Morningstar DBRS Maintains Under Review With Negative Implications Status on Viridis (European Loan Conduit No. 38) DAC

DBRS Ratings Limited (Morningstar DBRS) maintained the Under Review with Negative Implications (UR-Neg.) status on the following classes of notes issued by Viridis (European Loan Conduit No. 38) DAC (the Issuer):

-- Class A at AA (sf)
-- Class B at A (low) (sf)
-- Class C at BBB (sf)
-- Class D at BB (sf)
-- Class E at B (high) (sf)

The maintenance of the UR-Neg. status on the notes reflects the uncertainty around the refinancing of the transaction before the extended maturity date in January 2025.

CREDIT RATING RATIONALE
The transaction was originally backed by a GBP 192 million senior loan, which was split into two facilities: Facility A (which is the securitised loan), which totalled GBP 150 million, and Facility B (a syndicated loan, not forming part of the transaction), which totalled GBP 42 million. The senior loan is secured by Aldgate Tower (a modern Grade A office tower) on the outskirts of the City of London. In April 2021, Savills valued the Aldgate Tower building at GBP 330 million, representing a 58.2% day-one loan-to-value ratio (LTV). The interest-only loan initially had a three-year term to 20 July 2024 and was structured with no extension options. However, per a RIS notice dated 18 July 2024, the servicer had been in discussions with Aldgate Tower S.A.R.L. (the borrower) regarding its exit strategy and consented to the borrower's request to extend the loan maturity to 20 January 2025 from 20 July 2024.

According to the notice, as a condition precedent to the amendments, the loan facility agent had received from the borrower signed term sheet(s) from lender(s) in respect of the refinancing of the property on a 50% LTV basis, and China Life Insurance (Group) Company (China Life), majority owner of the joint venture controlling the borrower together with Brookfield Property Partners L.P., had agreed to provide the funds in connection with the refinancing of the loans. Morningstar DBRS understands from a separate RIS notice dated 13 September 2024 that China Life received all necessary internal approvals to participate in the refinancing equity injection.

As part of the amendment dated 18 July 2024, the borrower also agreed to ensure that an amount of not less than GBP 10.0 million was standing to the credit of the cash trap account as of 20 July 2024 and ensure that the hedging agreements, which were required to be in the form of an interest rate cap with a maximum strike rate of 1.00%, would be in place for a term ending no earlier than the extended maturity date. According to the July 2024 servicer report, GBP 8.9 million was trapped over the quarter ended July 2024 to bring the total balance of the cash trap account up to GBP 10.0 million, and the borrower procured an interest rate cap with a strike rate of 1.00% and expiring on 22 January 2025. The GBP 10.0 million standing to the credit of the cash trap account was applied to pay down the loan to GBP 182.1 million from GBP 192.0 million over the quarter ended October 2024 because of China Life not having received the necessary internal approvals as of 31 August 2024. However, as mentioned above, these approvals have since been received.

The borrower had also provided certain undertakings, including that a refinancing loan agreement would be signed by no later than 20 October 2024 as part of the amendment dated 18 July 2024. The loan security agent confirmed in a RIS notice dated 18 October 2024 that the borrower signed the refinancing loan agreement prior to the deadline of 20 October 2024. However, since refinancing efforts are not yet finalised, Morningstar DBRS maintains the UR-Neg. status on the notes.

The asset was most recently valued by Knight Frank LLP, which concluded to a value of GBP 260.0 million as of July 2023, showing a 13.3% decline over the previous GBP 300.0 million valuation dated August 2022 by Savills. LTV and debt yield (DY) stood at 70.0% and 7.7% as of October 2024, respectively. According to the October 2024 servicer report, the loan is in cash trap with respect to both LTV and DY metrics. The loan is structured with increasingly stringent DY cash trap covenants requiring the sponsors to improve asset performance in order to remain compliant with the loan terms. The DY covenants are tested quarterly on each interest payment date in Years 2 and 3 at 7% and 8%, respectively. The DY covenant will remain at 8% for the remaining life of the loan. Additionally, the structure includes a senior LTV cash trap covenant set at 70% LTV for the full life of the loan. There are no DY or LTV financial covenants applicable either prior to a permitted transfer or following a permitted transfer.

Morningstar DBRS' assumptions remained unchanged since its previous annual review, with Morningstar DBRS' stabilised net cash flow at GBP 11.1 million and Morningstar DBRS' capitalisation rate at 5.5%. This results in a Morningstar DBRS value of GBP 201.1 million, which represents a 22.6% haircut to the latest valuation as of July 2023.

The senior loan carries a floating rate of the Sterling Overnight Index Average (Sonia; floored at 0%) plus a 2.85% margin for a three-year term. The interest rate risk is fully hedged with a prepaid cap, with a maximum strike rate of 1.0% provided by Standard Chartered Bank and a term expiring on 22 January 2025.

The transaction also benefits from an issuer liquidity reserve in an aggregate amount of GBP 5,789,448. The Issuer's liquidity reserve can be used to cover interest shortfalls on the Class A, B, C, and D notes. According to Morningstar DBRS' analysis, the Issuer's liquidity reserve amount, as at closing, provided interest payment on the covered notes up to 18.7 months or 9.2 months based on the interest rate cap strike rate of 1% or on the Sonia cap of 4%, respectively. The final legal maturity of the notes is expected to be 22 July 2029, 4.5 years after the extended loan maturity (20 January 2025).

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in British pound 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.

Morningstar DBRS is undertaking a review and will remove the credit rating 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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include quarterly investor reports prepared by Mount Street Mortgage Servicing Limited and the most recent valuation report by Knight Frank LLP.

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 19 July 2024, when Morningstar DBRS placed all classes of notes Under Review with Negative Implications.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on http://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.

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 GmbH for use in the European Union.

Lead Analyst: Deniz Gokce, Senior Analyst
Rating Committee Chair: Mirco Iacobucci, Senior Vice President
Initial Rating Date: 28 June 2021

DBRS Ratings Limited
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Tel. +44 (0) 20 7855 6600
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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.

-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443196
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024),
https://dbrs.morningstar.com/research/439913
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024),
https://dbrs.morningstar.com/research/437781

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/439604.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.