DBRS Morningstar Upgrades Class A, B, and C Notes Ratings, Confirms Class D and E Notes Ratings on Helios (European Loan Conduit No. 37) DAC, Maintains Negative Trends

DBRS Ratings Limited (DBRS Morningstar) upgraded its ratings on the following classes of Commercial Mortgage-Backed Floating Rate Notes due 2030 (the Notes) issued by Helios (European Loan Conduit No. 37) DAC (the Issuer):

-- Class A at AAA (sf)
-- Class B at A (high) (sf)
-- Class C at BBB (sf)

DBRS Morningstar also confirmed its ratings on the following classes of Notes issued by the Issuer:

-- Class RFN at AAA (sf)
-- Class D at BB (high) (sf)
-- Class E at B (high) (sf)

The trend on Class RFN remains Stable and the trend on all other classes remains Negative.

The rating confirmations and upgrades follow the borrower’s partial pre-payment of the loan, resulting in de-leveraging, the cash contribution to cover future loan interest payments, and the transaction’s performance over the last 12 months.

Helios (European Loan Conduit No. 37) DAC is the securitisation of a single loan. The GBP 350 million senior loan matures on 12 December 2024 and the final Note maturity date is on 2 May 2030. The loan is secured by a portfolio of 49 limited-service hotels located across the United Kingdom. With the exception of the Hampton by The Hilton in Liverpool and Park Inn hotel in York, the portfolio comprises Holiday Inn Express Hotels.

The ultimate beneficial owner of the portfolio is London & Regional Group (L&R), which acquired the hotels from Lone Star Funds in 2016. The hotels are managed by Atlas Hotels Group, which was also acquired as part of the transaction in 2016 and is now a wholly owned operating company of L&R.

Amid the Coronavirus Disease (COVID-19) pandemic, on the October 2020 interest payment date, the Debt Yield (DY) covenant was breached and, as a consequence of not being cured, a transfer of the loan into Special Servicing occurred on 23 November 2020.

In December 2020, the Operating Advisor was appointed by the controlling class, Class E, and the Special Servicer requested an updated valuation of the underlying properties portfolio. In February 2021 , it was disclosed that the new value of the portfolio provided by Cushman & Wakefield was, as of the 5 January 2021, GBP 472 million, nearly 16% less than initial valuation of GBP 561 million. As a consequence, the LTV resulted in 73.6% in excess of the covenant requirement of 72.4%.

The revenues from the underlying assets have remained dramatically impacted in the first half of the 2021 with restriction measurements imposed by the government first until May 2021 and then further until July 2021. On 28 September 2021, the Special Servicer and the Borrower agreed terms of amendments to the facility agreement. In consideration for the waivers, the Borrower deposited on the 29 October 2021 funds for a partial prepayment of the loan by GBP 30 million and, separately deposited on the debt service account an amount equal to GBP 13,500,315 to cover debt service due on the January, April, July, and October 2022 interest payment date. The principal waterfall is currently sequential and the prepayment was applied for GBP 1,626,128 to the Class RFN notes and for GBP 29,123,438 to the Class A notes, as of November 2021.

DBRS Morningstar maintained its net cash flow (NCF) assumption at GBP 33 million as concluded at last year’s surveillance review. In addition, DBRS Morningstar maintained its cap rate at 8.9% which translates into a DBRS Morningstar value of GBP 367.2 million, representing a 22% haircut to the market value of GBP 472 million provided by C&W, as of January 2021. The underwritten occupancy rate is maintained at 73% across the portfolio as per last year’s review.

The transaction benefits from a liquidity reserve facility, which was funded by the issuance of the Class RFN notes, and may be used to cover shortfalls on the payment of interest due by the issuer to the holders of the Class A to Class D notes. No drawings have been made under the liquidity reserve facility since issuance. The outstanding amount for the liquidity reserve is GBP 14,402,372 as of November 2021.

The Class E notes have been accruing the deferral interest since the February 2021 interest payment date with the ending balance of GBP 14,600 as of November 2021. DBRS Morningstar’s expectations is that the Class E notes deferred interests will be repaid and DBRS Morningstar therefore confirmed the rating on the Class E notes.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to 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. In addition, commercial real estate values could be negatively affected, at least in the short term, affecting refinancing prospects for maturing loans and expected recoveries for defaulted loans. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include servicer reports provided by Mount Street Mortgage Servicing Limited and U.S. Bank Global Corporate Trust Limited since issuance.

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 4 November 2020 when DBRS Morningstar confirmed its rating on the Class RFN notes and downgraded its ratings on the Class A, Class B, Class C, Class D, and Class E notes.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at 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 Risk Sensitivity:
-- 10% decline in DBRS Morningstar Net Cash Flow (NCF), expected rating of the Class A notes at AAA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class A notes at AA (sf)

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

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

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

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

Class F Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class E notes at CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class E notes at CC (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. 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, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 October 2020

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 (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/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].