Morningstar DBRS Comments on River Green Finance 2020 DAC Loan Restructuring

DBRS Ratings GmbH (Morningstar DBRS) reviewed the recent modifications to the loan securitised in River Green Finance 2020 DAC and concluded that the changes do not currently affect the credit ratings or trends on the notes.

River Green Finance 2020 DAC is the securitisation of a EUR 196.2 million floating-rate commercial real estate loan, which is backed by a campus-style office property, River Ouest, located in Paris' western suburbs. The property has served as global headquarters of a French information technology service provider, Atos, since its completion in 2009.

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) agreed that a consensual long-term restructuring of the loan would be in the best interests of all parties concerned. This is due to the substantial deterioration of the credit profile of the largest tenant, Atos, which accounts for 85% of the rental income. In order to agree the restructuring, the borrower and the special servicer entered into a standstill agreement.

The special servicer has waived the maturity event of default and consented to certain loan-level modifications, which took effect on 6 August 2024 and are summarised below as per the regulatory information service notification dated 7 August 2024:

-- The maturity date of the loan has been extended to 15 April 2026 from 15 January 2024. There is also a possibility for the maturity date to be extended further to 15 April 2027, provided that at such time no loan default is continuing or would result from such extension, no Loan-to-Value (LTV) breach is continuing, and the borrower has entered into a hedging agreement.
-- The sponsor has deposited an amount of EUR 10.0 million, which can be used for servicer-approved asset management initiatives or loan repayment. Any unused amount will be applied to repay the loan at initial termination date in April 2026.
-- Any default interest accrued prior to the loan extension has been waived.
-- Debt Yield financial covenant ceased to apply, while LTV financial covenant has been waived until the initial termination date.

Morningstar DBRS also understands that the loan is in full cash sweep following the restructuring. According to the July 2024 servicer report, the servicer is currently holding ca. EUR 4 million of surplus funds, net surplus of which will be applied to partially repay the notes on the next available interest payment date (IPD).

No modifications were implemented at the note-level, and the notes' final legal maturity remains unchanged at 22 January 2032, resulting in a shorter tail period of under five years instead of the seven years at issuance. This is, however, commensurate with the current Morningstar DBRS credit ratings of the notes.

Despite the agreed amendments being generally credit positive for the transaction, in Morningstar DBRS' opinion, they do not remove the uncertainty around the property's future value and rental cash flow. Atos' debt restructuring is ongoing, with the company entering accelerated safeguard proceedings on 24 July 2024 after obtaining lender support in the form of a lock-up agreement under which company noteholders and bank lenders are committing EUR 1.675 billion in new funding as part of the restructuring plan. If it is approved by a court hearing scheduled for mid-October 2024, the restructuring is expected to be finalized by January 2025. Separately, Atos is in discussions with the borrower regarding its rental commitments. Morningstar DBRS understands that Atos continues to regularly pay rent at the contracted levels of EUR 22.3 million per annum. Atos' lease terminates on 31 July 2030.
The property's annual contracted rent decreased to EUR 26.4 million in July 2024 from EUR 26.9 million in May 2024 following the departure of Sophos in June 2024. As a result, vacancy at the property has increased to 3.5% in July 2024 from 1.7% previously. The lease of another tenant, EMC2, expired in September 2023. However, the tenant continues to pay rent as per the terms of the original lease and is negotiating the terms of an extension. Should EMC2 also vacate, the property's vacancy rate would increase to 17.2%.

The latest reported valuation conducted by CBRE Limited in January 2023 indicated a collateral value of EUR 307.0 million. However, the valuation is contingent on the outcome of Atos' debt restructuring proceedings, with the special servicer seeking to revalue the property once greater certainty emerges. As of the July 2024 IPD, the outstanding whole loan balance stood at EUR 185.9 million, which is 5.3% lower than the original loan amount. Together with the latest available valuation this translates into a reported LTV of 60.6%.

At this time, Morningstar DBSR did not update its net cash flow and value assumptions, which were last revised in May 2024, when Morningstar DBRS downgraded its credit ratings on all classes of notes and assigned Negative trends. For more details, please refer to the press release published on 7 May 2024. However, Morningstar DBRS continues to monitor the situation with regards to Atos' debt restructuring and lease negotiations with the borrower, and might revise its credit ratings once more clarity is available on the outcome of both processes.

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.

The transaction is supported by a EUR 10.6 million liquidity facility as of July 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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
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 Factors in Credit Ratings" at https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-factors-in-credit-ratings (13 August 2024).

Notes:
All figures are in euros unless otherwise noted.

The lead analyst responsibilities for this transaction have been transferred to Violetta Volovich.

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