DBRS Morningstar Confirms All Ratings on Sage AR Funding No. 1 Plc; Assigns Stable Trends; Removes Under Review with Negative Implications Status of the Ratings

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by Sage AR Funding No. 1 Plc (the Issuer) due 17 November 2030:

-- Class A notes at AAA (sf)
-- Class B notes at AA (high) (sf)
-- Class C notes at A (high) (sf)
-- Class D notes at BBB (sf)
-- Class E notes at BB (low) (sf)
-- Class F notes at B (sf)

DBRS Morningstar assigned Stable trends to all classes of notes based on the underlying loan performance, which has been in line with expectations and in accordance with the terms of the senior facility agreement. The borrower fulfilled all debt service requirements over the past year, and has put into place a new hedging agreement in compliance with the provisions of the transaction documents. The condition on the interest rate cap with a weighted-average strike rate on any day not be more than the higher of (i) 0.75% per year and (ii) the rate that ensures that, as at the date on which the relevant hedging transaction is contracted, the hedged interest coverage ratio (ICR) is not less than 1.5x, has been met.

DBRS Morningstar also removed the Under Review with Negative Implications (UR-Neg.) of the ratings, where they were placed on 26 October 2022.

The transaction is a securitisation of a GBP 220 million floating-rate senior social housing-backed loan (the senior loan) advanced by the Issuer to a single borrower, Sage Borrower AR1 Limited. The borrower onlent the funds to its parent, Sage Rented Limited (SRL), a for-profit registered provider of social housing, to acquire the properties and cover associated costs. The senior loan is backed by 1,609 new purpose-built residential units located across England. The loan term is for five years with an expected final repayment date on 15 November 2025. The portfolio was revalued by Savills Advisory Services Limited (Savills) in September 2021 to GBP 336.4 million, up from GBP 308.4 million (in terms of market value subject to tenancy), reducing the rated senior loan-to-value to 62.14% from 67.76%.

Sage Housing Limited (the sponsor) was established in May 2017 and is majority owned by Blackstone Inc. The portfolio is a mixture of new-build houses and flats, generally in a good residential location close to transport links and amenities. Approximately 60% of the portfolio is in London, the South East, and the South West. Most of the rented units are let on starter leases and then transferred to periodic assured tenancy agreements after an initial probationary period of 12 months, which is extendable to 18 months. Tenants in social housing typically occupy the units for more than five years beyond the probationary period.

The senior loan interest comprises two parts: (1) Sonia (subject to zero floor) plus a margin that is a function of the weighted average (WA) of the aggregate interest amounts payable on the rated notes; and (2) the lower of excess cash flow and 9% fixed interest on the retention tranche (the Class R notes). The borrower purchased a new interest cap agreement from Merrill Lynch International, with a cap strike rate of 0.75% for the full notional amount of the rated notes. The previous arrangement which comprised a cap strike of 0.50% terminated on 15 November when the new arrangement came into force. The hedging will expire on 17 November 2023, at which point it must be renewed annually for the remaining term of the loan.

The loan is interest only, with no scheduled amortisation during the term of the loan. However, prepayments are permitted as voluntary prepayments and also with respect to property disposals, with a release price of 100% of the allocated loan amount. No disposal has occurred since origination on 21 October 2020. The allocation of such principal prepayment to the notes will be pro rata prior to a sequential payment trigger, after which all principal will be applied sequentially. If a prepayment is made as a voluntary prepayment, such principal will be applied to the rated notes in reverse-sequential order.

The Issuer liquidity reserve (ILR) of GBP 6.5 million is provided by Deutsche Bank AG London Branch. The ILR covers interest payment shortfalls for Class A to Class C notes. DBRS Morningstar calculates that the ILR can cover interest payments on the covered notes up to 21 months, based on the interest cap strike rate of 0.75%, or ten months, based on the Sonia capped at 4.0% plus the respective notes’ margin.

To satisfy risk retention requirements, an entity within Sage Group has retained a residual interest consisting of no less than 5% of the nominal and fair market value of the overall capital structure by subscribing to the unrated and junior-ranking GBP 11 million Class R notes. The final legal maturity of the notes is expected to be 17 November 2030, five years after the expected loan maturity (15 November 2025).

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 Situs Asset Management Limited, U.S. Bank Trustees Limited since issuance, along with the valuation reports provided by Savills 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 26 October 2022, when DBRS Morningstar placed its ratings on all classes of notes UR-Neg.

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

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

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class D notes at BBB (low) (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 F notes at CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class F notes at CC (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, Credit Ratings
Rating Committee Chair: Mirco Iacobucci , Head of European CMBS
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 (17 December 2021),
https://www.dbrsmorningstar.com/research/389947/european-cmbs-rating-and-surveillance-methodology.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- 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.
-- 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].