DBRS Morningstar Downgrades 16 Ratings of Notes in Three UK CMBS Hotel Transactions; Removes All Ratings From Under Review with Negative Implications; Assigns Negative Trends

DBRS Ratings Limited (DBRS Morningstar) took rating actions on three UK CMBS hotel transactions: Ribbon Finance 2018 Plc, Magenta 2020 PLC, and Helios (European Loan Conduit No. 37) DAC. DBRS Morningstar confirmed the rating of the Class A notes issued by Ribbon Finance 2018 Plc at AAA (sf), confirmed the Class RFN rating of Helios (European Loan Conduit No. 37) DAC at AAA (sf) with a Stable trend, and downgraded the rest of the ratings as follows:

Ribbon Finance 2018 Plc
-- Class B downgraded to A (sf) from AA (low) (sf)
-- Class C downgraded to BBB (high) (sf) from A (sf)
-- Class D downgraded to BBB (low) (sf) from BBB (high) (sf)
-- Class E downgraded to BB (high) (sf) from BBB (low) (sf)
-- Class F downgraded to BB (low) (sf) from BB (high) (sf)
-- Class G downgraded to B (high) (sf) from BB (sf)

Magenta 2020 PLC
-- Class A downgraded to AA (high) (sf) from AAA (sf)
-- Class B downgraded to A (low) (sf) from AA (low) (sf)
-- Class C downgraded to BBB (low) (sf) from A (low) (sf)
-- Class D downgraded to BB (sf) from BBB (low) (sf)
-- Class E downgraded to B (high) (sf) from BB (sf)

Helios (European Loan Conduit No. 37) DAC
-- Class A downgraded to AA (sf) from AAA (sf)
-- Class B downgraded to BBB (high) (sf) from AA (low) (sf)
-- Class C downgraded to BBB (low) (sf) from A (low) (sf)
-- Class D downgraded to BB (high) (sf) from BBB (low) (sf)
-- Class E downgraded to B (high) (sf) from BB (high) (sf)

DBRS Morningstar assigned a Negative trend to these ratings because the underlying collateral, and the UK Hotels sector, continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. The ratings have been removed from Under Review with Negative Implications, where they were placed on 27 July 2020. DBRS Morningstar also rates the Class RFN notes of Helios (European Loan Conduit No. 37) DAC but did not place this AAA (sf) rating Under Review with Negative Implications.

The rating downgrades in all three transactions are driven by the negative impact on the hotel assets caused by the coronavirus pandemic. As England enters into its second national lockdown and tighter restrictions are enforced across the UK, DBRS Morningstar anticipates that hotel revenues will decrease further, pushing back any sector recovery.

Ribbon Finance 2018 Plc
Ribbon Finance 2018 Plc is secured by 19 upscale hotels: three operate under the Crowne Plaza brand and 16 operate under Holiday Inn. The hotels are managed by Lapithus Hotels Management UK. By location, there are five airport hotels in major UK cities (London, Manchester, and Glasgow), three London hotels, and 11 hotels outside of London. Following the sale of the Bloomsbury hotel in Q4 2019, there are a total of 4,531 guest rooms remaining and the portfolio is valued at GBP 618.00 million or GBP 136,394 per room, according to the HVS valuation report dated August 2019. The Loan to Value (LTV) ratio following the July 2020 Interest Payment Date (IPD) was 60.72%.

Earlier this year, the borrower and facility agent agreed to certain waivers, consents, and amendments under the senior finance documents. The Dayan family (the sponsor) deposited GBP 28,000,000 into the Equity Cure Account controlled by the Senior Loan Facility Agent. In exchange, the Senior Loan Facility Agent granted a waiver of any senior loan event of default, which would otherwise have arisen as a result of any breach of the LTV, net operating income debt yield, and interest coverage ratios (and any material adverse change relating to the breach of those financial covenants) for a period up to but excluding the senior loan payment date falling on 13 July 2021.

