Morningstar DBRS Takes Credit Rating Actions on Elizabeth Finance 2018 DAC

DBRS Ratings Limited (Morningstar DBRS) took the following credit rating actions on the commercial mortgage-backed floating-rate notes due July 2028 (the notes) issued by Elizabeth Finance 2018 DAC (the Issuer):

Morningstar DBRS downgraded its credit ratings on the Class A and Class C notes as follows:

-- Class A downgraded to A (sf) from A (high) (sf)
-- Class C downgraded to B (high) (sf) from BB (low) (sf)

Morningstar DBRS also confirmed its credit ratings on the Class B, Class D, and Class E notes:

-- Class B confirmed at BBB (low) (sf)
-- Class D confirmed at CCC (sf)
-- Class E confirmed at C (sf)

The trends on all credit ratings remain Negative.

CREDIT RATING RATIONALE
Elizabeth Finance 2018 DAC is a securitisation of two senior commercial real estate loans that Goldman Sachs International Bank advanced in August 2018. The GBP 21.2 million MCR loan was granted to refinance an office asset, Universal Square, located in Manchester. The GBP 69.6 million Maroon loan was granted to refinance a portfolio of three secondary retail properties located in King's Lynn and Loughborough in England and Dunfermline in Scotland. The MCR loan was repaid in full on the October 2020 Interest Payment Date (IPD).

The only remaining loan, Maroon, breached its loan-to-value (LTV) covenant, when a January 2020 portfolio revaluation concluded a market value decline of 17% year over year, resulting in an LTV of 96%. The initial special servicer, CBRE Loan Services Limited (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 three assets securing 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 (NOI) and to wait for an improvement of the retail investment market. Waypoint Asset Management LLC took over as asset manager in June 2022 and sought to rebase the in-place leases and collect the rent arrears.

The loan performance has remained largely unchanged since the last annual review. Although the annual contracted rent across the portfolio decreased to GBP 6.1 million in January 2024 from GBP 6.7 million a year ago because of new leases contracted at lower rental levels, this was offset by a reduction in nonrecoverable costs and improvement in the collection rate. As a result, NOI increased to GBP 5.3 million in January 2024 from GBP 4.1 million in January 2023. Despite the improvement in NOI, the reported debt service coverage ratio continues to be under pressure from the sharp increase in base rate (the loan is unhedged since maturity) and stands at 0.98 times as of January 2024. The borrower was able to meet its debt service obligations over the past 12 months, apart from the default interest that has not been paid since the July 2023 IPD.

The special servicer began marketing the three properties securing the Maroon loan in Q1 2024. The special servicer is of the view that market information, such as broker opinions and purchase offers, will be key in establishing property values. The most recent valuation was conducted in January 2020, when CBRE appraised the portfolio at GBP 68,900,000, a 34% drop in value from origination in 2018 (then valued at GBP 104,700,000).

The loan was amortising by 1% of the initial loan balance annually, however, amortisation is no longer required after the expected note maturity date (July 2023). As such, amortisation stopped following the July 2023 IPD and the outstanding loan balance stands at GBP 63,051,870 as of January 2024, a decrease of 9.4% from the initial loan balance. Together with the latest available valuation, this translates into an LTV of 91.5%.

The Maroon loan had a three-year initial term and two one-year extension options with the expected note maturity date in July 2023. The transaction has now entered into its tail period with the final note maturity scheduled in July 2028.

As the loan's performance and key metrics have remained stable over the past 12 months, Morningstar DBRS has maintained its assumptions of a Morningstar DBRS net cash flow of GBP 4.8 million and Morningstar DBRS value of GBP 50.4 million, which translates in a Morningstar DBRS LTV of 125%. At the same time, Morningstar DBRS has removed the amortisation credit from its analysis following the conclusion of the loan amortisation payments and took into account that the transaction has entered into its tail period. This resulted in a downgrade of the ratings on the Class A and Class C notes, while the ratings on the Class B, Class D, and Class E notes were confirmed. Reflecting the uncertainty around the outcome of the sales process against the backdrop of challenging market conditions, Morningstar DBRS maintained Negative trends on all classes of notes and will monitor the marketing process. In particular, bids below Morningstar DBRS value or a further delay of the sales process, could affect the ratings negatively.

The loan is no longer hedged and carries a floating interest rate equal to an aggregate of Sonia (subject to zero floor), a baseline credit adjustment spread of 0.1193% (following transition from LIBOR to Sonia) plus a margin of 2.7%. There is a Sonia cap of 5% with respect to payments on the notes following the expected note maturity date (July 2023).

The transaction still benefits from a liquidity facility of GBP 3.4 million as of January 2024, 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 IPD to cover interest shortfalls on all classes of notes.

Morningstar DBRS' credit ratings on Elizabeth Finance 2018 DAC address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes 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, Sonia Excess Amounts, Pro-Rata Default Amounts, and Note 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" (23 January 2024) at https://dbrs.morningstar.com/research/427030.

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

The principal methodology applicable to the credit rating is "European CMBS 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 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include quarterly servicer reports prepared by Mount Street Mortgage Servicing Limited, and quarterly cash manager reports prepared by US Bank Global Corporate Trust.

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

At the time of the initial 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 28 April 2023, when Morningstar DBRS confirmed its ratings on all classes of notes with Negative trends.

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

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS 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 Morningstar DBRS NCF, expected rating of Class A notes at A (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected rating of Class A notes at BBB (sf)

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

Class C Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected rating of Class C notes at below B (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected rating of Class C notes at below B (low) (sf)

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

Class E Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected rating of Class E notes at below B (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected rating of Class E notes at below B (low) (sf)

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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 GmbH for use in the European Union.

Lead Analyst: Deniz Gokce, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 20 August 2018

DBRS Ratings Limited
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London EC1Y 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
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://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].