Morningstar DBRS Takes Credit Rating Actions on Salus (European Loan Conduit No. 33) DAC

DBRS Ratings Limited (Morningstar DBRS) took the following credit rating actions on the bonds issued by Salus (European Loan Conduit No. 33) DAC (the Issuer):

-- Class A confirmed at A (high) (sf)
-- Class B confirmed at BBB (sf)
-- Class C downgraded to BB (sf) from BB (high) (sf)
-- Class D downgraded to B (high) (sf) from BB (low) (sf)

The trends on all credit ratings remain Negative.

CREDIT RATING RATIONALE
The credit rating actions followed Morningstar DBRS' review of the collateral's performance considering the terms of the restructuring. Despite improved occupancy, the level of concessions for new tenants remains high. The increase of the loan margin post-restructuring contributes further to the deterioration of the Morningstar DBRS debt service metrics, posing further stress to the transaction cash flow. The switch of the priority of payments to sequential, coupled by the absence of deleveraging embedded in the restructuring program, makes the junior classes more exposed to risk of defaulting.

The transaction is a securitisation of a GBP 363.3 million as of April 2025 (down from GBP 367.5 million at origination) floating-rate senior commercial real estate loan that Morgan Stanley & Co. International Plc (Morgan Stanley) advanced in November 2018 to CityPoint Holdings I Ltd., which is controlled by Brookfield Asset Management Inc. (the Sponsor). The senior loan is split into two pari passu facilities: Facility A, which totals GBP 349.9 million (down from GBP 354.0 million at origination), and Facility B (the capital expenditure (capex) facility), which totals of GBP 13.3 million (down from GBP 13.5 million). Facility A refinanced the borrower's existing debt, whereas the capex facility financed some refurbishment works that the Sponsor planned at issuance. Additionally, there is a nonsecuritised mezzanine facility totalling GBP 91.9 million that is contractually and structurally subordinated to the senior facilities. For the purposes of complying with the applicable risk retention requirements, Morgan Stanley also advanced a GBP 18.4 million vertical risk retention (VRR) loan to the Issuer.

The senior loan is secured by a single asset known as Citypoint, a 36-storey office tower in the City of London originally built for British Petroleum in 1967. The building offers 704,657 square feet (sf) of office space and more than 60,000 sf of retail space, including several restaurants and one of the largest health clubs in the Square Mile, Nuffield Health. It is one of the largest office buildings in the City of London and underwent a comprehensive reconstruction in 2001. Since then, the owner has maintained the property to a high standard with ongoing refurbishment works and, as such, the building does not show any significant signs of obsolescence. In particular, as part of the Sponsor's business plan to capture the asset's reversionary value potential, during the course of 2020-21, levels five to eight (the podium floors) underwent a comprehensive refurbishment at a cost of around GBP 167 per sf to provide high-quality Grade A offices and an additional floor area and walkway. Landscaped terraces were also included, and the dedicated podium reception was refurbished.

Compared to our last annual review conducted in December 2024, portfolio performance metrics have improved, with contracted rental income increasing by 16.1% to GBP 36.5 million in April 2025 from GBP 31.5 million in April 2024. Projected net rental income also increased to GBP 36.3 million from GBP 29.2 million over the same period. As a result, debt yield increased to 9.99% in April 2025 from 7.96% as of April 2024. As of April 2025, the Citypoint asset was 94.3% let to 20 different tenants. The top five tenants account for 75% of the overall gross rental income. Simpson Thacher & Bartlett LLP has leases over 11 floors with total annual contracted rent of GBP 8.6 million, all expiring March 2034. Simmons & Simmons LLP has leases over five floors with total annual contracted rent of GBP 6.9 million, all expiring March 2035 and all with a break option in March 2030. Squarepoint Capital LLP has leases over seven floors and one storage unit with total annual contracted rent of GBP 6.7 million; the leases on the seven floors expire November 2030 and all have a break option in November 2028, while the storage lease expires in November 2026.

As of the April 2025 interest payment date, the passing rent stands at GBP 25.1 million, down from last year's GBP 26.9 million due to rent-free periods agreed to during last quarter, and arrears increased to GBP 547,000 from GBP 24,000 last quarter. There are seven tenants with rent-free periods with a total rent-free amount of GBP 11.97 million. Expiration of the rent-free period profile pans out until mid-June 2027 with the majority of this (62.4%) expiring in September 2026.

The loan to value ratio (LTV) slightly reduced to 54.22% in January 2025 from 54.85%, due to a partial debt prepayment of GBP 4.2 million in January 2025. LTV is based on a dated valuation of GBP 670 million from Savills Plc (Savills) (March 2023) and it is expected that a new valuation will soon be mandated.

Following the restructuring consented by the noteholders via extraordinary resolution with effective date as of 17 April 2025 the financial covenants have been waived. Amendments included amongst others: three-year extension of the loan and notes maturity (until January 2028 and 2032, respectively), notes margin step up with consequent loan margin step up, new hedging, an injection of funds into the cash reserve account by way of a new money loan, and the switch of payments to a sequential basis with Class X being redeemed as of April 2025 note payment date.

