DBRS Assigns Provisional Ratings to CPUK Mortgage Finance Notes

DBRS has today assigned the following provisional ratings to the commercial mortgage backed floating rate notes issued by CPUK Mortgage Finance Limited, a Special Purpose Entity. Proceeds of the Notes will used to acquire the Tranche A portion of a secured loan to two borrowers containing the operating business (OpCo Group) and the property-owning business (PropCo Group) of Center Parks UK (CPUK). The borrowers, who are jointly liable for the loan, will apply the net operating and rental income arising from the operating subsidiaries, which own a portfolio of four UK-based forest holiday villages to meet their obligations.

The transaction is the first portfolio of UK holiday properties rated up to AAA without the benefit of third-party credit support. DBRS has rated the transaction on the basis of a hybrid approach, utilizing CMBS and corporate securitization methodologies for sizing the debt tranches. The AAA-rated notes, which comprise 60% of the investment-graded notes and 44% of the whole loan, are supported by the rents and strong operating cash flows generated by CPUK’s business. The woodland sites, which are designated for specific use as holiday villages, provide the basis for a strong, sustainable business and property valuation supporting full repayment of the notes. Based on an adjusted valuation of £1167 million, the loan-to-value for the AAA rated notes is 39% while the initial net operating income to interest coverage is 3.5x. Through all of the investment-grade rated debt classes, the loan-to-value is a moderate 64% and the initial interest coverage is 2.0x. The adjusted loan to value and initial interest coverage through the whole loan are 88% and 1.3x, respectively.

Substantial subordination for the rated notes is provided by the Tranche B portion of the secured loan, amounting to £282 million or 27% of the total loan. Further support for the ratings is also provided by the short duration of the transaction, with an expected maturity date of 4.3 years, a dedicated liquidity facility in the amount of £86 million which is sufficient to service 21.6 months of interest on the rated notes and long-dated swaps at the borrower level, which mitigate refinancing cost. The swaps expire one year after the legal final maturity date in October, 2018. Debt yield tests are also in place at the borrower level. which will trap cash flow for prepayment of debt if they are not met. The notes also have a seven-year tail period between the expected and legal final maturity in the event that refinancing conditions or market liquidity for specialized leisure property assets become more difficult. Under our base case, the cash flows generated during this period would be sufficient to repay all the rated notes.

Established in the 1980s, Center Parcs UK (CPUK) is the sole provider of self contained short break (three- or four-day) holidays based in forests in the UK. CPUK has maintained a high level of popularity and brand recognition particularly among families, as evidenced by its stable, high occupancy rates exceeding 90% with limited seasonality. Profitability and cash generation have been strong, with operating margins averaging 36% and net earnings growth averaging 11% per year over the past four years. Cash flow generation and visibility of performance is enhanced by moderate maintenance capital requirements and negative working capital, owing to a high level of advance bookings and a high level of repeat customers. Committed development funding totaling £40 million should enhance the quality of the estate and support future earning growth. The company should benefit from strong sponsor support from the Blackstone Group, with its extensive international experience in the leisure, hotel and real estate sectors.