DBRS Morningstar Confirms Ratings on River Green Finance 2020 DAC with Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage-Backed Floating Rate Notes due January 2032 issued by River Green Finance 2020 DAC as follows:

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

The trends on all ratings are Stable.

The rating confirmations reflect the stable performance of the transaction over the last 12 months, with the underlying loans amortising according to schedule.

River Green Finance 2020 DAC is the securitisation of two floating-rate commercial real estate loans advanced by Goldman Sachs International Bank to a French OPCI (the Facility B Borrower) and four ring-fenced compartments of LRC RE-2, a Luxembourg investment company (the Facility A Borrowers). The loans amortise at a rate of 1.0% of the original loan amount annually, with the amortisation stepping up to 2.0% in the fifth year, should the loan still be outstanding at that time. Therefore, the loans’ balance has decreased to EUR 192,200,000 as of January 2022 from EUR 196,200,000 at origination in 2020.

The debt facilitated the acquisition of River Ouest, a single campus-style office property built by HRO Group in 2009 and located on the right bank of the River Seine in the western suburb of Paris, approximately five kilometres northwest of a major business district, La Défense.

CBRE valued the property at EUR 343.3 million at origination. CBRE undertook a new valuation in March 2021, revaluing the asset 1.7% below the original value at EUR 337.4 million. This has led to a marginal increase in the loan-to-value, which went up to 57.1% in Q4 2021 when the valuation report was finalised, compared to 56.3% in the previous quarter. This is still well in line with the cash trap and default covenants of 62.15% and 67.15%, respectively.

The property is let to three tenants and serves as the global headquarters of Atos, a French multinational IT and consulting company, which accounts for 83.3% of the annual contracted rent. The other two tenants, Dell EMC and Sophos, account for 14.7% and 2.0% of the contracted rent, respectively. The vacancy rate has remained stable at 1.6% since origination, with only one office plate vacant. However, the Sophos lease has expired, with the tenant still in occupation on a rolling contract and the discussions about lease renewal ongoing, as per the latest investor report. Should the tenant decide to leave, the overall vacancy would increase to 3.4%, which is below the vacancy assumption of 11.9% underwritten by DBRS at origination.

The transaction’s performance was stable over the last 12 months, with no adverse impact from the Coronavirus Disease (COVID-19) pandemic. According to the latest investor report, tenants were not seeking to reduce their space and no rent arrears were reported since origination.

As a result, DBRS Morningstar did not revise its underwriting assumptions and confirmed its ratings on all classes of notes with Stable trends. DBRS Morningstar’s net cash flow (NCF) assumption remains at EUR 18.3 million and its valuation continues to be EUR 269.9 million, which represents a 20.1% haircut to the latest valuation.

The transaction is supported by a EUR 11.1 million liquidity facility (EUR 11.3 million at origination). The liquidity facility is provided by Crédit Agricole Corporate and Investment Bank and can be used to cover interest shortfalls on the Class A through Class C notes, as well as the issuer loan.

The three-year loans have two one-year extension options that can be exercised if certain conditions are met. The fully extended maturity of the loans is in January 2025 and the final legal maturity of the notes is in January 2032, seven years after the fully extended loan maturity date. DBRS Morningstar believes that this provides sufficient time, given the security structure and jurisdiction of the underlying loan, to enforce on the loan collateral and repay bondholders.

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 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 euros unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology” (17 December 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 quarterly servicer reports provided by Mount Street Mortgage Servicing Limited, as well as a valuation report prepared by CBRE Limited dated 31 March 2021.

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 10 February 2021, when DBRS Morningstar confirmed its ratings on the Class A, Class B, Class C, and Class D notes at AAA (sf), AA (low) (sf), A (low) (sf), and BBB (sf), respectively, with Stable trends.

The lead analyst responsibilities for this transaction have been transferred to Violetta Volovich.

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 NCF, expected rating of Class A Notes to AA (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A Notes to AA (low) (sf)

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

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

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

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 Limited for use in the United Kingdom.

Lead Analyst: Violetta Volovich, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 8 January 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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 (17 December 2021),
https://www.dbrsmorningstar.com/research/389947/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].