DBRS Morningstar Confirms Ratings on Class RFN and Class A to Class D Notes of Helios (European Loan Conduit No. 37) DAC; Places Class E Notes Under Review with Negative Implications

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the commercial mortgage-backed floating rate notes due 2030 (the notes) issued by Helios (European Loan Conduit No. 37) DAC (the Issuer):

-- Class RFN notes confirmed at AAA (sf)
-- Class A notes confirmed at AAA (sf)
-- Class B notes confirmed at A (high) (sf)
-- Class C notes confirmed at BBB (sf)
-- Class D notes confirmed at BB (high) (sf)
-- Class E notes confirmed at B (high) (sf) and placed Under Review with Negative Implications (UR-Neg.)

The trend on Class RFN remains Stable while the trends on all other classes remain Negative.

The rating confirmations on the Class A to Class D notes were driven by the transaction’s improved performance over the past 12 months and the borrower’s earlier partial prepayment of the loan at the October 2021 Interest Payment Date (IPD), with subsequent deleverage of the transaction.

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 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 the Park Inn hotel in York, the portfolio entirely 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.

As of June 2022, the portfolio’s net operating income (NOI) was GBP 41.4 million, up from GBP 33.2 million in March 2022 (the NOI was GBP 27.8 million in December 2021 and GBP 16.7 million in September 2021). The operating performance has continued to improve as the Coronavirus Disease (COVID-19) pandemic restrictions are lifted and the debt yield of 13.20% (as of August 2022) was above the covenant level of 10.00% and the cash trap level of 11.30%.

The latest valuation conducted by Cushman & Wakefield in January 2021 valued the portfolio at GBP 472.0 million, which results in a loan-to-value (LTV) of 66.41%, as of August 2022. The LTV is currently above the cash trap LTV covenant level of 64.9% but is below the event of default covenant threshold of 72.4%. The occupancy for the portfolio was 71.5% as of 30 June 2022.

DBRS Morningstar maintained its net cash flow (NCF) assumption at GBP 33 million and the cap rate at 8.9%, which translates into a DBRS Morningstar value of GBP 367.2 million, a 22% haircut to the latest market value provided by Cushman & Wakefield, as of January 2021. DBRS Morningstar maintained its underwritten 73% portfolio-wide occupancy rate.

On the October 2020 interest payment date (IPD), the debt yield covenant was breached and as a consequence of it not being cured, the loan was transferred into special servicing on 23 November 2020; however, on 28 September 2021, the special servicer and the borrower agreed to the amended terms of the facility agreement. In consideration of the waivers, the borrower partially prepaid the loan by GBP 30 million and deposited in the debt service account a sum of GBP 13,500,315 towards a debt service contribution fund, which was applied on the January, April, July, and October 2022 IPDs. The loan remained in special servicing until April 2022 and then returned to primary servicing as a corrected loan.

Following the application of the GBP 30 million prepayment under a sequential payment waterfall, the Class A notes were partially redeemed, thereby increasing the weighted-average margin of the notes. DBRS Morningstar calculates the weighted-average margin (WAM) of the notes to be 3.18%, which reduces the excess spread between the note margin and the loan margin (3.25%) and together with the presence of the senior ranking issuer costs have started to eat into the interest amount payable in respect of the Class E notes since February 2022 IPD. As of the 2 November 2022 IPD, the deferred interest amount on Class E stood at GBP 798,800.11.

DBRS Morningstar has raised a query to the cash manager regarding the classification of this interest shortfall due to the WAM increasing as a result of the partial prepayment of the Class A notes and therefore apparently triggering the available funds cap (AFC) provisions of the Class E notes. This query has not been answered by the cash manager yet and so it remains unclear to DBRS Morningstar whether these funds should be deferred or not due under the AFC provisions and, as a result of this uncertainty, DBRS Morningstar has placed its rating on the Class E notes UR-Neg. until this determination has been made.

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 Mount Street Mortgage Servicing Limited and US Bank Trustees 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 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 upgraded its ratings on the Class A, Class B, and Class C notes; confirmed its ratings on the Cass RFN, Class D, and Class E notes; and maintained the Stable trend on the Class RFN notes and the Negative trends on all other classes of notes.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: 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 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)

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: David Lautier, Senior Vice President
Initial Rating Date: 16 October 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 (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].