The original maturity date was 20 January 2022 with two one-year conditional extension options, which were exercised. The maturity date was extended to 20 January 2025, and thus further extended by three years to 20 January 2028.

As a result of the loan amendment, the interest rate is the aggregate of compounded daily SONIA plus a margin of 2.69% per annum (p.a.), inclusive of credit adjustment spread (0.11193%), capped at 2.78%. The margin was previously increased to 2.50% effective 20 January 2024 with the increase margin passed onto the Noteholders and the VRR Lender. The loan is fully hedged with an interest rate cap agreement provided by Goldman Sachs International with a strike rate of 4.5%. The cap will terminate on 23 January 2028.

The restructuring also includes a further amount, the note exit amount. This accrues on each class of notes at the relevant rate of 0.45% per p.a. and it will be applied following the satisfaction in full of all principal and interest due or overdue in respect of each class of notes and the VRR Loan. Morningstar DBRS does not deem this as a financial obligation and does not rate it.

The restructuring comprises a new money loan provided by an affiliate of the Sponsor to BSREP CityPoint Bidco Limited, the new money borrower, in four tranches with a fixed rate of 15 % p.a.: A1 Tranche represents a committed facility of GBP 8.5 million, which has been drawn on the effective date to pay for fees and expenses in connection with restructuring with the remaining balance deposited into the senior borrower's cash trap account to fund a cash reserve; A2 Tranche is an uncommitted facility of GBP 10 million; A3 Tranche is an uncommitted facility for such additional amounts as may be approved by the original new money lender and the servicer; and A4 Tranche is a committed facility in an amount equal to GBP 3 million whose condition precedent to its utilisation is the delivery of Squarepoint's irrevocable notice to exercise the break option in respect of the space leased by it, and in the instance the Squarepoint premises are not under offer to be leased to another tenant(s).

The new money loan is subordinated to the senior loan and it is not part of the securitisation. Further financial liabilities arising from this debt will not directly or indirectly impact the rated securities, and they are not rated by Morningstar DBRS.

Morningstar DBRS notes that the 50% of the payable amount of Brookfield Asset Management fee, 3% of gross rental income p.a., is accrued and shall be deferred until notes are redeemed. Furthermore, a distribution block has been agreed so that payments from the senior obligors to the Sponsor, the mezzanine obligors, and the mezzanine finance parties are prohibited until the senior loan is repaid in full.

Morningstar DBRS maintained its stabilised net cash flow assumption at GBP 25.3 million and its cap rate assumption at 6.3%, which translates into an updated Morningstar DBRS value of GBP 401.6 million, equals to 40.0% haircut to Savills' valuation dated March 2023.

The liquidity facility outstanding balance stood at GBP 19.7 million as of the April 2025 IPD, down from our previous review in December 2024 as it follows partial prepayment of the notes in January 2025. The liquidity support covers the Class A through Class D notes. According to Morningstar DBRS' analysis, the outstanding amount of the liquidity facility provides coverage of 9.4 months based on the interest rate cap strike rate of 4.5% or 8.8 months based on the 5.0% Sonia cap payable on the notes after the expected note maturity date. The liquidity coverage is compliant with Morningstar DBRS' requirement for "A" category rated transactions.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the credit ratings is: European CMBS Rating and Surveillance Methodology (4 March 2025) https://dbrs.morningstar.com/research/449278.

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

Morningstar 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 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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include the servicer reports published by Mount Street Mortgage Servicing Limited.

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

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

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

Morningstar DBRS 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 Issuer took place on 20 December 2024, when Class A was downgraded to A (high) (sf) from AA (high) (sf), Class B was downgraded to BBB (sf) from A (low) (sf), Class C was downgraded to BB (high) (sf) from BBB (low) (sf, and Class D was downgraded to BB (low) (sf) from BB (sf), all with Negative trends.

The lead analyst responsibilities for this transaction have been transferred to Mirco Iacobucci.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS 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 Morningstar DBRS NCF, expected credit rating of Class A notes to A (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating of Class A notes to BBB (sf)

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

Class C Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating of Class C notes to BB (low)) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating of Class C notes to below B (low) (sf)

Class D Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating of Class D notes to B (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating of Class D notes to below B (low) (sf)

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

For further information on Morningstar DBRS 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 Morningstar DBRS 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 GmbH for use in the European Union.

Lead Analyst: Mirco Iacobucci, Senior Vice President, Sector Lead
Rating Committee Chair: David Lautier, Senior Vice President, Global Structured Finance
Initial Rating Date: 11 December 2018

DBRS Ratings Limited
1 Oliver's Yard 55-71 City Road 2nd Floor,
London EC1Y 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- European CMBS Rating and Surveillance Methodology (4 March 2025), https://dbrs.morningstar.com/research/449278
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024), https://dbrs.morningstar.com/research/439913
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443196
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025), https://dbrs.morningstar.com/research/454196

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/439604.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.