Preliminary Ratings Assigned To Libra (European Loan Conduit No. 31) DAC#s European CMBS Notes

Stocks and Financial Services Press Releases Monday June 18, 2018 17:37
LONDON--18 Jun--S&P Global Ratings

LONDON (S&P Global Ratings) June 18, 2018--S&P Global Ratings has today assigned its preliminary ratings on Libra (European Loan Conduit No. 31) DAC's class A1, A2, B, C, D, and E notes. At closing Libra will also issue unrated class X notes (see list below).

The transaction is backed by one senior loan, which Morgan Stanley & Co. International PLC (Morgan Stanley) originated in January 2018 to facilitate the refinancing of the light industrial portfolio initially acquired by MStar Europe L.P. (95%-owned by Starwood Fund IX and 5%-owned by M7 Real Estate Ltd.).

The senior loan backing this true sale transaction equals EUR282.5 million and is secured by 49 light industrial properties and one office building in Germany and in the Netherlands (these assets provided the collateral for the Bilux loan securitised in TAURUS 2015-3 EU DAC CMBS and for the MStar Europe loan securitised in DECO 2015 CHARLEMAGNE S.A).

The securitized loan balance will be 82% of the senior loan (EUR282.5 million) with Morgan Stanley holding a EUR50 million interest that will rank pari passu with the securitized loan. The issuer will create a EUR11.63 million (representing 5% of the securitised senior loan) vertical risk retention loan interest (VRR loan) in favour of Morgan Stanley to satisfy E.U. and U.S. risk retention requirements.

Morgan Stanley arranged and underwrote the single loan to facilitate the refinance of a portfolio of 50 assets located in major cities across Germany and the Netherlands.

The loan, which matures in January 2021 and has two one-year extension options amortizes at 0.125% quarterly during years two and three and at 0.250% quarterly during years four and five. Its event of default covenants are triggered at an 80% LTV ratio or at a 7.25% debt yield ratio during years one and two and at 7.75% during years three to five. An 8.33% debt yield ratio would trigger a mandatory cash trap event in years one and two while an 8.89% ratio would trigger it during years three to five. An LTV ratio higher than 74.25% would also trigger a mandatory cash trap.

In our analysis, we evaluated the underlying real estate collateral securing the loan to generate an expected case value. Our analysis focused on sustainable property cash flows and capitalization rates. We assumed that a real estate workout would be required throughout the five-year tail period (the period between the maturity date of the loan that matures last and the transaction's final maturity date) needed to repay noteholders, if the respective borrowers defaulted. We then determined the loan recovery proceeds applying a recovery proceeds rate at each rating level. This analysis begins with the adoption of base market value declines and recovery rate assumptions for different rating levels. At each rating category, we adjusted the base recovery rates to reflect specific property, loan, and transaction characteristics.

We aggregated the derived recovery proceeds above for each loan at each rating level, and compared them with the proposed capital structure. Following our credit analysis, we consider the available credit enhancement for each class of notes to be commensurate with our preliminary ratings on the notes.

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