DBRS Morningstar Takes Rating Actions on Elizabeth Finance 2018 DAC

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

-- Class C Notes to BBB (low) (sf) from BBB (sf)
-- Class D Notes to B (sf) from B (high) (sf)

DBRS Morningstar confirmed the ratings on the remaining classes as follows:

-- Class A Notes at AA (high) (sf)
-- Class B Notes at A (low) (sf)
-- Class E Notes at B (low) (sf)

The trends on all classes of notes remain Negative because of the exposure of the last remaining loan to the challenges facing the UK retail sector, as it bears the economic consequences of the Coronavirus Disease (COVID-19) pandemic, as well as increasing competition from online sales.

Elizabeth Finance 2018 DAC is a securitisation of initially two British senior commercial real estate loans advanced by Goldman Sachs International Bank. The GBP 20.4 million MCR loan (GBP 21.1 million at inception) repaid in full on the Q3 2020 interest payment date (IPD). The GBP 64.7 million Maroon loan (GBP 69.6 million at inception), secured by three secondary shopping centres (two in the UK and one in Scotland) is still outstanding instead. The loan is currently in special servicing following the failure of the Maroon borrower (under the control of the mezzanine lender) to cure for a second time the 75% loan-to-value (LTV) covenant breach (the first LTV breach was cured by the mezzanine lender in July 2019 through a partial loan prepayment of GBP 1.2 million). The initial special servicer of the Maroon Loan, CBRE Loan Services Limited (CBRELS), 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 have provided an exit strategy showing how it expected to repay the loan in full on the initial maturity date.

The exit strategy provided by the Maroon borrower was not considered satisfactory by the special servicer. As a result, in October 2020, CBRELS decided to accelerate the loan and subsequently fixed charges receivers were appointed by the common security agent with the aim of disposing of the assets in a timely manner. However, in March 2021, the controlling Class D noteholders decided to replace CBRELS with Mount Street Mortgage Servicing. DBRS Morningstar understands that the new special servicer will temporarily suspend the sale of the assets and will try to implement asset management initiatives to improve and stabilise the portfolio’s net operating income as well as wait for a likely pickup of the retail investment market following the expected ramp down of the coronavirus pandemic (DBRS Morningstar's downgrades of the Class C and Class D Notes are not directly a result of the change in the special servicer per se).

DBRS Morningstar’s underwriting assumptions consider a net cash flow (NCF) of GBP 5.6 million and a long-term stabilised cap rate of 9.5%, resulting in a DBRS Morningstar stressed value of GBP 59.4 million (or 109% LTV). This represents a 13.7% haircut to the latest revaluation finalised by CBRE in March 2020 and concludes a portfolio market value of GBP 68.9 million. Based on the latest available investor report restated on 17 February 2021, the transaction could still rely on a relatively sound debt service coverage ratio of 1.55x and an overall 2020 collection rate of 81.02% (Kingsgate 90.01%, The Rushes 76.14%, and Vancouver Quarter 71.65%). In DBRS Morningstar’s opinion, these figures should back the ability of the loan to continue serving its debt in the short to medium term.

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 Maroon borrower was unable to exercise the extension option, but with the final note maturity scheduled in July 2028, the transaction still provides the special servicer with sufficient time to workout the loan.

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 continue to arise 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 in relation to expected performance 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 updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

DBRS Morningstar notes that the above press release was amended on 10 May 2021 to reflect the correct UK issuing office address for DBRS Ratings Limited in the disclosure 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” (26 February 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://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/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports from CBRE Loan Services, valuation report from CBRE, and cash manager 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 2020, when DBRS Morningstar downgraded the Class A, Class B, Class C, Class D, and Class E Notes and changed the trend on the Class A Notes to Negative from Stable, in line with the other classes of notes.

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 to the parameters used to determine the ratings (the Base Case):

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

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

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

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

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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. 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, Assistant Vice President
Rating Committee Chair: Mirco Iacobucci, Senior Vice President
Initial Rating Date: 20 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 (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021), https://www.dbrsmorningstar.com/research/376314/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.
-- 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 [email protected].