Morningstar DBRS Downgrades Credit Ratings on River Green Finance 2020 DAC With Negative Trends, Removes From Under Review With Negative Implications

DBRS Ratings GmbH (Morningstar DBRS) downgraded its credit 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 to A (high) (sf) from AA (high) (sf)
-- Class B notes to BBB (high) (sf) from A (high) (sf)
-- Class C notes to BB (high) (sf) from BBB (high) (sf)
-- Class D notes to B (high) (sf) from BB (high) (sf)

Additionally, Morningstar DBRS removed the credit ratings from Under Review with Negative Implications, where they were placed on 9 February 2024. The trends on all classes of notes are Negative.

CREDIT RATING RATIONALE
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 Luxembourg 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 (the borrower).

River Ouest is a campus-style office in the Bezons municipality in Paris' western suburbs. The property has served as global headquarters of a French information technology service provider, Atos, since its completion in 2009. Atos provided 84% of the property's gross rental income as of January 2024, with two other tenants, EMC2 and Sophos, contributing 14% and 2% of the gross rental income, respectively. Atos' credit profile has deteriorated since issuance. The company is in the midst of debt restructuring and has opened an amicable conciliation procedure, with a view to reaching a refinancing plan by July 2024 (see Atos' press release "Atos reports full year 2023 results" dated 26 March 2024 for additional details). The conciliation proceeding is a pre-insolvency, fully confidential proceeding carried out under the supervision of a court-appointed officer (conciliateur) available to a French company facing difficulties without being yet insolvent (or being insolvent for less than 45 days). Its aim is to reach an agreement with the debtor's main creditors and stakeholders. A conciliation procedure lasts four months, and may be extended by one month.

The loan failed to repay at the extended maturity date and was transferred into special servicing on 16 January 2024. Although the second and last extension option, which would have extended the loan to January 2025, was still available, the borrower and the special 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 to restructuring, the borrower and the servicer entered into a three-month standstill agreement until 15 April 2024. The special servicer has received a proposal from the borrower to restructure the loan and this proposal is currently being considered. To that end, the special servicer has extended the standstill period until 1 July 2024.

The special servicer has also commissioned an updated valuation of the property. However, the valuation appears to depend on the outcome of Atos' debt restructuring proceedings, with the special servicer noting in the Regulatory Information Services (RIS) notice dated 3 April 2024 that the numbers provided in that valuation, when considered against previous advice received over the last 13 months by other third-party valuers, do not provide accurate enough evidence of the value for the building at this time. As such, the special servicer decided to leave the valuation in the draft form until there is greater clarity on Atos' financial status. The latest reported valuation conducted by CBRE Limited (CBRE) in January 2023 indicated a collateral value of EUR 307.0 million.

Although annual contracted rent increased to EUR 26.6 million in January 2024 from EUR 25.3 million previously following the leases' indexation, the uncertainty around the property's future rental cash flow continues to increase. Sophos, whose lease expired in May 2020 and who has remained in situ on a rolling contract, has served notice to vacate by 30 June 2024. The EMC2 lease expired in September 2023, and the company is completing a global review of its office requirements before making a decision on the lease extension. Should EMC2 also vacate, the property's vacancy rate would increase to 17.2% from 1.6% as of January 2024. Additionally, Atos is in the aforementioned process of debt restructuring and is looking to sublet some of its rented space. The cash flow outlook is also challenged by the property's secondary location, declining market rents in the submarket, and increasing rental incentives, which increased to 30% of headline rent, according to CBRE.

Consequently, Morningstar DBRS has revised its net cash flow (NCF) assumptions by increasing its vacancy assumption to 17.2% from 15.0%, and adjusted its market rent assumption to incorporate downward pressure on rental cash flow. The resulting Morningstar DBRS NCF decreased to EUR 14.2 million from EUR 18.1 million previously. This led to a Morningstar DBRS value decline to EUR 195.3 million, which translates into a Morningstar DBRS loan-to-value of 96%. The reduced Morningstar DBRS value has resulted in Morningstar DBRS downgrading its credit ratings on all classes of notes. Reflecting the uncertainty around the outcome of Atos' debt restructuring process and its potential implications for the collateral value, the trends on all classes of notes are Negative.

As of the January 2024 Interest Payment Date, the outstanding whole loan balance stood at EUR 187.9 million, which is 4.3% lower than the original loan amount. The loan amortised at a rate of 1.0% per annum (p.a.) of the original loan amount. The amortisation stepped up to 2% p.a. following the fourth anniversary of the utilisation date (23 December 2023). Following the loan transfer to special servicing, principal receipts are applied sequentially towards repayment of the notes.

The final maturity of the notes is on 22 January 2032.

The loan accrues interest at the aggregate of three-month Euribor (floored at zero) plus a margin of 2.4%. It is fully hedged with a prepaid interest rate cap provided by Wells Fargo Bank, N.A. (rated AA with a Stable trend by Morningstar DBRS) with a strike rate of 5.0%. The cap agreement terminates on 22 January 2025. Following the loan maturity, default interest applies 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, 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 River Green Finance 2020 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, Euribor 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 at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings 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 these credit ratings include the RIS notification dated 3 April 2024 and quarterly servicer reports prepared by Mount Street Mortgage Servicing 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 these credit ratings 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 9 February 2024, when Morningstar DBRS placed the credit ratings on all classes of notes Under Review with Negative Implications.

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 ratings, 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 credit rating of Class A notes at A (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating of Class A notes at BBB (sf)

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

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

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

These credit ratings are 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

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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].