DBRS Assigns Provisional Ratings to Ribbon Finance 2018 Plc

DBRS Ratings Limited (DBRS) assigned provisional ratings to the following classes of notes to be issued by Ribbon Finance 2018 Plc (the Issuer):

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class G at BB (sf)

All trends are Stable.

Ribbon Finance 2018 Plc is the securitisation of a GBP 449.8 million senior loan advanced 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 initial lender is Goldman Sachs Bank USA and the transaction is arranged by Goldman Sachs International (together, Goldman Sachs). Goldman Sachs Bank USA also advanced a mezzanine loan of GBP 69.2 million to Ribbon Mezzco Limited, which was later sold to funds advised and managed by Apollo Global Management LLC. The mezzanine loan is structurally and contractually subordinated to the senior loan and is not part of the transaction. DBRS understands that the Sponsor has paid a total GBP 742 million for the acquisition and will fund an additional GBP 38 million capex planned in 2018.

The senior loan is secured by 20 hotels located in the U.K.: three hotels operate under the Crowne Plaza brand and 17 hotels are flagged by Holiday Inn (the Portfolio). LHM also manages the Holiday Inn Mayfair hotel, which is not included in the Portfolio. The valuer, HVS - London Office (HVS), has estimated the total market value (MV) net of 6.8% purchaser’s cost to be GBP 692.2 million, or GBP 143,017 per room based on the 4,840 rooms in the Portfolio. The resulting senior loan-to-value ratio (LTV) of the Portfolio is 65.0%. Southeast England and London are the two regions where the majority of the Portfolio is located, comprising 11 hotels, 1,435 rooms, 62.2% MV and 60.0% of the 12-month trailing (T-12) EBITDA ending February 2018. DBRS’s value assumption for the Portfolio is GBP 561 million (19% haircut), resulting in an 80% stressed LTV.

The Portfolio benefits from a high occupancy rate of 84.6% as at the end of 2017 with a revenue per available room of GBP 72.2 per night and an average daily rate of GBP 85.3 per night. According to the STR dated YE2017, the Portfolio’s overall performance is slightly better than its competition set. Nevertheless, LHM plans to improve further the occupancy and net operating income (NOI) by implementing a capex plan of GBP 38 million to be funded by the Sponsor. The Portfolio also demonstrated a strong operating performance in the recent past. For the T-12 ending February 2018, the Portfolio generated GBP 181.0 million revenue, after deducting costs and expenses, the EBITDA for the same period was GBP 57.8 million and the NOI was GBP 50.6 million after removing GBP 7.2 million for furniture, fixture and equipment. DBRS’s net cash flow assumption is GBP 43.8 million.

The Portfolio is concentrated by property type, as all properties are full-service hotels. Hotels have the highest cash flow volatility of all property types because of their relatively short leases (i.e., lengths of stay) compared with commercial properties and their higher operating leverage. These dynamics can lead to rapidly deteriorating cash flows in a declining market. The borrower group was recently restructured so that 20 companies own one hotel each in the transaction. DBRS notes that the property-owning companies are trading companies that have on aggregate approximately 2,200 employees. DBRS incorporated potential redundancy costs or compensation claims into its analysis, and factored into its LTV-sizing parameters potential trade liabilities. In addition, the analysis accounted for potentially longer enforcement timing and higher enforcement costs compared with other commercial real estate asset classes.

Some of the properties are held on leaseholds with relatively short remaining term (approximately 50 years). This was factored into the valuation, as were potential ground lease increases following upcoming rent reviews. DBRS notes that the franchise fee will increase considerably in coming years as well, so that to maintain the current level of net cash flow generated by the Portfolio, turnover and gross operating profit will have to increase.

The senior loan bears interest at a floating rate equal to three-month LIBOR (subject to zero floor) plus a margin of 3.19% per annum. If the mezzanine loan is voluntarily prepaid on 3 April 2020 or later, the margin on the senior loan would step down to 3.00% per annum. The expected maturity date is 2 April 2023 with no extension option available. The notes to be issued by the Issuer bear a final maturity date falling in April 2028, thereby providing a tail period of five years.

