DBRS Morningstar Confirms Ratings on Elizabeth Finance 2018 DAC

DBRS Ratings Limited (DBRS Morningstar) confirms its ratings on the Class A, Class B, Class C, Class D, and Class E Notes of Elizabeth Finance 2018 DAC (the Issuer) as follows:

-- Class A Notes confirmed at A (high) (sf)
-- Class B Notes confirmed at BBB (low) (sf)
-- Class C Notes confirmed at BB (low) (sf)
-- Class D Notes confirmed at CCC (sf)
-- Class E Notes confirmed at C (sf)

The trends remain Negative.

RATING RATIONALE
The rating confirmations follow the portfolio’s performance of cash flow and occupancy, which have shown signs of improved stability. The continuing uncertainty surrounding the UK retail property market is reflected in the Negative trend on the notes.

The transaction is a securitisation of two senior commercial real estate loans that Goldman Sachs International Bank advanced in August 2018. The MCR loan of GBP 21.2 million was granted to refinance an office asset, Universal Square, located in Manchester and the Maroon loan of GBP 63.9 million (GBP 69.6 million at inception) was granted to refinance a portfolio of three secondary retail properties in the UK (King’s Lynn and Loughborough in England and Dunfermline in Scotland). The MCR loan was repaid in full on the Q3 2020 interest payment date.

The Maroon loan is secured by three secondary shopping centres. The initial special servicer, CBRE Loan Services Limited (CBRELS), accelerated the loan following a loan-to-value (LTV) covenant breach. CBRELS subsequently agreed to a standstill until the initial loan maturity in January 2021. It was also agreed that, three months before such maturity, the Maroon borrower would provide an exit strategy showing how it expected to repay the loan in full on the initial maturity date; however, the special servicer considered the exit strategy provided by the Maroon borrower to be unsatisfactory. As a result, in October 2020, CBRELS accelerated the loan and, subsequently, the common security agent appointed fixed-charge receivers with the aim of disposing the assets in the loan.

Following the appointment of the fixed-charge receivers, the controlling Class D Noteholders exercised their right to replace CBRELS with Mount Street Mortgage Servicing Limited (Mount Street) as the special servicer. Subsequently, Mount Street temporarily suspended the sale of the portfolio and sought to implement asset management initiatives to improve and stabilise the portfolio’s net operating income and to wait for a likely pickup of the retail investment market following the easing of lockdown restrictions related to the Coronavirus Disease (COVID-19) pandemic. Waypoint Asset Management LLC took over as asset manager in June 2022 and sought to rebase the in-place leases and collect the arrears which, as of January 2023, were reported at GBP 1.7 million following a write-off of approximately GBP 1.0 million.

DBRS Morningstar still maintains its assumption on vacancy of 28% and net cash flow (NCF) of GBP 4.8 million in line with its last annual surveillance review in April 2022, following signs that the portfolio asset manager is achieving a more stabilised cash flow (GBP 6.7 million) and occupancy rate (83%) while reducing the level of arrears. DBRS Morningstar also maintained its cap rate of 9.5%, keeping its portfolio valuation at GBP 50.4 million. The valuation represents a 27% haircut to CBRE’s March 2020 valuation of GBP 68.9 million.

The Maroon loan had an initial maturity date of January 2021 and two one-year extension options were initially included in the facility agreement, provided that the loan still complied with its default covenants. Because of the outstanding event of default, the borrower was unable to exercise the extension option and the loan was accelerated. The final note maturity is scheduled in July 2028. The loan continues to amortise by 0.25% of the original loan balance each quarter and has amortised by 9.1% since the closing date. The LTV based on the last valuation is 92.0%. The loan has now switched basis to Sonia and is unhedged, meaning the debt service obligations will increase if there are further rises in the Sonia rate; however, there is a Sonia cap of 4% with respect to payments on the notes.

The transaction still benefits from a liquidity facility of GBP 3.4 million as of January 2023, provided by ING Bank N.V. The liquidity facility can be used to cover interest shortfalls on the Class A, Class B, Class C, and Class D Notes. Furthermore, at closing, the Issuer funded an interest reserve using the proceeds from the notes’ issuance, which currently stands at GBP 58,000. The reserve stands to the credit of the Issuer transaction account and forms part of the interest available funds on each interest payment date to cover interest shortfalls on all classes of notes except the Class X Notes.

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 British pounds sterling unless otherwise noted.

The principal methodology applicable to the rating 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.

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 investor reports provided by Situs Asset Management Limited, the European Investor Reporting Package files, and the latest available tenancy schedules.

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 28 April 2022, when DBRS Morningstar downgraded its ratings on the Class A, Class B, Class C, Class D, and Class E Notes to A (high) (sf), BBB (low) (sf), BB (low) (sf), CCC (sf), and C (sf) from AA (high) (sf), A (low) (sf), BBB (low) (sf), B (sf), and B (low) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Sioban Sugrue.

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

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

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class C Notes at CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class C Notes at CCC (sf)

Class D Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class D Notes at CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class D Notes at CCC (sf)

Class E Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class E Notes at C (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class E Notes at C (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Sioban Sugrue, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 20 August 2018

DBRS Ratings Limited
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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 (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].