DBRS Morningstar acknowledges the positive intent of the sponsor by depositing an equity amount to cover the budgeted shortfall until May 2021, the date at which the sponsor anticipates to achieve a positive EBITDA; however, in line with its coronavirus considerations and macroeconomic scenarios for 2020-2022, DBRS Morningstar anticipates a longer period to a recovery resulting from lower occupancy rates across the portfolio and reduced cash flows. Consequently, DBRS Morningstar has assumed a market value (MV) decline of 40%, resulting in the downgrade in ratings of the Class B to Class G notes.

DBRS Morningstar’s revised underwritten value is GBP 378.5 million, representing a LTV of 99.25% (as of the July 2020 loan balance).

Magenta 2020 Plc
The portfolio securing Magenta 2020 PLC (the most recent UK Hospitality securitisation transaction) is made up of 17 hotels located across the UK. Valor Europe manages these hotels and operates them under various franchise agreements with InterContinental Hotels Group (IHG), Hilton, and Marriott. The portfolio comprises three hotels operated under the Hilton Double Tree brand, seven hotels flagged by Crowne Plaza, three by Hilton Garden Inn, two AC by Marriott, one by Holiday Inn, and one by Indigo.

The valuer, Savills - London Office (Savills), has estimated the total MV to be GBP 435.55 million (August 2019), or GBP 128,747 per room based on the 3,383 rooms in the portfolio. The LTV following the September 2020 IPD was 62.19%.

Earlier this year, CBRE Loan Services Limited (the servicer) entered into an Amendment and Waiver Letter with the Senior Loan Facility Agent, the Mezzanine Loan Facility Agent, Senior Holdco, and Mezzanine Holdco with a view to allowing the Senior Obligors to manage their liquidity and their business in the medium term without breaching their obligations under the senior loan finance documents, subject to certain conditions imposed to protect the Issuer’s position.

These conditions included the deposit of GBP 17.5 million equity into the cure account to be used to cover operating and financing shortfalls and the timely submission to the servicer of a 12-month cash flow forecast on a monthly basis.

According to the September 2020 investor report, all hotels secured by Magenta 2020 Plc reopened on 4 July with the exception of Crown Plaza Harrogate and AC Marriott, Manchester, which reopened on 10 July 2020. In July and August, total revenue exceeded the monthly forecasts provided by the sponsor (although revenue was lower than in the pre-coronavirus business plan). Occupancy varied significantly across the portfolio, with leisure destinations such as Chester and Plymouth performing the strongest and the bigger cities including Manchester, Bristol, and Birmingham, seeing slower growth.

DBRS Morningstar acknowledges the positive intent of the sponsor by depositing an equity amount to cover the budgeted shortfall until the initial loan termination date in December 2021; however, in line with its coronavirus considerations and macroeconomic scenarios for 2020-2022, DBRS Morningstar anticipates a longer period to a recovery resulting from lower occupancy rates across the portfolio and reduced cash flows. Consequently, DBRS Morningstar has assumed a MV decline of 40%, resulting in the downgrade in ratings of the Class A to Class E notes.

DBRS Morningstar’s revised underwritten value is GBP 266 million, representing an LTV of 102% (as of the September 2020 loan balance).

Helios (European Loan Conduit No. 37) DAC
The portfolio securing Helios (European Loan Conduit 37) DAC consists of 49 limited-service hotels that are largely managed by Atlas and operate under franchise agreements with IHG and Hilton. The portfolio largely operates as Holiday Inn Express hotels that are located across England, Wales, and Scotland. Five of the hotels are located within Greater London (25% of MV), six hotels are located in Scotland (10% of MV), and two are in South Wales (1% of MV). The remainder of the portfolio is in England, primarily located in city centres or near infrastructure hubs, such as motorway junctions or airports.

