The latest information on the rating, including rating reports and related methodologies, is available on this LINK.^a

Rating action

The rating actions are as follows:

Class A Notes (ISIN REGS/144A: XS2459127226/XS2459127739), EUR 153,425,000: rated (P) A+_SF

Class B Notes (ISIN REGS/144A: XS2459128463/XS2459128547), EUR 34,800,000: rated (P) BBB+_SF

Class C Notes (ISIN REGS/144A: XS2459130014/XS2459130527), EUR 47,245,000: rated (P) B+_SF

Preliminary ratings rely on factual information made available to Scope up to November 2022. Scope may assign final ratings subject to a review of the latest rent roll, loan agreements, legal opinions, hedging agreements and any other documentation available to noteholders and credit rating agencies solicited by the issuer. Final credit ratings may deviate from preliminary ratings.

The assigned preliminary ratings do not address payment of any Euribor excess amount that may arise if the Euribor rate exceeds four percent per annum after the expected note maturity date of 22 May 2027 or any exit payment amount in respect of the notes.

The assigned preliminary rating on the Class C notes addresses the ultimate payment of interest and repayment of principal on or before the final maturity date.

Transaction overview

Cassia 2022-1 S.R.L. is a EUR 235.47m commercial mortgage-backed securitisation (CMBS) transaction collateralised by two senior pari-passu non-cross collateralised and non-cross defaulted commercial real estate (CRE) loans (named Thunder II and Jupiter). Blackstone Group Inc. (Blackstone) is the loan sponsor, and Bank of America Europe DAC Milan Branch and Goldman Sachs Bank Europe SE are the transaction arrangers. The transaction closed on 7 April 2022 and has its legal final maturity on 22 May 2034.

The Thunder II loan is a EUR 164.0m five-year interest-only first-lien senior mortgage loan. The underlying collateral consists of 20 big-box logistics assets totaling 341,000 sq m. They are managed by Logicor, which is partially owned by the sponsor. The loan exhibited a debt yield (DY) ratio of 8.1% at closing in April 2022 and a loan-to-value (LTV) ratio of 61.4% based on an aggregate market value of EUR 266.92m. The portfolio exhibited an occupancy level of 99.8%, a weighted average unexpired lease to break (WAULB) of 4.0 years, and some in-place rental increase potential (4.3% under-rented) as at the cut-off date in October 2021.

The Jupiter loan is a EUR 72.4m five-year interest-only first-lien senior mortgage loan. The underlying collateral consists of 22 predominantly last-mile logistics assets offering 165,997 sq m. They are managed by Mileway, an affiliate of the sponsor. The loan exhibited a DY yield of 9.7% at closing and an LTV ratio of 61.5% based on an aggregate market value of EUR 117.67m. The loan’s property portfolio exhibited an occupancy level of 93.2%, a WAULB of 3.9 years and some marginal in-place rental increase potential (1.4% under-rented) as at the cut-off date.

Rating rationale

The ratings benefit from an experienced sponsor combined and the strong track record of the asset managers in the light industrial and logistics space. The ratings also benefit from the good location and quality of the properties, moderate leverage and robust metrics at closing, high quality main tenants and strong tailwinds for the logistics sector.

The ratings are constrained by a weak structure for senior noteholders, including the pro-rata allocation of proceeds to the loans’ shares in each note and the low liquidity reserve coverage, taking into account the amortisation of the liquidity reserve at the first payment date. The ratings are also constrained by a low tenant diversity, weak cash trap and financial covenants, the release premium mechanism and the medium term and refinancing default risks of Thunder II and the high refinancing default risk for Jupiter.

 Key rating drivers

Experienced sponsor and affiliated asset managers (positive)². Blackstone is the leading real estate private equity firms in the world and the main sponsor of European logistics CMBS. Logicor, originally founded and now partially owned by Blackstone, is the largest owner and operator of distribution and logistics warehouses across Europe. Mileway, an affiliate of Blackstone, is its counterpart in last-mile logistics. Both Logicor and Mileway have a robust track record and extensive experience managing assets. (ESG factor)

Good location and quality properties (positive)¹. The properties are good quality, and all are strategically located close to at least one of Italy’s main logistics corridors and/or one of its main cities. Thunder II, which is secured predominantly by big-box logistics properties, is fully let (99.8%). Jupiter, which is secured predominantly by light industrial properties, is 93.2% let.

