Morningstar DBRS Comments on Interest in Arrears on Class B, Class C, Class D, and Class E Notes of Elizabeth Finance 2018 DAC

DBRS Ratings Limited (Morningstar DBRS) notes the deferral of interest due on the Class B, Class C, Class D, and Class E notes of the commercial mortgage-backed floating-rate notes issued by Elizabeth 2018 DAC as per the last interest payment date (IPD). The four classes of notes therefore carry an Interest in Arrears designation from Morningstar DBRS.

On the July 2024 IPD, inadequate funds led to a GBP 0.65 million drawing on the liquidity facility to pay interest to Class A and Class B noteholders. According to the special servicer, Mount Street Mortgage Servicing Limited (Mount Street), the shortfall in revenue receipts was largely due to a one-off nonrecoverable expense incurred at the Kingsgate property as part of the APCOA Parking UK Limited settlement agreement, which lowered net operating income (NOI) for the quarter. NOI was expected to normalise in the following quarter; however, the interest revenue received at the October IPD was again insufficient to pay the accrued interest, including the deferred interest, to the respective noteholders.

In the 17 June 2024 Regulatory Information Services (RIS) notice, Mount Street announced that the sale of the three secondary UK shopping centres securing the Maroon loan in this transaction was agreed at a purchase price of GBP 35 million. Subsequently, due diligence and building surveys of the Maroon loan properties highlighted a number of issues at the Kingsgate Centre, which led to a reduced portfolio purchase price of GBP 33.2 million. As reported in a RIS notice dated 13 December 2024, the sale of the properties for a purchase price of GBP 33.2 million was completed on 12 December 2024 and net proceeds are estimated at GBP 28.5 million. The sale will not generate enough proceeds to recover the interest shortfall resulting in final losses on the Class B to Class E notes. Consequently, Morningstar DBRS also anticipates the full write-off of the outstanding principal balance of the Class B to Class E Notes and a partial loss on the Class A Notes. Net sale proceeds are expected to be distributed to noteholders shortly after Mount Street makes a final recovery determination.

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, 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 borrower repaid the MCR loan 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 by CBRELS hat, 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 as the special servicer. Mount Street suspended the sale of the portfolio and sought to implement asset management initiatives to improve and stabilise the portfolio's NOI 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.

In January 2020, CBRELS 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. Mount Street 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 GBP 35 million represented a 49% decline from the 2020 valuation and a 67% decline from the 2018 valuation.

Notes:

For details on the Interest in Arrears designation, please refer to the Ratings Actions, Designations, Commentaries, and Press Releases Global Policy and Default Definition at https://dbrs.morningstar.com.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) 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) https://dbrs.morningstar.com/research/437781 .

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