DBRS Morningstar Takes Rating Actions on Magenta 2020 PLC

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the commercial mortgage-backed floating rate notes (the notes) issued by Magenta 2020 PLC (the Issuer):

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

DBRS Morningstar also changed the trend on all classes of notes to Stable from Negative.

The rating actions reflect the deleveraging of the loan and improved performance metrics of the underlying hotels following the lifting of Coronavirus Disease (COVID-19) restrictions over the last year.

Magenta 2020 PLC is the securitisation of a GBP 274.0 million senior loan advanced to DTP Subholdco Limited (the borrower) to finance the acquisition of a portfolio of hotels from Marathon Asset Management Limited in March 2020. The borrower also acquired a 25% stake in the operating platform Valor Hospitality Europe Limited (Valor Europe), although it did not use the loan to acquire this stake. The lender and lead arranger, Goldman Sachs Bank U.S.A., also provided a mezzanine loan of GBP 66.0 million to DTP Regional Hospitality Group Limited, part of the borrower group. The mezzanine loan is structurally and contractually subordinated to the senior loan and is not part of the transaction. The senior loan is secured by 17 hotels located in the U.K, concentrated mainly in the north west of England, and the East Midlands. The hotels are managed by Valor Europe and operate under various franchise agreements with InterContinental Hotels Group (IHG), Hilton and Marriott. Three hotels operate under the Hilton Double Tree brand; seven under the Crowne Plaza brand; three under Hilton Garden Inn; two under AC by Marriott; and one each under the Holiday Inn and Indigo brands.

Following the pandemic-led disruption to business, the servicer, CBRE Loan Services Limited (CBRE), entered into an amendment and waiver letter with the borrower and finance counterparties in June 2020 to allow the borrower to manage their medium term liquidity without breaching their obligations, subject to certain conditions imposed to protect the Issuer’s position. Specifically, the sponsor (DTGO Corporation Limited) injected GBP 17.5 million of equity into the cure account for the borrower to cover operating and financial shortfalls. Further equity injections occurred in December 2020 (GBP 0.7 million), March 2021 (GBP 5.8 million), and May 2021 (GBP 1.5 million).

On 20 December 2021 (the original initial maturity date), the noteholders approved a restructuring of the loan via a written extraordinary resolution and the maturity was extended to December 2024 (final loan maturity) with new hedging in place until the final loan maturity, offering protection from further interest rate hikes.

As part of the agreement, the senior loan was deleveraged by GBP 12 million in March 2022 by way of prepayment via an equity injection. Proceeds were applied on a pro-rata basis. Finally, the deadline for a programme of improvement works on the Hilton properties was also extended to December 2023.

Following the restructuring, a 12 months period was established, during which the debt yield (DY) ratio default covenant was waived. The waiver expires as of the December 2022 interest payment date (IPD).

As of the September 2022 IPD, the loan metrics reflect an improving outlook: the occupancy rate has increased to 72% from less than 50% last year, and the average daily rate is GBP 98, compared with GBP 86 at the cut-off date in March 2020. Overall, the net operating income is GBP 24.8 million p.a. The DY is 10.9%, which is above the 9.3% cash trap covenant. The DY cash trap will increase to 9.6% from the December 2022 IPD. DBRS Morningstar expects the DY default covenant to revert to the previously agreed level of 8.75% from December 2022 IPD onwards.

In September 2022, Savills carried out a new valuation and, in aggregate, appraised the portfolio’s market value at GBP 397.6 million, representing a 3% increase from the August 2021 valuation. However, this is still 9% below the original 2019 valuation. Based on the new valuation and the outstanding loan amount as of the September 2022 IPD, the loan to value (LTV) ratio is 62.3%. Due to the deleveraging of the loan, both by scheduled amortisation and by prepayment via equity injection, the LTV ratio dropped to the level at origination (62.2%) and below the LTV cash trap covenant of 67.2%.

In October 2022, an amendment and reinstatement agreement to the senior loan facility was signed for the remedial works on cladding to be completed by 31 July 2023.

DBRS Morningstar’s assumptions remain unchanged since it downgraded its ratings on the notes in November 2020: the cap rate and net cash flow (NCF) remain unchanged at 7.75% and GBP 21 million, respectively. As a result, DBRS Morningstar’s NCF haircut on issuer NCF stands at 15.3% and DBRS Morningstar value haircut stands at 31.9% on appraised value.

The transaction benefits from a liquidity reserve facility of GBP 8.08 million available to the Class A, Class B and Class C notes, which was funded out of the proceeds of the Class A notes and a proportionate amount of the issuer loan. Based on a cap strike rate of 3.8%, DBRS Morningstar estimated that the liquidity reserve will cover 14 months of interest payments on the notes. Based on a cap on the Sterling Overnight Index Average (Sonia) of 5%, the liquidity reserve will cover nine months of interest.

The final maturity of the loan is in December 2024. The transaction benefits from a five year tail period with final notes’ maturity in December 2029.

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 quarterly reports issued by US Bank Global Corporate Trust Limited and CBRE.

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 actions on this transaction took place on 14 December, 2021 , when DBRS Morningstar confirmed its ratings on the classes of notes all with Negative trends.

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):

Class A Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class A notes of AA (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class A notes of A (high) (sf)

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

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

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class D notes of BB (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class D notes of B (sf)

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class E notes of B (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class E notes of CCC (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: Gareth Levington, Managing Director
Initial Rating Date: 13 February 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.
-- 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.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-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].