DBRS Morningstar Finalises Provisional Ratings on River Green Finance 2020 DAC

DBRS Ratings GmbH (DBRS Morningstar) finalised the following provisional ratings on the notes issued by River Green Finance 2020 DAC (the Issuer or the Transaction):

-- Class A notes at AAA (sf)
-- Class B notes at AA (low) (sf)
-- Class C notes at A (low) (sf)
-- Class D notes at BBB (sf)

All trends are Stable.

The Issuer is the securitisation of two floating-rate commercial real estate facilities advanced by Goldman Sachs International Bank (GS) to a French Organisme de Placement Collectif en Immobilier (OPCI, the Facility B Borrower) and four ringfenced compartments of a Luxembourg investment company with a variable capital-reserved alternative investment fund (société d’investissement à capital variable–fonds d’investissement alternatif reserve or SICAV-RAIF; the Facility A Borrowers). The Issuer will purchase the loans using proceeds from the CMBS issuance (95.0% of the purchase price) and an issuer loan advanced by GS (5.0% of the purchase price). Class X1 and Class X2 certificates were also issued but DBRS Morningstar does not rate them.

The EUR 196.2 million debt facilitated the acquisition of the River Ouest building by a group of investors led by LRC Real Estate Limited (the Sponsors) from a consortium of sellers led by AEW, including CDC, Predica, and Scor. River Green Finance 2020 DAC is the first green bonds European CMBS issuance, as it is expected to comply with the International Capital Market Association Green Bond Principles 2018 (ICMA Green Bond Principles).

The Transaction is backed by a single campus-style office property named River Ouest built by HRO Group in 2009. As the name indicates, the asset is located on the right bank, west of the River Seine in the Bezons municipality in the western suburb of Paris. Colombes, a commune in the northwestern suburbs of Paris, is on the other side of the river from the property; La Défense, a major business district, is southeast of the asset.

There are three tenants occupying 98.3% of the building. Atos International (Atos), an information technology service provider, is the largest tenant, providing approximately 83.4% of the property’s EUR 23.7 million gross rental income after indexation. River Ouest has served as Atos’ global headquarters since its completion in 2009 and Atos has renewed its lease for a 12-year term that expires in 2029. The other two tenants are Dell (previously EMC2, which was absorbed by Dell in 2016) and Sophos Group Plc.

CBRE Group, Inc. valued the office campus at EUR 343.3 million on 31 July 2019. Based on the EUR 18.3 million DBRS Morningstar net cash flow (NCF), DBRS Morningstar derived a stressed DBRS Morningstar value of EUR 268.9 million. This represents a value haircut of 21.7%. DBRS Morningstar views the current tenancy profile favourably as it provides a stable rental income during the loan term, especially after Dell effectively waived its 2020 lease break option by not delivering a notice before 31 December 2019.

The Transaction marks a first green bonds European CMBS issuance, as it is expected to comply with the ICMA Green Bond Principles. River Ouest was awarded the Building Research Establishment Environmental Assessment Method (BREEAM) “Very Good” certificate on 25 January 2017. BREEAM is a globally recognised sustainability assessment method for masterplanning projects, infrastructure, and buildings. Sustainalytics, an independent environmental, social, and corporate governance research, ratings, and analytics firm, reviewed the Transaction’s green bond framework and concluded it is aligned with the ICMA Green Bond Principles. DBRS Morningstar understands that to maintain green bond compliance the building needs to maintain or improve its environmental label, which is also the Sponsor’s intention. In its rating analysis, DBRS Morningstar assessed the BREEAM certification and compliance with the ICMA Green Bond Principles as credit neutral.

The securitised debt is split into two facilities: the EUR 35.8 million Facility A, lent to four ringfenced compartments of a Luxembourg SICAV-RAIF investment fund; and the EUR 160.4 million Facility B, lent to the French OPCI that holds a direct interest in the asset. However, because of French financial assistance and corporate benefit rules, the Facility B Borrower cannot grant any security over its assets for the benefit of the Facility A lender. As a result, only Facility B benefits from direct mortgage security over the asset and, consequently, Facility A is not mortgage secured. To mitigate this, Facility A is secured by, inter alia, French trusts, which would ultimately provide the Facility A lender an indirect security interest granted for the purpose of Facility B (see the Loan Details section in the DBRS Morningstar rating report and/or the prospectus section titled French Trust over Shares and Shareholder Loans for more details). The French trustee structure could also mitigate the risk of the Facility B Borrower initiating safeguard proceedings by exercising the shareholder rights of the Facility B Borrower to replace its manager. The new manager would be mandated to terminate any insolvency and safeguard proceedings (see the section in the prospectus titled Risks Relating to Insolvency of the Facility B Borrower or the Opening of French Safeguard Proceedings for more details).