Moderate leverage and robust loan metrics (positive)³. Both loans present a similar initial LTV ratio of 59.85%. The weighted average debt yield is 8.6%, which breaks down as 8.1% for Thunder II and 9.7% for Jupiter.

Strong main tenants’ covenants (positive)¹. The top five and top 10 tenants, representing 42.9% and 61.4% of total gross income respectively, exhibit a long weighted average lease to break of 6.7 years and 5.3 years respectively – longer than each loan’s five-year tenor. Furthermore, most of the leases are indexed to Istat CPI. Finally, 70.4% of the top 10 tenants are either pure logistics/third-party logistics companies (37.9%) or in the food and consumer goods business (32.5%), which have been resilient and thriving sectors during the pandemic.

Strong tailwinds for the logistics sector (positive)². The logistics sector has benefited greatly from increased warehouse demand since the Covid-19 crisis. This is particularly true in Italy, which not only suffered from tight restrictions during the pandemic but also exhibits one of the lowest e-commerce penetration rates in Europe. Additionally, rental income currently benefits from high inflation given that most leases are indexed to the Istat CPI. (ESG factor)

Weak liability structure (negative)³. The transaction securitises two non-cross defaulted, non-cross collateralised loans and features limited excess spread partially mitigated by the ongoing issuer costs letters. It also features pro-rata allocation of principal proceeds to the loans’ shares of each note, detrimental to the senior noteholders. There is a misalignment of interests between the noteholders and the vertical risk retention (VRR) instrument holders because the payment interests of the VRR instruments is senior to all other note payments. Interest shortfalls on the most junior classes of notes may not be fully repaid if the loans refinance. (ESG factor)

Low liquidity coverage (negative)^3,4,5,6. A EUR 11.5m liquidity reserve, partially funded from an over-issuance of class A, provided 2.7 years and 2.1 years of interest and senior costs coverage to class A and class B notes respectively at closing. The liquidity reserve amount shrank by EUR 1.7m at the first interest payment date because of an underestimated multiplier with the proceeds allocated pro-rata to class A to class C leading to a 1.3 years and 1.1 years of coverage to class A and class B at the then 2.0% Euribor rate. Scope considers these coverage levels to be low and lower than the peer average. Amendments to the documentation, including a correction of the multiplier, reinstated the required liquidity reserve amount at EUR 11.5m. The liquidity reserve will be topped up through excess spread (if any) and/or principal repayments on the loans. Scope notes that the excess spread stemming from the amortisation of the notes is unlikely to be sufficient to top it up to EUR 11.5m before the expected maturity of the notes. (ESG factor)

Low tenant diversity (negative)¹: The Jupiter loan exhibits a high tenant concentration, with the top five tenants accounting for 76.5% of the gross rental income. Thunder II’s top five tenants account for 48.8% of the gross rental income.

Weak cash trap and financial covenants (negative)³: There is no financial covenant prior to a permitted change of control. Furthermore, the cash trap mechanism allows costs to be deducted from the trapped amount prior to being swept and the LTV covenant is calculated considering an up to 5% portfolio premium. (ESG factor)

Weak release premium (negative)^2,3: The release premium is flat for the first 10% of property disposal in market value, 5% for the subsequent 10% and 10% thereafter but decreasing to a floor of 2.5% after each disposal. The overall release premium ranges from 3.8% to 4.4% and is significantly below the 10%-15% observed average release premium of similar transactions. (ESG factor)

No amortisation (negative)³: The Thunder II and Jupiter loans are exposed to medium and high refinancing risk respectively due to a lack of scheduled amortisation. The Jupiter loan is particularly exposed, with its main tenant benefiting from a break option soon before the loan’s scheduled maturity date.

One or more key drivers of the credit rating action is considered an ESG factor.

Upside rating-change drivers

Collateral value increase: An increase in the value of collateral could positively impact the ratings.

Lease rollover management and rental income improvement: Positive management of the lease rollover combined with higher-than-expected rent indexation could positively impact the rating of the most senior class of note.

