Morningstar DBRS Places All Classes of River Green Finance 2020 DAC Under Review with Negative Implications

DBRS Ratings GmbH (Morningstar DBRS) placed its credit ratings on the following classes of the commercial mortgage-backed floating-rate notes due January 2032 issued by River Green Finance 2020 DAC (the Issuer) Under Review with Negative Implications (UR-Neg.).

-- Class A rated AA (high) (sf)
-- Class B rated A (high) (sf)
-- Class C rated BBB (high) (sf)
-- Class D rated BB (high) (sf)

CREDIT RATING RATIONALE
The UR-Neg. credit rating actions follow the underlying loan’s failure to repay at maturity on the January 2024 interest payment date (IPD), and the loan’s subsequent transfer to special servicing on 16 January 2024.

The loan was scheduled to mature on 15 January 2024, after a one-year extension option was exercised last year. According to a transaction notice from the servicer, although the second and last extension option, which would have extended the loan to January 2025, was still available, the borrower (LRC Real Estate Limited) and the servicer (Mount Street Mortgage Servicing Limited) were jointly of the view that a consensual long-term restructuring of the loan would be in the best interests of all parties concerned. In order to agree restructuring, the borrower and the servicer entered into a three-month standstill agreement.

River Green Finance 2020 DAC is the securitisation of a EUR 196.2 million floating-rate commercial real estate loan split into two facilities (Facility A and Facility B) both advanced by Goldman Sachs International Bank (GS). The EUR 35.8 million Facility A was advanced to four ring-fenced compartments of LRC RE-2, a Luxemburg investment company with variable share capital, the reserved alternative investment fund (the Facility A Borrower), while the EUR 160.4 million Facility B was advanced to a French Organisme de Placement Collectif Immobilier (the Facility B Borrower). 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). The debt facilitated the acquisition of the River Ouest building by a group of investors led by LRC Real Estate Limited. As of the January 2024 IPD, the outstanding whole loan balance stands at EUR 187.3 million, which is 4.5% lower than the original loan amount. The loan amortised at a rate of 1.0% per annum of the original loan amount.

River Ouest is a campus-style office with amenities including 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 approximately five kilometres southeast of the asset. The property’s market value declined to EUR 307.0 million following the latest revaluation conducted by CBRE Limited in January 2023, representing a fall of 9.0% from the previous valuation (March 2021), and a 10.7% decline from the original valuation (July 2019).

The property is occupied by three tenants. As of the October 2023 IPD, 83% of the total rental income comes from a lease to Atos which expires in July 2030. Atos is a French multinational IT and consulting company, whose credit outlook has deteriorated since issuance. The company is currently in the midst of debt restructuring, with a EUR 1.5 billion term loan maturing in January 2025 (https://atos.net/en/2024/press-release20240103/market-update-2), subject to two six-months extension options, in addition to several bond maturities over 2024 and 2025. In February 2024, Atos requested an appointment of an independent mediator (mandataire ad hoc) to facilitate its discussions with the banks (https://atos.net/en/2024/press-release20240205/market-update-3). The company is also pursuing a sale of some of its business divisions.

The other two tenants are Dell Technologies (15% of rental income) and Sophos (2% of rental income), whose leases expired in September 2023 and May 2020, respectively. The tenants remain as occupants, with leasing negotiations ongoing. Together, the uncertainties around the future of Atos and tenants’ leasing terms raise concerns about the property’s future cash flow.

In its credit rating review, Morningstar DBRS will focus on near to mid-term rental cash flow expectations considering potential leasing negotiations and the ability of the borrower to ultimately repay the debt by means of property sale or refinancing.

The loan matured on 15 January 2024, with the final maturity of the notes scheduled on 22 January 2032.

The loan accrues interest at the aggregate of three-month Euribor (floored at zero) plus a margin of 2.4% and it is fully hedged with a prepaid interest rate cap provided by Wells Fargo Bank, N.A. (rated AA with a Stable trend by DBRS Morningstar) with a strike rate of 5.0%. The cap agreement terminates on 22 January 2025. Following the loan maturity, default interest will apply on the unpaid amounts at a rate that is 1.0% higher than the loan interest rate.

The transaction is supported by a EUR 10.8 million liquidity facility as of January 2024 (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 through Class C notes (the covered notes), as well as the Issuer loan. Based on the 5.0% cap strike rate, the estimated coverage amounts to approximately 13 months.

Morningstar DBRS’ credit ratings on the Issuer address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Class Balances.

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, the credit ratings on the notes do not address the payment of Euribor Excess Amounts, Pro-Rata Default Interest Amounts, and Prepayment Fees.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is European Rating and Surveillance Methodology (17 January 2024), https://dbrs.morningstar.com/research/426818.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS is undertaking a review and will remove the credit ratings from this status as soon as it is appropriate.

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 Morningstar DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include RIS Notification dated 16 January 2024, quarterly servicer reports prepared by Mount Street Mortgage Servicing Limited, and quarterly calculation agent reports prepared by U.S. Bank Global Corporate Trust Limited.

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

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

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

Morningstar DBRS 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 21 August 2023, when Morningstar DBRS downgraded its ratings on Class A notes to AA (high) (sf) from AAA (sf), on Class B notes to A (high) (sf) from AA (low) (sf), on Class C notes to BBB (high) (sf) from A (low) (sf), and on Class D notes to BB (high) (sf) from BBB (sf), with Stable trends.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

This credit rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. However, Morningstar DBRS notes that agreement of the restructuring terms might take longer than anticipated by the borrower and the servicer, and as such the notes might remain under review for longer than 90 days.

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Andrea Selvarolo, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 8 January 2020

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- European CMBS Rating and Surveillance Methodology (17 January 2024),
https://dbrs.morningstar.com/research/426818
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].