The Facility A Borrowers are four ringfenced compartments of a Luxembourg umbrella SICAV-RAIF, formed as a corporate partnership limited by shares, and will attract up to 28% withholding tax (WHT) on dividend distributions made by the Facility B Borrower. This may increase the risk of potential shortfalls on interest or principal payments due on Facility A. The Sponsors have undertaken to convert the SICAV-RAIF to a specialised investment fund (SICAV-SIF), which is entitled to a reduced WHT rate on its dividend distributions to mitigate the WHT liability impact. DBRS Morningstar understands that the reduced rate is 15%. Failure to convert the fund within one year after the utilisation date will trigger a margin step-up to 2.65% from 2.4%, and any potential exposure or claim to a higher WHT rate will trigger a WHT cash trap (see the Loan Details section in the DBRS Morningstar rating report for more details). DBRS Morningstar also understands that the fund’s status (either as a SICAV-RAIF or a SICAV-SIF) is subject to the satisfaction of certain regulatory requirements in relation to diversification in investments, and the Sponsors will maintain the relevant status of the funds or a loan event of default may occur (see the Loan Details section in the DBRS Morningstar rating report and/or the prospectus section titled Risks of Non-Compliance By the Fund With Its Regulatory or Tax Requirements or Failure of the Fund to Convert into a Specialised Investment Fund for more details). In DBRS Morningstar’s view, although such risks cannot be fully avoided, they could be mitigated by the strong and stable cash flow from the underlying asset, stringent covenant setting, and limited size (18.3%) of Facility A in the total debt amount.

There are three sets of cash trap covenants based on performance ratios, WHT liability, and technical and environmental items. The ratio cash trap covenants are set at 10.27% for debt yield (DY) calculated based on 12-month forward-looking adjusted net rental income and a 62.15% loan-to-value (LTV) based on the latest valuation. WHT cash trap is triggered by any action, claim, investigation, or proceeding commenced or announced by the French tax administration or any other person, without limitation, to levy WHT at a rate greater than the rate then currently provided for by the French Tax Code (currently 15%) on the dividend distribution by the Facility B Borrower. Under the WHT cash trap, an amount corresponding to the increased tax exposure will be trapped after paying senior costs and interest but before the ratio and technical items cash trap amounts. The technical items cash trap is meant to incentivise the Sponsor to carry out the immediate remedial works identified in the technical and environmental reports. The total immediate capex requirement identified in the technical report is approximately EUR 1.5 million, of which EUR 1.0 million is covered by the 10-year builder insurance. Failure to appoint a contractor within three months of utilisation or failure to complete the remedial works by nine months of the utilisation date will trigger the technical items cash trap event and trap the corresponding required capex amount.

The financial default covenants are based on 67.15% LTV and 9.39% DY ratios. A noncured financial covenant breach will trigger a loan event of default. However, it should be noted that mere financial covenant breaches are not enforceable under the French trust agreement.

The three-year loans have two one-year extension options that can be exercised if certain conditions are met. During the loan term, the Facility A and Facility B borrowers are required to amortise the principal amount by 1.0% per year and the amortisation will step up to 2.0% in the fifth year, should the loan still be outstanding at that time.

To hedge against increases in the interest payable under the loans, the borrower will purchase an interest cap agreement from Wells Fargo Bank, N.A. (rated AA with a Stable trend by DBRS Morningstar). The cap agreement covers 100% of the total loan amount (quarterly reduced to match the scheduled amortisation) with a cap strike rate of not higher than 2.5%. After the expected note maturity, the Euribor will be capped at 5%.

To cover any potential interest payment shortfalls, the Issuer has obtained a liquidity facility of EUR 11.3 million from Crédit Agricole Corporate & Investment Bank. The liquidity facility will cover the Class A through Class C notes and the issuer loan. DBRS Morningstar estimates that the commitment amount at closing will be equivalent to approximately 23 months of coverage based on the hedging terms mentioned above or approximately 13 months of coverage based on the 5% Euribor cap. The liquidity facility will be reduced based on the amortisation and market value decline of the property.

The Class D notes are subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes.

The Transaction features a Class X interest diversion structure. The diversion trigger is aligned with the financial covenants of the loan; once triggered, any interest and prepayment fees due to the Class X certificate holders will instead be paid directly into the Issuer’s transaction account and credited to the Class X diversion ledger. The diverted amount will be released once the trigger is cured; only following the expected note maturity or the delivery of a note acceleration notice can such diverted funds be used to amortise the notes and the issuer loan.

The final legal maturity of the notes is in January 2032, seven years after the fully extended loan maturity date. DBRS Morningstar believes that this provides sufficient time to enforce the loan collateral and repay the bondholders, given the security structure and jurisdiction of the underlying loan.

To comply with the applicable regulatory requirements, GS retained an ongoing material economic interest of no less than 5% of the Transaction amount by advancing an issuer loan to the Issuer.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology”.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” methodology at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments

The sources of data and information used for these ratings include Goldman Sachs International and its delegates, Allen & Overy LLP and the CBRE Group.

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

DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

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

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.
Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

Class A Notes Risk Sensitivity:
--A 10% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class A notes to AA (high) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class A notes to AA (low) (sf)

Class B Notes Risk Sensitivity:
--A 10% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class B notes to A (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class B notes to A (low) (sf)

Class C Notes Risk Sensitivity:
--A 10% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class C notes to BBB (high) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class C notes to BBB (low) (sf)

Class D Notes Risk Sensitivity:
--A 10% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class D notes to BB (high) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class D notes to BB (sf)

For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 8 January 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology

A description of how DBRS Morningstar 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.