Morningstar DBRS Downgrades and Confirms Credit Ratings 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):

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

Morningstar DBRS also removed the trends on all credit ratings.

CREDIT RATING RATIONALE
These credit rating actions follow the 17 June 2024 Regulatory Information Services (RIS) notice announcing the sale of the three secondary UK shopping centres securing the Maroon loan securitised in this transaction. According to the notice, the special servicer accepted a bid of GBP 35 million for the acquisition of the portfolio. The offer comes in the form of a cash purchase and is the highest portfolio bid received during the sales process. The special servicer and the selected purchaser, who will remain anonymous until the point of sales contract exchange, signed a heads of terms agreement for the proposed sale, with exchange expected in July 2024 and completion a month later. Based on the special servicer's estimate of GBP 31.5 million in net proceeds to be allocated to the Notes on the October 2024 interest payment date (IPD), Morningstar DBRS anticipates the full write-off of the outstanding balance of the Class B to Class E Notes and a partial loss on the Class A Notes.

The transaction is a securitisation of initially 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, UK. 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 IPD.

The Maroon loan breached its loan-to-value (LTV) covenant in January 2020 after a revaluation. 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 borrower would provide an exit strategy demonstrating how it expected to fully repay the loan on the initial maturity date; however, the special servicer considered this exit strategy 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. 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 an improvement in the retail property 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 in arrears.

The most recent valuation for the three properties was conducted in January 2020, when CBRE appraised the portfolio at GBP 68.9 million, representing a 34% drop in value from GBP 104.7 million at origination in 2018, resulting in the LTV covenant breach. The special servicer began marketing the properties in Q1 2024 with the view that market information, such as broker opinions and purchase offers, would be key in establishing property values. The agreed sales price of GBP35mn represents a 49% decline from the 2020 valuation and a 67% decline from the 2018 valuation.

According to the RIS notice published on 17 June 2024, the heads of terms agreement proposed that the exchange of the sales contract will occur on or before the loan IPD on 15 July 2024 when the purchaser is required to pay a deposit of 10% of the purchase price. Following the exchange of the sales contract, the special servicer indicated that the sale of the portfolio will complete within one month to allow net sale proceeds to be distributed to Noteholders on the October 2024 IPD.

The special servicer estimates net sale proceeds after sales costs to be around GBP 31.5 million, leading to an approximate 50% principal loss on the loan with a current outstanding balance of GBP62.8 million. At transaction level, this would result in a loss of the whole remaining notional balance across all non-senior Notes. The Class A notes that have an outstanding balance of GBP 33.6 million would incur a partial principal loss of 6.4% or more, depending on transaction level senior ranking items including interest due on the Notes.

Consequently, Morningstar DBRS downgraded its credit ratings on the Class A to Class D Notes to reflect the near-certainty of principal losses on the Notes. The portfolio sale may not complete and the properties sold at a higher price. Morningstar DBRS deems this scenario unlikely, however, also considering that according to the RIS notice the agreed sale reflects the highest of all portfolio bids received.

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 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 quarterly servicer reports prepared by Mount Street and the RIS notice dated 17 June 2024.

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 was supplied with one or more third-party assessments. Morningstar DBRS applied additional cash flow stresses in its 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 26 April 2024, when Morningstar DBRS downgraded its credit ratings on the Class A and Class C Notes to A (sf) and B (high) (sf) from A (high) (sf) and BB (low) (sf), respectively, and confirmed its credit ratings on the Class B, Class D, and Class E Notes at BBB (low) (sf), CCC (sf), and C (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Mirco Iacobucci.

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

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: Mirco Iacobucci, Senior Vice President, Sector Lead
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 20 August 2018

DBRS Ratings Limited
1 Oliver's Yard 55-71 City Road, 2nd Floor
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 https://dbrs.morningstar.com or contact us at [email protected].