Cushman & Wakefield estimated the portfolio’s total MV to be GBP 546.9 million (net of standard asset sale purchaser’s costs, which vary between English and Scottish jurisdictions) or GBP 91,577 per room based on the portfolio’s 5,972 rooms. The LTV following the August 2020 IPD was 62.14%

As of the reporting period ending August 2020, most of the hotels were closed over the initial lockdown period (March to June); however, 22 had remained open to accommodate key workers on behalf of government and charitable organisations. These agencies utilised the hotels in mid-March 2020 and had an initial right of use for 90 days. The arrangement generated revenue but failed to reach the same levels as would have been anticipated under normal operation. Furthermore, there were additional costs associated with ensuring operating hotels complied with the relevant safety measures. It was reported in August 2020 that the cash trap covenant had been triggered with almost no head room left for debt yield default covenant. The borrowers and the servicer have not agreed to any amendment or waiver of senior financial obligations so far.

With England and Wales experiencing second national lockdowns and Scotland seeing restrictions tighten, DBRS Morningstar, in line with its coronavirus considerations and macroeconomic scenarios for 2020-2022 anticipates a medium to longer term recovery resulting from lower occupancy rates across the portfolio and reduced cash flows. Consequently, DBRS Morningstar has assumed a MV decline of 35% resulting in the downgrade in ratings of the Class A to Class E notes. The value decline on this limited-service hotel portfolio is lower when compared with the upscale hotels because typically a larger proportion of EBITDA is made up from room sales alone.

DBRS Morningstar’s revised underwritten value is GBP 367.8 million representing a LTV of 95% (as of the August 2020 loan balance).

COVID-19 CONSIDERATIONS

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

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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” (13 December 2019).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the transactions legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include various reports, from January 2020 – September 2020 provided by CBRE Loan Services Limited and Mountstreet Mortgage Servicing Limited.

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 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 these transactions took place on 27 July 2020 when DBRS Morningstar placed its ratings of certain classes of notes Under Review with Negative Implications.

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):

Ribbon Finance 2018 Plc
Class A Notes Risk Sensitivity:
--10% decline in DBRS Morningstar net cash flow (NCF), expected rating of Class A to AA (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class A to A (high) (sf)

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

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

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

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

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

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

Magenta 2020 Plc
Class A Notes Risk Sensitivity:
--A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at A (low) (sf)

--A 20% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class A notes to BBB (high) (sf)

Class B Notes Risk Sensitivity:
--A 10% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class B notes to BB (high) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class B notes to BB (high) (sf)

Class C Notes Risk Sensitivity:
--A 10% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class C notes to BB (high) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class C notes to B (high) (sf)

Class D Notes Risk Sensitivity:
--A 10% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class D notes to B (low) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class D notes to lower than B (low) (sf)
Class E Notes Risk Sensitivity:
--A 10% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class D notes to lower than B (low) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected downgrade of the Class D notes to lower than B (low) (sf)

Helios (European Loan Conduit No. 37) DAC

Class A Notes Risk Sensitivity:
-- a 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at A (high) (sf)
-- a 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at A (low) (sf)

Class B Notes Risk Sensitivity:
-- a 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at BBB (sf)
--a 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at BB (high) (low) (sf)

Class C Notes Risk Sensitivity:
-- a 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BB (high) (sf)
-- a 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BB (high) (sf)

Class D Notes Risk Sensitivity:
-- a 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BB (sf)
-- a 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at B (sf)

Class E Notes Risk Sensitivity:
-- a 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at B (low) (sf)
-- a 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at below B (low) (sf)

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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.

Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.

Lead Analyst: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Dates: Ribbon Finance 2018 Plc was 8 June 2018; Magenta 2020 PLC was 13 February 2020; and Helios (European Loan Conduit No. 37) DAC was 16 December 2019.

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 (13 December 2019), https://www.dbrsmorningstar.com/research/354637/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.

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 these credits or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

This press release was amended on 12 January 2021 to clarify that DBRS Morningstar also confirmed the Class RFN rating of Helios (European Loan Conduit No. 37) DAC at AAA (sf) with a Stable trend.