estimated a current portfolio valuation of GBP 213.5 million, considering the remaining assets. The new market value represents a 5.7% increase over the same assets per the previous valuation. As of the most recent investor report from May 2017, the loan-to-value (LTV) ratio was 42.3% and was lower than the 65.0% at issuance.

Per the loan documents, every quarter the loan is subject to covenant tests. These covenants require maintaining a minimum ICR of 1.8x and a 2.0x ICR Cash Trap. Additionally, the loan has an LTV covenant test of a maximum of 78.5% LTV and a 72.5% LTV Cash Trap trigger. As of this review, all the ratios were within the expected range at issuance and DBRS estimates a currently low risk of the covenant’s triggers being breached during the remaining loan term.

The transaction does not benefit from a liquidity facility. The final maturity date of the CMBS Notes is in May 2022, three years beyond the fully extended maturity date of the loan in May 2019.

The rating assigned to Class A Notes materially deviates from the higher rating implied by the direct sizing hurdles that are a substantial component of the DBRS “European CMBS Rating and Surveillance” methodology. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by a substantial component of a rating methodology. In this case, the assigned rating reflects that the transaction does not benefit from a liquidity facility.

Notes:
All figures are in British pounds (GBP) 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 these ratings include the servicer, CBRE Loan Services Ltd.

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

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 these ratings to be of satisfactory quality.

DBRS 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 July 2016, when DBRS confirmed the rating on all classes of notes and changed the trend of two classes issued by Taurus CMBS UK 2014-1.

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 with 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 expenses ratios, capital expenditures and re-tenanting costs, would lead to the following ratings 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 at A (sf)
-- 20% decline in DBRS NCF, expected downgrade of Class A to BB (high) (sf)

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected downgrade of Class B to BB (low) (sf)
-- 20% decline in DBRS NCF, expected downgrade of Class B to CCC (sf)

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected downgrade of Class C to B (low) (sf)
-- 20% decline in DBRS NCF, expected downgrade of Class C to CCC (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, European CMBS
Rating Committee Chair: Christian Aufsatz, Managing Director, European CMBS
Initial Rating Date: 18 June 2014

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
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations

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