DBRS Morningstar Confirms Class A, E and F Notes Ratings; Upgrades Class B, C, D Notes Ratings; and Discontinues Class G Notes Rating on Ribbon Finance 2018 Plc with Negative Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating Rate Notes due 2028 issued by Ribbon Finance 2018 Plc (the Issuer):

-- Class A at AAA (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (low) (sf)

DBRS Morningstar also upgraded its ratings on the following classes:

-- Class B at A (high) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)

DBRS Morningstar also discontinued its rating on the following class due to repayment:

-- Class G

All trends are Negative.

The rating confirmations and upgrades follow the borrower’s equity injection and the transaction’s performance over the last 12 months.

Ribbon Finance 2018 Plc is the securitisation of a GBP 449.8 million senior loan at issuance. The senior loan was advanced in June 2018 to Ribbon Bidco Limited (the Borrower) to provide partial acquisition financing for the Dayan family (the Sponsor) to acquire Lapithus Hotels Management UK (LHM) and 20 hotels (the Transaction). The initial lender is Goldman Sachs Bank USA and the Transaction was arranged by Goldman Sachs International. Goldman Sachs Bank USA also advanced a mezzanine loan of GBP 69.2 million to Ribbon Mezzco Limited. The mezzanine loan, fully repaid on 27 July 2020, was structurally and contractually subordinated to the senior loan and was not part of the Transaction. As of October 2021, the outstanding senior loan amount was GBP 283.8 million. The expected maturity date is on 13 April 2023 with no extension option available. The CMBS notes final maturity date is in April 2028, thereby the transaction benefits from a tail period of five years.

The senior loan is secured by 19 hotels (20 originally) located in the UK, three operate under the Crowne Plaza brand, 15 are flagged by Holiday Inn, and one by Best Western (the Portfolio). In February 2018, the initial valuer, HVS - London Office appraised the total market value of the Portfolio at GBP 692 million, subsequently, the value reduced to GBP 618 million in August 2019 following the sale of the Bloomsbury Hotel. In May 2021, Savills re-valued the Portfolio at GBP 528.1 million showing a market value decline of 14.5% when compared with the value in August 2019.

The loan interest is three-month Libor plus a 3.19% margin and the interest payment date (IPD) falls quarterly on the 15th of January, April, July, and October, together with the scheduled amortisation set at 1% per annum since origination.

On 10 July 2020, the facility agent agreed to waive any loan event of default in connection with the Coronavirus Disease (COVID-19) pandemic and the resultant temporary closure of certain Hotels, for a period up to but excluding July 2021 IPD in return for an equity cure payment. As such, the Sponsor deposited GBP 28 million into the equity cure account. Subsequently, on 10 April 2021, a new amendment and waiver letter was agreed, extending the current waiver of the backward looking covenants (interest coverage ratio and Debt Yield) until (but excluding) the July 2022 IPD. As part of the amendment and waiver agreement, the borrower made a GBP 58 million mandatory loan prepayment on the April 2021 IPD, which was allocated to the notes on a pro rata basis, whereas GBP 20 million of funds was placed in a blocked account to sufficiently cover debt service costs during the 12-month waiver period. Additionally, the borrower agreed to a bi-annual valuation in order to closely monitor the loan-to-value (LTV) ratio, and a further partial paydown of the loan to maintain a level of LTV lower than 60%. The Sponsor accordingly made a partial loan prepayment of GBP 20 million in July 2021 bringing the LTV to 49.88%.

In November 2020, DBRS Morningstar downgraded its ratings on Classes B to G, in line with its coronavirus considerations and macroeconomic scenarios for 2020-2022, where DBRS Morningstar anticipated a longer period to a recovery resulting from lower occupancy rates across the Portfolio and reduced cash flows.

Since the easing of coronavirus lockdown restrictions by the UK Government in May 2021, the Portfolio performance metrics have shown some improvement with reported occupancy at 79.06% (trailing three months) versus an occupancy of 56.58% (trailing 12 months) as of October 2021. As such, DBRS Morningstar maintained its assumptions on occupancy of 63% across the Portfolio and net cash flow (NCF) at GBP 31.5 million, as concluded at its last review of the transaction. The cap rate was also maintained at 8.5%, which translates to a DBRS Morningstar value of GBP 378.6 million, representing a 28.3% haircut to the current market value of GBP 528.1 million.

The loan prepayment of GBP 78 million and consequently lower LTV, when coupled with the borrowing entity’s commitment to inject equity to cover debt service until July 2022 has resulted in the upgrade of the ratings on the Class B notes to A (high) (sf) from A (sf), Class C notes to A (low) (sf) from BBB (high) (sf), and Class D notes to (BBB) (sf) from BBB (low) (sf). The rating on the Class G notes has been discontinued as the notes were redeemed in full, following the reverse sequential application of the voluntary prepayment in July 2021. DBRS Morningstar maintained its ratings on the Class A notes at AAA (sf), Class E notes at BB (high) (sf), and Class F notes at BB (low) (sf).

Although there has been a reported improvement in the take-up of hotel rooms and hotel amenities, DBRS Morningstar maintains a Negative trend on all classes of notes due to the uncertainty still surrounding the hospitality sector caused by the coronavirus pandemic.

The transaction benefits from a liquidity reserve facility, which may be used to cover shortfalls on the payment of interest due by the Issuer to the holders of the Class A to Class E notes. No drawings have been made under the liquidity reserve facility since issuance. The outstanding amount for the liquidity reserve is GBP 17,539,481 as of October 2021.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many tenants and borrowers. DBRS Morningstar anticipates that vacancy rate increases and cash flow reductions may continue to arise for many CMBS borrowers. In addition, commercial real estate values could be negatively affected, at least in the short term, affecting refinancing prospects for maturing loans and expected recoveries for defaulted loans. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 16 June 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated CMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/362693/european-cmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology” (26 February 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar 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 rating action.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include servicer reports provided by CBRELS Ltd and U.S. Bank Global Corporate Trust Limited since issuance.

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

At the time of the initial ratings, 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.

The last rating action on this transaction took place on 4 November 2020, when DBRS Morningstar removed the ratings from Under Review with Negative Implications, confirmed the rating on the Class A notes and downgraded the ratings on all remaining classes with Negative trends.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at www.dbrsmorningstar.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 ratings (the Base Case):

Class A Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class A notes at AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class A notes at AA (sf)

Class B Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class B notes at A (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class B notes at A (low) (sf)

Class C Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class C notes at A (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class C notes at BBB (sf)

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class D notes at BBB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class D notes at BBB (low) (sf)

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class E notes at B (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class E notes at CCC (sf)

Class F Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class E notes at CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class E notes at CC (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 October 2020

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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

-- European CMBS Rating and Surveillance Methodology (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.