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 (the Issuer) 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)

All trends are Stable.

RATING RATIONALE
The confirmations reflect the transaction’s continued stable performance over the last 12 months and improving leverage and debt yield (DY) metrics, with the underlying loan amortising according to schedule.

River Green Finance 2020 DAC is the securitisation of a EUR 196.2 million floating-rate commercial real estate loan split into two different facilities (facility A and facility B) both advanced by Goldman Sachs International Bank (GS) for the purpose of acquiring the River Ouest office building located in the western suburbs of Paris. The EUR 35.8 million facility A was advanced to four ringfenced compartments of LRC RE-2, a Luxembourg SICAV-RAIF investment fund, while the EUR 160.4 million facility B was advanced to a French Organisme de Placement Collectif Immobilier (OPCI). The Issuer purchased the loan using the proceeds from the notes’ issuance (95.0% of the purchase price) and from an Issuer loan advanced by GS (5.0% of the purchase price).

River Ouest is a campus-style office with many other amenities such as restaurants, terraces, an auditorium, a fitness club, and concierge services located in the Bezons municipality in Paris’ western suburbs. A major business district, La Défense, is located approximately five kilometres southeast of the asset. Built in 2009, it was awarded a sustainability rating of "Very Good" under the Building Research Establishment Environmental Assessment Method scheme on 25 January 2017.

On 31 March 2021, CBRE Limited (CBRE) revalued the property at EUR 337.4 million, which is only 1.7% lower than the EUR 343.3 million estimated at issuance. The servicer confirmed that a new valuation has been mandated and will be available soon. According to the latest servicer report, as of the October 2022 interest payment date (IPD), the outstanding whole loan balance was EUR 190.8 million, which is 2.8% lower than the original loan amount. The loan amortises at a rate of 1.0% per annum (p.a.) of the original loan amount, with a step-up to 2.0% in the fifth year, should the loan still be outstanding at that time. As a result of the loan’s amortisation, on the October 2022 IPD, the loan-to-value (LTV) ratio decreased to 56.6% compared with 57.1% as of October 2021, when it increased slightly due to the reduced market value.

The property is let to the same three tenants that were occupying it at issuance. It mainly serves as the global headquarter of Atos, a French multinational IT and consulting company, which accounts for 82.9% of the annual contracted rent. The second-largest tenant is Dell Technologies, accounting for 15.0% of the contracted rent, whose lease expires in June 2023. According to the servicer, negotiations with the tenant to further extend the lease term have started. The third tenant is Sophos Group plc, accounting for 2.1% of the contracted rent, whose lease expired in May 2020. The tenant is currently occupying the property on a rolling month-to-month contract and, similar to last year’s review, discussions are ongoing with the borrower regarding a potential lease extension. However, should the tenant decide to leave, the overall property’s vacancy would increase to 3.5%, which is still well below DBRS Morningstar’s vacancy assumption rate of 11.9% underwritten at issuance.

The whole loan’s performances and key metrics continue to be well in line with DBRS Morningstar’s expectations at issuance, with stable occupancy and rental income figures reported to date. Specifically, as of October 2022, the loan reported an occupancy rate of 98.4%, a stable annual net rental income of EUR 23.9 million and a weighted-average lease term of 6.6 years. The loan’s DY increased to 12.6% in October 2022 compared with 12.4% as of October 2021 and with 12.0% at issuance, mainly as a result of scheduled amortisation. Since closing, there have been no arrears, with 100% of scheduled rent always collected.

DBRS Morningstar did not revise its underwriting assumptions. In particular, DBRS Morningstar’s net cash flow assumption remains at EUR 18.3 million. In addition, DBRS Morningstar maintained its long-term cap rate assumption at 6.8%, which translates to a DBRS Morningstar value of EUR 268.9 million, representing a 20.3% haircut to CBRE’s most recent valuation.

The loan was initially scheduled to mature on 15 January 2023, with two one-year conditional extension options available to the borrowers. The borrowers exercised the first extension option, thus extending the loan’s maturity to 15 January 2024 (the first extended termination date) following satisfaction of the required conditions. According to a notice from the Issuer dated 17 January 2023, some amendments were also agreed to reduce the minimum time before maturity to deliver the extension notice (no later than one day but no more than 90 days before the initial termination date) and to increase the maximum strike rate for the new interest rate cap agreement to 5.0% from 2.5%. According to the servicer, the amendments comply with the servicing standard.

The loan accrues interest at the aggregate of three-month Euribor (floored at zero) plus a margin of 2.4% p.a. and it is fully hedged with a prepaid interest rate cap provided by Wells Fargo Bank, N.A. with a strike rate of now 5.0%. The cap agreement terminates on 24 January 2023. Despite the increased strike rate, DBRS Morningstar believes that the current property’s cash flow will still be sufficient to meet the borrowers’ debt obligations until the first extended termination date.

There are three sets of cash trap covenants based on performance ratios, withholding tax (WHT) liability, and technical and environmental (T&E) items. The performance ratio cash trap covenants are set at 10.27% for DY calculated based on 12-month forward-looking adjusted net rental income and a 62.15% LTV based on the latest valuation. WHT cash trap is triggered by any action, claim, investigation, or proceeding commenced or announced by the French tax administration or any other person, without limitation, to levy WHT at a rate greater than the rate then currently provided for by the French Tax Code (currently 15%) on the dividend distribution by the Facility B Borrower. Under the WHT cash trap, an amount corresponding to the increased tax exposure will be trapped after paying senior costs and interest but before the ratio and technical items cash trap amounts. The T&E items cash trap is meant to incentivise the Sponsor to carry out the immediate remedial works identified in the T&E reports at issuance. According to a notice from the Issuer dated 30 January 2023, the servicer has agreed to further extend the deadline for the facility B borrower to remedy T&E defects under the T&E items cash trap trigger to 30 September 2023. In particular, the borrower provided the servicer with satisfactory evidence that it had undertaken its best endeavours to remedy each of the T&E defects, a condition for the deadline to be extended under limb (b) of the definition of a T&E items cash trap event.

The financial default covenants are only based on 67.15% LTV and 9.39% DY ratios. A noncured financial covenant breach will trigger a loan event of default and subsequently the acceleration of the loan.

The transaction is supported by a EUR 10.9 million liquidity facility (EUR 11.3 million at origination). The liquidity facility was provided by Crédit Agricole Corporate and Investment Bank at issuance and can be used to cover interest shortfalls on the Class A to the Class C notes (the covered notes), as well as the Issuer loan. At the transaction’s closing, DBRS Morningstar estimated the initial EUR 11.3 million commitment amount to be equivalent to approximately 21 months of coverage based on a 2.5% cap strike rate or approximately 13 months of coverage based on the 5.0% cap on the three-month Euribor applicable after the expected note maturity. Following the increase in the cap strike rate to 5.0%, the estimated coverage decreased to approximately 13 months, which is still in line with DBRS Morningstar’s expectations based on the 5.0% Euribor cap after the expected note maturity. DBRS Morningstar’s ratings continue to address the timely payment of interest on the covered notes at least until the first extended termination date.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology” (14 December 2022), https://www.dbrsmorningstar.com/research/407379/european-cmbs-rating-and-surveillance-methodology.

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 data from the servicer report published by Mount Street Mortgage Servicing 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 9 February 2022, when DBRS Morningstar confirmed its ratings on all classes of notes with Stable 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 to AA (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class A notes to AA (low) (sf)

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

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

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class D notes to BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on 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: Mark Wilder, Senior Vice President
Initial Rating Date: 8 January 2020

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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 (14 December 2022), https://www.dbrsmorningstar.com/research/407379/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].