Downside rating-change drivers

Collateral value decline: A drop in the value of collateral could negatively impact the ratings.

Portfolio credit quality migration: Asset disposals could affect the overall credit quality of the transaction, particularly in light of the weak release premium and increased tenant concentration.

Quantitative analysis and assumptions

Scope used its cash flow CRE tool to analyse the transaction. In particular, the agency considered the two distinct principal waterfalls corresponding to each loan’s share of the capital structure if one loan was to default or be prepaid/refinanced.

Scope considered key rating-conditional assumptions disclosed below.

B rating stress:
Weighted average capitalisation rate (%): 6.0%
Rental value haircuts (%): 2.0%
Void periods (months): 6
Foreclosure period (months): 36

BBB rating stress:
Weighted average capitalisation rate (%): 7.2%
Rental value haircuts (%): 11.6%
Void periods (months): 14
Foreclosure period (months): 50

A rating stress:
Weighted average capitalisation rate (%): 7.8%
Rental value haircuts (%): 16.4%
Void periods (months): 18
Foreclosure period (months): 57

Scope modelled a fixed structural vacancy rate of 5.0% in addition to an inflation rate of 2.0% per annum applied to rental income, costs and estimated rental value. The agency considered an average tenant credit quality of BB for unrated tenants and in other cases adjusted the credit quality of the rated parent company down by one notch.

Scope did not model any cash trap covenants that it considered weak, nor did it model any default covenants.

Sensitivity analysis

Scope tested the resilience of the credit ratings against deviations in the main input parameters as well as in transaction-specific scenarios. This analysis has the sole purpose of illustrating the sensitivity of the credit ratings to input assumptions, and it is not indicative of expected or likely scenarios.

The following summary shows the resulting notch downgrades (-) or upgrades (+) compared to the assigned ratings:

Increase capitalisation rate (+20%): 0 (Class A) / 0 (Class B) / 0 (Class C)
Increase vacancy rate (+20%): 0 (Class A) / 0 (Class B) / 0 (Class C)
Increase rental value haircut (+20%): 0 (Class A) / 0 (Class B) / 0 (Class C)
Top two rated tenants jump-to-default: 0 (Class A) / +3 (Class B) / 0 (Class C)
Euribor excess amount considered in the rating promise: -3 (Class A) / 0 (Class B) / -2 (Class C)
33% voluntary prepayment on both loans: 0 (Class A) / -3 (Class B) / N/A notes repaid (Class C)
Jupiter only (Thunder II repaid): 0 (Class A) / +3 (Class B) / +3 (Class C)
Thunder II only (Jupiter repaid): +3 (Class A) / +3 (Class B) / +1 (Class C)
5% per annum inflation rate: 0 (Class A) / +3 (Class B) / 0 (Class C)
Rent rolled updated to the servicer’s latest report (leases to expiry): +3 (Class A) / +3 (Class B) / +1 (Class C)

a. The sentence was added on 19 January 2023 and did not appear in the original publication.

Rating driver references
1. CBRE valuation reports 
2. Scope assumptions (Confidential)
3. Offering circular 
4. Notice dated 30 Nov 2022 
5. Payment report 22 Aug 2022 
6. Payment report 22 Nov 2022 

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction using the agency’s CRE tool, which incorporates relevant asset assumptions. The agency took into account the transaction’s main structural features, such as the instruments’ priority of payments and the instruments’ size, coupons and hedging arrangements. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for this Credit Rating, (CRE Loan and CMBS Rating Methodology, 6 October 2022; General Structured Finance Rating Methodology, 17 December 2021; Counterparty Risk Methodology, 14 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Credit Rating was not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation   NO
With access to internal documents                                 NO
With access to management                                          NO
The following substantially material sources of information were used to prepare the Credit Rating: public domain, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment. The external due diligence assessment/asset audit was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Bouchet Benjamin, Director
Person responsible for approval of the Credit Rating: Benoit Vasseur, Executive Director
The preliminary Credit Rating was first released by Scope Ratings on 18 January 2023
The Credit Rating concern a financial instrument that has been rated by Scope Ratings for the first time.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.