During the loan term, the Borrower is required to amortise the senior loan by GBP 1,124,500 per interest payment date (IPD) or GBP 4,498,000 per annum, which is 1% of the senior loan amount at issuance. However, from April 2019 onwards, the Borrower is required to double the amortisation payment on each IPD should the NOI debt yield (DY) for that period fall below 11.54%. The T-12 ending February 2018 NOI DY was 11.25%, implying that the Portfolio must improve NOI by GBP 783,840.8 by April 2019 to avoid double amortisation. Scheduled amortisation proceeds will be distributed pro rata to the noteholders unless a sequential payment trigger is continuing, in which case, the proceeds will be distributed sequentially. Before a sequential payment trigger event, in case of mandatory prepayment after property disposals, the senior allocated loan amount (ALA) will be allocated pro-rata to the notes and the issuer loan, whereas the release premium will be applied sequentially. The senior release price for the corresponding property is set at 5-20% above the ALA of the disposed property. Voluntary prepayment funded by equity would be applied reverse sequentially, unless a sequential payment trigger event is continuing.

The senior loan has tightening LTV covenants for cash trap and event of default. The LTV cash trap covenant is set at 71.5% for the first two years, the covenant will decrease by 1.08% to 70.42% in year three and will decrease by a further 1.08% to 69.33% for the last two years of the senior loan. The LTV default covenants are set 4.33% higher at 75.83% and will decrease in parallel to cash trap covenants to 73.67% for years four and five. The other two covenants, NOI DY and interest coverage ratio (ICR), are set at 10.10% and 1.95x for cash trap and 9.26% and 1.78x for event of default.

The interest rate risk is to be fully hedged over the life of the senior loan by way of a prepaid cap provided by Goldman Sachs Bank USA. Classes F and G are subjected to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes.

The liquidity provider, [*] , will provide a liquidity facility (LF) for the transaction which is initially set at GBP [27.8] million, or [6.2]% of the total outstanding balance of the notes. DBRS understands that the LF will cover the interest payments of all classes and will amortise in line with their outstanding balance. However, classes F and G are subjected to available fund caps and will not be covered by LF, unless these classes are then most senior class, once their total drawings have reached 20% of the total LF commitment. Based on a cap strike of 2.0% and Libor cap of 5%, DBRS estimated the liquidity facility will cover [18] months’ and [13] months’ interest payment, respectively, assuming the Issuer does not receive any revenue. DBRS’s analysis assumes that the liquidity facility agreement will be consistent with DBRS’s Legal Criteria for European Structured Finance Transactions.

To maintain compliance with applicable regulatory requirements, Goldman Sachs will retain an ongoing material economic interest of not less than 5% of the securitisation via an issuer loan which is to be advanced by Goldman Sachs Bank USA.

The ratings will be finalised upon receipt of execution version of the governing transaction documents. To the extent that the documents and information provided to DBRS as of this date differ from the executed version of the governing transaction documents, DBRS may assign a different final rating to the rated notes.

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”.

DBRS 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 “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include Goldman Sachs International and its delegates.

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

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

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

DBRS 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 ratings on this financial instrument.

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

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

Class A Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class A Notes to AAA (sf)
--20% decline in DBRS NCF, expected rating of Class A Notes to AA (sf)

Class B Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class B Notes to A (sf)
--20% decline in DBRS NCF, expected rating of Class B Notes to A (low) (sf)

Class C Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class C Notes to A (low) (sf)
--20% decline in DBRS NCF, expected rating of Class C Notes to BBB (sf)

Class D Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class D Notes to BBB (low) (sf)
--20% decline in DBRS NCF, expected rating of Class D Notes to BBB (low) (sf)

Class E Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class E Notes to BB (high) (sf)
--20% decline in DBRS NCF, expected rating of Class E Notes to BB (sf)

Class F Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class E Notes to BB (sf)
--20% decline in DBRS NCF, expected rating of Class E Notes to B (sf)

Class G Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class E Notes to BB (low) (sf)
--20% decline in DBRS NCF, expected rating of Class E Notes to B (sf)

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

Lead Analyst: Christian Aufsatz, Managing Director, Global Structured Finance
Rating Committee Chair: Erin Stafford, Managing Director, Global Structured Finance
Initial Rating Date: 9 May 2018

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

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 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.