Overview

• Following our review of Pembroke Property Finance 2, we raised our ratings on the class B to E notes, and affirmed our ratings on the class A and F notes.
• The transaction's sequential amortization has led to increases in the credit enhancement for all except the most junior class of notes.
• Pembroke Property Finance is an Irish true-sale CMBS transaction. Out of the 147 loans secured at closing, 138 loans remain in the pool.

FRANKFURT (S&P Global Ratings) Feb. 2, 2023--S&P Global Ratings today raised its credit ratings on Pembroke Property Finance 2 DAC'S class B, C, D, and E notes. At the same time, we affirmed our 'AAA (sf)' and 'B (sf)' ratings on the class A and F notes, respectively.

Rating rationale

Today's rating actions follow our review of the transaction's five key rating factors (credit quality of the securitized assets, legal and regulatory risks, operational and administrative risks, counterparty risks, and payment structure and cash flow mechanisms). Since closing, the issuer received approximately €19.6 million in scheduled amortization and €28.9 million in prepayments, together accounting for 13.8% of the initial principal balance (see "Pembroke Property Finance 2 DAC CMBS Notes Assigned Ratings," published on Feb. 23, 2022). Of the principal receipts, the issuer used €21.2 million for further advances.

Further advances are limited to 14.5% of the portfolio (by balance) over the transaction's life and are subject to various value and income tests at the portfolio, loan, and asset levels. To date, the transaction has made about half the further advances that are allowed.

Moreover, the transaction pays sequential from closing, so the repayments, net of further advances, have increased credit enhancement for all classes of notes except the most junior class.

Portfolio performance

As of the November 2022 interest payment date:

• The pool's average loan size is €2,023,725.
• Of the loans, 5.3% are interest-only mortgage loans.
• The current weighted-average loan-to-value (LTV) ratio is 57.0%, down from 59.7% at closing.
• The weighted-average current interest rate is 7.62%, up from 6.14% at closing.
• The portfolio decreased to 138 loans from 147 at closing.
• Obligor groups also decreased, to 73 from 79 over the same period.

Of the original 79 obligor groups, six fully repaid and all except one borrower group amortized partially, either from scheduled amortization or from prepayments.

The total property value of the underlying assets has declined slower than the debt, so the pool's weighted-average LTV is 57.0%, down from 59.7% at closing. Only 14 of the 244 remaining properties report an updated valuation since closing. For this subset, the external market value was up by 36%. However, the previous valuations dated back to 2017 and 2019.

As of the most recent report, none of the loans are in arrears or default. The loans have a weighted-average remaining term of 2.6 years, which is unchanged from closing given the changes in the underlying pool. However, the weighted-average seasoning has increased to 30 months from 23 months, while the longest maturity remains in 2031.

Loan concentration within the pool has increased, although it does not affect our analysis because we give very little diversity credit in our CMBS ratings, and the diversity credit stops increasing after 10 effective loans.

Table 1

Credit evaluation

In our analysis, we evaluated each loan's underlying real estate collateral to generate an "expected case" value. This value constitutes the S&P Global Ratings value that we determine for each property--or portfolio of properties--securing a loan (or multiple loans) in a securitization. It primarily results from a calculation that considers each property's net adjusted cash flows and an applicable capitalization (cap) rate.

We determined the loan's underlying value, focusing on sustainable property cash flows and cap rates. We assumed that a real estate workout would be required throughout the tail period (the period between the maturity date of the latest maturing loan and the transaction's final maturity date) needed to repay noteholders if the respective borrowers defaulted.

Table 2

S&P Global Ratings' NCF

Our property-level cash flow analysis derives what we believe to be a property's long-term sustainable NCF. In our analysis, we considered provided rental levels and operational statements, third-party appraisal reports, relevant market data, and assessments of the various properties' competitive positions.

Our poolwide NCF is 13.6% lower than the reported net operating income, compared with 9.0% at closing.

Other analytical considerations

Our rating analysis includes an analysis of the transaction's payment structure and cash flow mechanics. We assess whether the cash flow from the securitized assets would be sufficient, at the applicable ratings, to make timely payments of interest and ultimate repayment of principal by the legal maturity date for each class of notes, after taking into account available credit enhancement and allowing for transaction expenses and external liquidity support.

The transaction maintains a €7.4 million liquidity reserve, which was funded out of the issuance of the class Z notes.

We also analyzed the transaction's counterparty exposure. The maximum rating achievable for this transaction under our current counterparty criteria is 'AAA (sf)' based on the replacement provisions of the account banks.

Our analysis also includes a full review of the legal and regulatory risks and operational and administrative risks. Our assessment of these risks remains unchanged since closing and is commensurate with the ratings assigned.

Rating actions

Our ratings in this transaction address the timely payment of interest, payable quarterly in arrears, and the payment of principal no later than the legal final maturity dates.

Our opinion on the long-term sustainable value is unchanged (down 0.3% since closing) on a like-for-like basis, meaning when considering only the properties that were already in the pool at closing and that remain in the pool now.

However, the issuer applied substantial amortization in the transaction over the same period--about 9% of the securitized loan balance after considering further advances--to the class A notes only, increasing credit enhancement for all classes of notes except the class F notes. We therefore raised to 'AA+ (sf)', 'A+ (sf)', 'A- (sf)', and 'BBB- (sf)' from 'AA (sf)', 'A (sf)', 'BBB (sf)', and 'BB+ (sf)' our ratings on the class B, C, D and E notes, respectively. We also affirmed our 'AAA (sf)' rating on the class A notes as the available credit enhancement continues to be commensurate with the assigned rating.

Our model-indicated rating for the class F notes is 'B- (sf)'. However, we affirmed our 'B (sf)' rating on this class of notes given the transaction's overall performance and the overcollateralization provided by the class Z notes.

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
• Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
• Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
• Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
• Criteria | Structured Finance | CMBS: European CMBS Methodology And Assumptions, Nov. 7, 2012
• Criteria | Structured Finance | CMBS: CMBS Global Property Evaluation Methodology, Sept. 5, 2012
• General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
• Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28, 2009
• Criteria | Structured Finance | CMBS: Methodology For Analyzing Loan-Level Limited Purpose Entities In European CMBS, Sept. 1, 2004

Related Research

• Asset Price Risks: How Safe Is European CMBS Performance In The Face Of Rising Real Estate Values?, June 9, 2022
• Pembroke Property Finance 2 DAC CMBS Notes Assigned Ratings, Feb. 23, 2022
• 2017 EMEA CMBS Scenario And Sensitivity Analysis, July 6, 2017
• Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
• European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016