DBRS Morningstar Downgrades Ratings of Elizabeth Finance 2018 DAC

DBRS Ratings Limited (DBRS Morningstar) downgraded its ratings of the Class A, Class B, Class C, Class D, and Class E Notes of Elizabeth Finance 2018 DAC (the Issuer) as follows:

-- Class A Notes to A (high) (sf) from AA (high) (sf)
-- Class B Notes to BBB (low) (sf) from A (low) (sf)
-- Class C Notes to BB (low) (sf) from BBB (low) (sf)
-- Class D Notes to CCC (sf) from B (sf)
-- Class E Notes to C (sf) from B (low) (sf)

The trends on all classes of notes remain Negative.

The downgrades follows the portfolio’s deteriorating cash flow. The continued slow recovery in the aftermath of the Coronavirus Disease (COVID-19) outbreak and the continuing uncertainty surrounding the UK retail property market is reflected in the Negative trend on the notes.

Elizabeth Finance 2018 DAC is a securitisation of two senior commercial real estate loans that were advanced by Goldman Sachs International Bank in August 2018. The MCR loan of GBP 21.2 million was granted to refinance an office asset, Universal Square, located in Manchester and the Maroon loan of GBP 63.9 million (GBP 69.6 million at inception) was granted to refinance a portfolio of three secondary retail properties in the United Kingdom (Kings Lynn and Loughborough in England and Dunfermline in Scotland). The MCR loan was repaid in full on the Q3 2020 interest payment date.

The Maroon loan is secured by the three secondary shopping centres. The loan was accelerated by the initial special servicer CBRE Loan Services Limited (CBRELS) following a loan-to-value (LTV) covenant breach. CBRELS subsequently agreed to a standstill until the initial loan maturity in January 2021. It was also agreed that three months before such maturity, the Maroon borrower would provide an exit strategy showing how it expected to repay the loan in full on the initial maturity date; however, the exit strategy provided by the Maroon borrower was considered unsatisfactory by the special servicer. As a result, in October 2020, CBRELS decided to accelerate the loan and subsequently fixed charge receivers were appointed by the common security agent with the aim of disposing of the assets.

Following the appointment of the fixed charge receivers, the controlling Class D noteholders exercised their right to replace CBRELS with Mount Street Mortgage Servicing (Mount Street) as the special servicer. Subsequently, Mount Street temporarily suspended the sale of the portfolio and sought to implement asset management initiatives to improve and stabilise the portfolio’s net operating income and to wait for a likely pickup of the retail investment market following the easing of lockdown restrictions during the course of the pandemic. Waypoint Asset Management, which is set to take over as the asset manager in June 2022, is currently drawing up business plans to re-base the in-place leases and collect the arrears, which now stand at GBP 4.6 million across the portfolio.

The litigation hanging over the Kingsgate Shopping Centre asset, in Dunfermline, between APCOA parking and the borrower HRGT Crosslands Holdco (UK) Ltd for the entire portfolio (Crosslands) was settled around 1 April 2022 with the lease remaining in place until September 2034. It was agreed that APCOA will pay 50% of the outstanding rent/licence fee and service charge arrears within seven days of the date of the settlement agreement. Going forward, the rental amount due to 31 October 2024 will be GBP 507,472 per annum, then GBP 512,547 per annum for the period from 1 November 2024 to 31st October 2029; increasing to GBP 520,235 per annum for the period commencing on 1 November 2029 until 31st October 2035; and GBP 528,039 per annum commencing on 1 November 2035 until the date of the termination of the lease (20 September 2034). APCOA will contribute GBP 150,000 (plus any value-added tax payable to this sum towards Crossland’s cost of defending the proceedings. Furthermore, the lease will be guaranteed by APCOA Parking Holdings GmbH, an indirect parent of APCOA. Following the settlement, the Maroon borrower will likely incur a cost of approximately GBP 250,000 (or in the worst case scenario GBP 1 million) to remediate parts of the car park; however, even with this cost, Mount Street deemed the net outcome to be positive.

The portfolio vacancy saw a steep rise to 36%, as reported in Mount Street’s April 2022 asset status report from 7% in January 2022. This was largely due to the closure of the 80,000-square foot Debenhams store at the Kingsgate asset. Consequently, DBRS Morningstar revised its vacancy assumption of 20% in April 2021 to 28% as of April 2022, which subsequently lowered the portfolio net cash flow (NCF) to GBP 4.8 million from GBP 5.6 million in April 2021. While DBRS Morningstar maintains a cap rate of 9.5%, it has lowered its portfolio valuation to GBP 50.4 million from GBP 59.4 million. The lower valuation represents a 27% haircut to CBRE’s March 2020 valuation of GBP 68.9 million and largely reflects the deterioration in cash flow, the build-up of arrears, and the increased vacancy across the portfolio. Ultimately, DBRS Morningstar expects the Class D and Class E Notes to incur losses.

The Maroon loan had an initial maturity date of January 2021 and two one-year extension options were initially provided in the facility agreement, provided the loan was still compliant with its default covenants. Because of the outstanding event of default, the borrower was unable to exercise the extension option. The final note maturity is scheduled in July 2028. The loan continues to amortise by 0.25% of the original loan balance each quarter and has amortised by 8.6 % since the closing date; however, the LTV of 93.03% remains above the cash trap and default covenant level. The loan has now switched basis to Sonia and the reported debt service coverage ratio of 1.38 times (x) in January 2022 remains below the cash trap but still above the covenant level and allows the borrower to service its ongoing debt obligations.

The transaction still benefits from a liquidity facility of GBP 3.4 million as of April 2022, provided by ING Bank N.V. (the Liquidity Facility Provider). The liquidity facility can be used to cover interest shortfalls on the Class A, Class B, Class C, and Class D Notes. Furthermore, at closing the Issuer funded an interest reserve using the proceeds from the notes’ issuance, which currently stands at GBP 58,000. The reserve stands to the credit of the issuer transaction account and forms part of the interest available funds on each interest payment date to cover interest shortfalls on all of the notes (other than the Class X Notes).

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” (17 December 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://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. The 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 investor reports and asset status reports from Mount Street Mortgage Servicing Limited and investor reports from U.S. Bank Global Corporate Trust.

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 30 April 2021 when DBRS Morningstar confirmed its ratings on the Class A, Class B, and Class E Notes at AA (high) (sf), A (low) (sf), and B (low) (sf), respectively, and downgraded its ratings on the Class C and Class D Notes to BBB (low) (sf) and B (sf) from BBB (sf) and B (high) (sf), respectively.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

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

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

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class B Notes at BB (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class B Notes at B (sf)

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class C Notes at CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class C Notes at CCC (sf)

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

Class E Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class E Notes at C (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class E Notes at C (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: David Lautier, Senior Vice President
Initial Rating Date: 28 August 2018

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 (17 December 2021),
https://www.dbrsmorningstar.com/research/389947/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.