DBRS Morningstar Upgrades and Confirms Ratings on Ribbon Finance 2018 Plc; Changes Trends to Stable from Negative

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the commercial mortgage-backed floating rate notes due April 2028 issued by Ribbon Finance 2018 Plc (the Issuer):

-- Class A notes confirmed at AAA (sf)
-- Class B notes confirmed at A (high) (sf)
-- Class C notes confirmed at A (low) (sf)
-- Class D notes confirmed at BBB (sf)
-- Class E notes confirmed BB (high) (sf)
-- Class F notes upgraded to BB (sf) from BB (low) (sf)

DBRS Morningstar also changed the trends on all ratings to Stable from Negative.

The rating confirmations on the Class A to Class E notes and the upgrade of the most junior Class F notes follow the senior loan’s improved performance, as well as a GBP 20 million voluntary prepayment on the October 2022 Interest Payment Day (IPD), which contributed to a substantial deleveraging of the Class F notes thanks to the reverse principal allocation. The loan’s improved revenue performance and the recovery in the hospitality sector following the lifting of the Coronavirus Disease (COVID-19) pandemic-induced restrictions is also reflected in the trend change to Stable from Negative.

Ribbon Finance 2018 Plc is the securitisation of a GBP 449.8 million (at inception) senior loan advanced to Ribbon Bidco Limited (the borrower) to provide partial acquisition financing to the Dayan family (the sponsor) to acquire Lapithus Hotels Management UK and 20 hotel properties located across the United Kingdom. The initial lender is Goldman Sachs Bank USA and the transaction was arranged by Goldman Sachs International. Goldman Sachs Bank USA also advanced a mezzanine loan of GBP 69.2 million to Ribbon Mezzco Limited. The mezzanine loan was fully repaid on 27 July 2020. The five-year-term loan does not have extension options and will mature on 13 April 2023. As such, the borrower is currently working towards the refinancing of the loan.

The senior loan is secured by a portfolio of 18 hotels (20 at origination): 15 hotels are flagged by the Holiday Inn brand while the remaining three operate under the Crowne Plaza brand. The majority of the portfolio is located in Southern England, with a part of the portfolio located in Cardiff, Glasgow, Edinburgh, Manchester, and Birmingham. Five of the properties are in the Greater London area. In general, the properties are located close to key vehicular routes or interchanges and benefit from excellent accessibility. Five of the hotels are located at or near airports. The hotels in Cardiff, London (Regent’s Park), and Milton Keynes benefit from their central locations and are well placed to benefit from the strong post-pandemic demand recovery.

Since the COVID-19-related restrictions disrupted hotel operations and cash flows, the facility agent agreed to waive any loan event of default in connection with the pandemic. The waiver expired on the July 2022 IPD, and the loan is now fully compliant with all the covenant requirements. As a result, GBP 20 million of funds, which were placed in a blocked account to sufficiently cover debt service costs as a condition of the waiver agreement, have been released to the borrower and subsequently applied towards the voluntary prepayment of the loan on the October 2022 IPD. The prepayment receipts were applied to the notes in a reverse sequential order and therefore resulted in the substantial deleveraging of the most junior Class F notes.

As a result of the voluntary prepayment, scheduled amortisation, and sale of one property (Best Western Ariel Heathrow), the loan balance as of the October 2022 IPD has reduced to GBP 250.3 million, down GBP 33.5 million since the last annual surveillance. In July 2022, Savills Advisory Services Limited (Savills) carried out a new valuation and, in aggregate, appraised the portfolio’s market value at GBP 559.5 million, which represents an 8.3% increase in value for the 18 properties compared with the May 2021 valuation. The reduced loan balance and the increased valuation together translated to a loan-to-value reduction to 48.2% in October 2022 from 54.2% a year ago.

Since May 2021, the hotels have been able to operate as ‘Business as Usual’ and have seen a strong recovery in revenue performance. Helped by the strong demand, the average daily rate and occupancy have seen a steady increase over the past year, with total revenue reaching GBP 110.4 million in July 2022 compared with GBP 48.8 million in July 2021. The increased revenue led to a strong improvement in debt yield (DY) over the past year. In July 2022, DY increased to 11.9%, resulting in amortisation requirements halving to GBP 1,124,500 per quarter. Overall, recovery in the loan’s revenue performance coupled with voluntary prepayments have contributed to substantial improvement in the loan’s key performance indicators (LTV and DY). Based on the current loan metrics, DBRS Morningstar expects the loan to be refinanced at maturity amid higher interest rates.

Reflecting the property disposal, DBRS Morningstar reduced its net cash flow (NCF) to GBP 30.6 million from GBP 31.5 million at last annual surveillance. With the capitalisation rate remaining unchanged from the previous review, the resulting DBRS Morningstar value is EUR 368.2 million, representing a haircut of 34.2% to the most recent appraised value. Deleveraging of the most junior notes has resulted in the upgrade of the Class F notes to BB (sf) from BB (low) (sf). The ratings on Class A to Class E notes have been confirmed, and the trends on all ratings changed to Stable from Negative, reflecting the loan’s improved revenue performance and the recovery in the hospitality market.

The loan has tightening LTV covenants for cash trap and event of default. The LTV cash trap covenant is set at 71.50% for the first two years, at 70.42% in year three, and at 69.33% for the last two years of the loan. The LTV default covenants are set at 75.83% for the first two years, at 74.75% in year three, and at 73.67% for years four and five. The other two covenants, DY and interest coverage ratio, are set at 10.10% and 1.95x for cash trap and 9.26% and 1.78x for event of default.

During the loan term, the borrower is required to amortise the senior loan by GBP 1,124,500 per IPD or GBP 4,498,000 per annum, which is 1% of the senior loan amount at issuance. However, the borrower is required to double the amortisation payment on each IPD should the NOI debt yield DY for that period fall below 11.54%.

The senior loan carries a floating interest rate with a Sonia benchmark plus a margin of 3.19% per annum. The senior loan is 100% hedged with an interest rate cap provided by Goldman Sachs Bank USA, with a strike rate of 2.0%.

The transaction benefits from a liquidity reserve facility that may be used to cover shortfalls on the payment of interest due by the Issuer to the holders of the Class A to Class F notes. No drawings have been made under the liquidity reserve facility since issuance. The liquidity facility amortises in line with the notes’ balances and amounted to GBP 15.5 million as of October 2022.

The legal final maturity of the notes is in April 2028, five years after the loan maturity.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

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” (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/401817/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 and quarterly data provided by CBRE Loan Services Ltd. and U.S. Bank Global Corporate Trust Limited since issuance, as well as the valuation report prepared by Savills.

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 2021 when DBRS Morningstar confirmed its ratings on the Class A, Class E, and Class F notes at AAA (sf), BB (high) (sf), and BB (low) (sf), respectively, and upgraded its ratings on the Class B, Class C, and Class D notes to A (high) (sf), A (low) (sf), and BBB (sf) from A (sf), BBB (high) (sf), and BBB (low) (sf), respectively.

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):

Class A Risk Sensitivity:
-- 10% decline in DBRS Morningstar 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 (high) (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 (sf)

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

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

Class F Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class F notes at BB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class F notes at B (high) (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 GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 9 May 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 (17 December 2021), https://www.dbrsmorningstar.com/research/389947/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/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 (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].