DBRS Assigns Provisional Ratings to Elizabeth Finance 2018 DAC

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

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

All trends are Stable.

Elizabeth Finance 2018 DAC is a securitisation of two British senior commercial real estate (CRE) loans that were advanced by Goldman Sachs International Bank (the Loan Seller). The two loans are the GBP 69.6 million Maroon loan (original balance GBP 69.9 million), which was advanced to three borrowers, and the GBP 21.1 million (original balance GBP 21.2 million) MCR loan that was advanced to Cypresshawk Limited. Both loans act as refinancing facilities and have partially amortised since the origination date. The collateral securing the Maroon loan comprises three shopping centres located in England and Scotland; each property is held by property holding companies (propcos) under the respective Maroon borrower. The MCR loan is secured by a campus-style office building located in Manchester, England. Oaktree Capital Management (Oaktree) is the sponsor for the Maroon loan while the sponsor of the MCR loan is Ms. Naeem Kauser as trustee of the Mussarat Children’s Trust.

The Maroon assets are the Kingsgate Shopping Centre, located in Dunfermline in Scotland; the Vancouver Quarter, located in King’s Lynn in East England; and the Rushes Shopping Centre, located in Loughborough in the East Midlands. Based on the valuation provided by CBRE on 3 November 2017, the total market value (MV) of the Maroon portfolio is GBP 104.7 million, which results in a day-one loan-to-value (LTV) of 66.5%. Excluding H&M’s pre-let space in the Vancouver Shopping Centre, as at 16 July 2018 (the Cut-Off Date) the properties were 89.2% occupied based on the equivalent rental value (ERV) provided by CBRE and generate a total GBP 10.0 million gross rental income (GRI) from 131 tenants. GBP 665,000 of the GRI is exposed to budget retailers (Poundland, Poundworld and Bargain Buys), of which GBP 500,000 rental income has been discounted by the Loan Seller as riskier rental income. Indeed, on 10 July 2018 Poundworld confirmed that it will close its shop in the Rushes Shopping Centre, which is paying GBP 75,000 gross rent (0.8% of the Maroon GRI) and occupying 5,226 square feet (0.6% of the Maroon retail space). The annualised net operating income (NOI) in Q2 2018 was GBP 8.5 million, representing a conservative debt yield (DY) of 12.3%. DBRS’s NOI and net cash flow (NCF) assumptions are GBP 7.1 million and GBP 5.6 million, respectively. The loan carries a floating interest rate equal to three-month LIBOR (subject to zero floor) plus a margin of 2.7% and is fully hedged with an interest rate cap at the strike rate of 0.75% provided by Wells Fargo Bank, NA (London Branch). The Maroon loan amortises 1% of its initial loan amount each year and matures on 15 January 2021, with two extension options lasting one year each and subject to the satisfaction of certain conditions. The cash trap and default covenants of the Maroon loan are set, respectively, at 70% and 75% based on LTV or 1.75X or 1.30X based on debt servicing ratio.

The MCR loan served to refinance the existing debt of the borrower, who has recently redeveloped the Universal Square, which serves as the collateral of the MCR loan. The Universal Square is a campus-style office asset comprising five buildings. Four buildings are leased on standard commercial lease terms, while one building has been converted to a business centre to suit the needs of small and medium-sized enterprises by providing short-term leases for smaller units or for individual desks. The LTV of the loan is 67.3% based on the GBP 31.4 million MV estimated by Cushman & Wakefield Debenham Tie Leung Limited (Cushman & Wakefield) on 9 January 2018. As at the Cut-Off Date, the asset’s physical occupancy was 83.7% with 119 tenants, of which, 64 tenants are from the business centre. The largest ten tenants accounting for 60.2% of the GBP 3.1 million GRI. DBRS has noted that the two largest tenants, CarFinance 247 Ltd. and Softcat Ltd., contribute 32.0% to the GRI in total; however, their leases are relatively long with the next lease breaks falling on 2 June 2021 and 2 August 2020, respectively. The sponsor’s business plan is to lease up the remaining vacant space by 5% p.a., starting from 2019. The Q2 2018 annualised NOI shows GBP 2.7 million after the deduction of the rent-free and capex expenses. DBRS’s NOI and NCF assumptions are GBP 2.6 million and GBP 2.4 million, respectively. The cash trap and default covenants of the MCR loan are set, respectively, at 72.3% and 77.3% based on LTV or 9.68% or 9.18% based on debt yield. Moreover, the cash will also be trapped should the weighted average unexpired lease term of the Universal Square fall under one year. The loan bears interest at a floating interest rate equal to three-month LIBOR (subject to zero floor) plus a margin of 4.3%. The transaction is fully hedged with an interest rate cap having a strike rate of 2.0% provided by Wells Fargo Bank NA (London Branch). The loan maturity is on 15 July 2023, and the loan structure includes amortisation of 1.0% p.a. in Years 1 to 2, 2.0% p.a. in Years 3 to 4, and 2.5% in Year 5.

The transaction will benefit from a liquidity facility of GBP 5.15 million, or 6.0% of the total outstanding balance of the covered notes and will be 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. According to DBRS’s analysis, the commitment amount, as at closing, could provide interest payment coverage up to approximately 19 months and nine months coverage on the covered notes, based on the weighted-average interest rate cap strike rate of 1.04% p.a. and the LIBOR cap of 5% after loan maturity, respectively. Moreover, at closing the Issuer will fund an interest reserve to GBP 100,000 using the proceeds from note issuance. The reserve will stand to the credit of the issuer transaction account and will form part of the interest available funds on each interest payment date to cover interest shortfalls on all of the notes (other than Class X). The interest reserve amount (to the extent not utilised to cover interest shortfalls) will be paid to the Class X noteholder upon redemption of the notes.

The transaction is expected to repay by 20 July 2023, after the maturity of the MCR loan. Should the notes fail to be repaid by then, this will constitute, among others, a special servicing transfer event of the loan and the transaction has envisaged a five-year tail period to allow the special servicer to work out the loan(s) by July 2028 at the latest, which is the legal final maturity of the notes.

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

The transaction includes a Class X diversion trigger event, meaning that if the loans’ financial covenants are breached, any interest and prepayment fees due to the Class X noteholders will instead be paid directly into the Issuer transaction account and credited to the Class X diversion ledger. However, only following the expected note maturity or the delivery of a note acceleration notice, such funds can potentially be used to amortise the notes.

To maintain compliance with the applicable regulatory requirements, Goldman Sachs International Bank will hold 5% of each class of notes to be issued.

DBRS understands that the transaction has already been priced however, 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.

At the time of the initial rating, 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.

This rating concerns 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 A (high) (sf)

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

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

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

Class E Notes Risk Sensitivity:
--10% decline in DBRS NCF, expected rating of Class E Notes to B (high) (sf)
--20% decline in DBRS NCF, expected rating of Class E Notes to CCC (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: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Chuck Weilamann, Managing Director, Global Structured Finance
Initial Rating Date: 20 August 2018

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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.