DBRS Morningstar Confirms Credit Ratings on Magenta 2020 PLC and Assigns Negative Trend to All Classes

DBRS Ratings Limited (DBRS Morningstar) confirmed its credit ratings on the commercial mortgage-backed floating-rate notes (the notes) issued by Magenta 2020 PLC (the Issuer) as follows:

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

The trends of all credit ratings are now Negative.

CREDIT RATING RATIONALE

The trend change reflects the uncertainty due to certain deadlines the obligors will have to meet related to the programme of improvement works on the Hilton properties and Permitted Reorganisation Condition Subsequent before the loan maturity date in December 2024.

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 UK, 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 its medium-term liquidity without breaching its 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 as indicated in the September 2022 servicer report.

As part of the restructure in December 2021, the obligation to comply with clause 4.3 (g)(iii)(A) of the Senior Facility Agreement, which relates to reducing the KPMG Steps Paper Indebtedness and KPMG Steps Paper Loans (together the KPMG Steps Paper Debts) by Permitted Reorganisation, was waived until the December 2022 Interest Payment Date (IPD). The obligors were unable to meet this deadline and requested an extension to comply with clause 4.3 (g)(iii)(A) and an opportunity to update the original KPMG Steps Paper, which was obsolete.

The obligors delivered an updated paper dated March 2023, which explained that the obligors would be able to complete a reorganization with a view to simplify and rationalize the group structure similar to that envisaged under the original KPMG Steps Paper. However, due to significant reserve deficits existing at the top of the obligor group, the obligors wouldn’t be able to reduce or eliminate the KPMG Steps Paper Debts as part of the reorganization.

Under the consent and waiver letter signed in June 2023, the obligors were required to implement the steps outlined in the updated paper in accordance with the original timetable with all steps to be completed by the end of November 2023. The obligors requested an extension to approve the statutory accounts to the end of August 2023, which had a knock-on effect to the remaining steps under the original timetable.

The extension was granted, and therefore the Senior and Mezzanine Facility Agents waived certain events of default arising from the obligors’ failure to eliminate the KPMG Steps Paper Debts until the Loan Termination Date in December 2024, provided that the obligors meet certain requirements and deadlines, including but not limited to completing the steps outlined in the updated paper by the end of January 2024. According to the September 2023 servicer report, Phases 1 through 3 were implemented.

If the obligors are unable to meet deadlines related to the programme of improvement works on the Hilton properties or the Permitted Reorganisation Condition Subsequent laid out above, this could potentially lead to an event of default. DBRS Morningstar changed its trend on all classes of notes from Stable to Negative in light of these considerations.

Apart from the above considerations, the loan showed stable performance over the last 12 months. The loan-to-value ratio (LTV) declined to 60.6% as of September 2023 from 62.5% as of September 2022, and the loan amortized to GBP 243.7 million from GBP 249.2 million over the same period. Net Operating Income (NOI) as of September 2023 is in line with NOI as of September 2022 at approximately GBP 24.8 million. Debt yield (DY) declined to 10.2% from 10.9%. However, the decline in DY was driven primarily by the decline of the balance of Senior Cash Trap Account, which gets deducted from the loan balance in DY calculation.

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. According to the servicer report dated September 2023, as at 20 July 2023, the fire safety monitor reported that the final cladding project reached completion and is compliant.

DBRS Morningstar’s assumptions remain unchanged since it downgraded its credit 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 the Issuer NCF stands at 15.4%, and DBRS Morningstar value haircut stands at 31.9% on appraised value.

The transaction benefits from a liquidity reserve facility of GBP 7.90 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 2.25%, DBRS Morningstar estimated that the liquidity reserve would 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 would cover eight months of interest.

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

DBRS Morningstar’s credit ratings on the notes issued by Magenta 2020 PLC addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are Interest Payments and the Principal Amounts.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Sonia Excess Amounts, Default Interest Amounts, Deferred Interest, and Note Prepayment Fees.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the credit ratings is: European CMBS Rating and Surveillance Methodology (19 October 2023) https://www.dbrsmorningstar.com/research/422173/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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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/421590.

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.

The sources of data and information used for these credit ratings include the valuation report dated September 2022 Savills and quarterly reports issued by US Bank and CBRE Services Limited.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on December 14, 2022 , when DBRS Morningstar upgraded Class A notes to AAA (sf) from AA (high) (sf), Class D notes to BB (high) from BB (sf), Class E notes to BB (low) (sf) from B (high), and confirmed Class B notes and Class C notes at A (low) (sf) and BBB (low), respectively.

The lead analyst responsibilities for this transaction have been transferred to Deniz Gokce.

Information regarding DBRS Morningstar credit 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 credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the Base Case):

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

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

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

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

Class E Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected credit rating on Class E notes of B (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected credit 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://registers.esma.europa.eu/cerep-publication. 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.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Deniz Gokce, Senior Analyst, Credit Ratings
Rating Committee Chair: David Lautier, Senior Vice President, Global Structured Finance
Initial Rating Date: 13 February 2020

DBRS Ratings Limited
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Registered and incorporated under the laws of England and Wales: Company No. 7139960

The credit 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 (19 October 2023) https://www.dbrsmorningstar.com/research/422173/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023) https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023) https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023) https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/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].