DBRS Upgrades Class C and Confirms Class A and B of Taurus CMBS UK 2014-1 Limited

DBRS Ratings Limited (DBRS) upgraded its rating on the following class of the Commercial Mortgage-Backed Floating-Rate Notes Due May 2022 (the Notes) issued by Taurus CMBS UK 2014-1 Limited:

-- Class C at to BB (high) (sf) from BB (sf)

In addition, DBRS confirmed its ratings on the following classes:

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

All trends are Stable.

The rating upgrade reflects the deleveraging of the loan because of principal repayments being made after the sales of 40 properties in the last 12 months. The transaction consists of one interest-only, floating-rate loan with an initial securitised balance of GBP 211.5 million, which was originally 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 in May 2019. As of the most recent investor report from May 2018, the loan had a current whole loan balance of GBP 50.5 million and a current securitised loan balance of GBP 48.0 million. This represents a total 77.3% loan collateral reduction since issuance, because of the disposal of 101 assets since issuance and a voluntary principal prepayment of GBP 5.8 million, made by the sponsor in May 2017. A total of GBP 37.8 million has been repaid during the last 12 months, representing 17.0% of collateral reduction.

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 and high street retail, which combined account for 82% of the pool by market value and 77.1% of the total annual revenue.

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 77.3% collateral reduction, is mainly concentrated in the northwestern areas of the U.K. which account for approximately 34.4% of the current portfolio rental income. 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 2018, the Tier 1 and Tier 2 concentration ratios were 80.4% and 19.6%, respectively, an improvement compared with the May 2017 report which had Tier 1 and Tier 2 consisting of 75.9% and 24.0% of the portfolio, respectively. The most recent reported vacancy rate increased slightly to 26.6% from 26.2% at last review in June 2017. The largest ten tenants account for approximately 20.9% of the portfolio’s annual rental income; however, combined they present a current weighted-average lease length of 8.2 years, providing rental stability to the portfolio. The former largest tenant in the portfolio, Sheffield Hallam University, which accounted for 3.7% of the total income in the portfolio at last review, vacated in June 2017. In total, the portfolio shows a more moderate lease rollover with 13.4% of total annual revenue expiring in the next 12 months, which is down significantly compared with the last review which had 29.7% of total revenue rolling in the next 12 months. DBRS will continue to monitor the lease rollover and subsequent leasing activity.

In October 2017, CBRE revalued the portfolio and estimated a current portfolio valuation of GBP 173.5 million, considering the remaining assets. The new market value represents a 5.7% like-for-like value increase of the remaing assets compared with the previous valuation. As of the most recent investor report from May 2018, the loan-to-value (LTV) ratio was 29.1%, a significant decline since the at last review and since issuance, which was 42.3% and 65.0%, respectively.

The servicer’s 12-month projected net operating income (NOI) is GBP 9.2 million. High street retail properties show a current vacancy rate of 26.6%, an improved figure since the last review on which the reported vacancy was 34.3%; however, this is still up significantly compared with the issuance figure of 8.5%. Additionally, shopping centre properties reported an elevated vacancy rate of 26.3%, a significant increase compared with May 2017, which reported a vacancy rate of 19.4%. In addition to the already high vacancy within the portfolio, there are several retail tenants,which have in DBRS’s view an increased probability of failing to meet their contractual rental obligations, including: Poundworld which recently filed for administration, Poundland which also is reportedly having financial difficulties, New Look Retailers, which released a list of upcoming store closures including the subject’s Wellington Square Shopping Centre location, and House of Fraser which released a list including the subject’s location at Stamford Quarter Shopping Centre. Moreover, DBRS has noted that there are no remaining allocated loan amounts to the remaining office and industrial assets and consequently disregarded any cashflow and market value of such assets. DBRS has updated its underwritten cash flows to reflect the higher increased risk with the aforementioned retailers resulting in a stressed DBRS underwritten net cash flow of GBP 6.9 million for the retail assets only. According to the investor report from May 2017, the reported interest coverage ratio is 4.42x.

The borrower exercised the second of its one-year extensions to complete the full liquidation of the assets until its final fully-extended maturity in May 2019. The maximum target whole loan amount for February 2018 was GBP 56.4 million, which was achieved and which was the last target whole loan provided in the issuing documents before the May 2019 maturity date. Should the sponsor fail to fully repay the loan at maturity, a special servicing transfer event and a loan failure event would be triggered, switching the payment waterfall to sequential, after paying interest due on all classes.

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.

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 the class A Notes materially deviates from the rating stress level the notes can withstand according to 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 stress level 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 sterling unless otherwise noted.

The principal methodology applicable to the ratings 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 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 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 CBRE Loan Services Ltd and its delegates.

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 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 23 June 2017, when DBRS confirmed the ratings on all classes of notes and changed the trend of two classes issued by Taurus CMBS UK 2014-1.

The lead analyst responsibilities for this transaction have been transferred to Mattia Pauciullo.

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 BBB (high) (sf)

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

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected downgrade of Class C to B (high) (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 and US regulations only.

Lead Analyst: Mattia Pauciullo, Senior Financial Analyst, European CMBS
Rating Committee Chair: Christian Aufsatz, Managing Director, European CMBS
Initial Rating Date: 18 June 2014

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

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
-- Interest Rate Stresses 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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.