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

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

The UR-Neg. status of the notes reflects the uncertainty around the refinancing of the transaction before the extended maturity date in April 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 the Aldgate Tower (a modern Grade A office tower) on the outskirts of the City of London. In April 2021, Savills valued the 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 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. Post the first extension, the servicer subsequently agreed to extend the loan maturity twice: first to 20 February 2025 and then to 20 April 2025, to allow more time for the refinancing.

According to the July 2024 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 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 1.0%, would be in place for a term ending no earlier than the extended maturity date (20 January 2025). According to the July 2024 servicer report, GBP 8.9 million was trapped over the quarter ending 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 1.0% 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 in 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 has not yet occurred, Morningstar DBRS maintains the UR-Neg. status on the notes.

In addition, the above-mentioned interest rate cap with a strike rate of 1.0% expired on 22 January 2025 and was not renewed. Morningstar DBRS understands from the January 2025 servicer report that there is currently no hedging in place as this was waived as part of the loan maturity extension to April 2025. However, there is a Sonia Notes cap of 4.0%.

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 6.5% as of January 2025, respectively. According to the January 2025 servicer report, the loan is in cash trap with respect to both LTV and DY metrics. The loan was structured with increasingly stringent DY cash trap covenants and the DY cash trap 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 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 transaction also benefits from an Issuer liquidity reserve in an aggregate amount of GBP 5.5 million as of January 2025, which can be used to cover interest shortfalls on the Class A, Class B, Class C, and Class D notes. According to Morningstar DBRS' analysis, the Issuer's liquidity reserve amount provides interest payment on the covered notes for up to 8.7 months based on the Sonia cap of 4.0%. The legal final maturity of the notes is in July 2029, 4.25 years after the extended loan maturity (20 April 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) 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" (4 March 2025), https://dbrs.morningstar.com/research/449278

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS is undertaking a review and will remove the credit rating from this status as soon as it is appropriate.

Morningstar DBRS has conducted a review of the amendments that took place with regard to the Facilities Agreement. A review of any other transaction legal documents was not conducted as the 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 rating, 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 issuer took place on 6 December 2024 when Morningstar DBRS maintained the UR-Neg. status on the notes.

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

This credit rating is UR-Neg. 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: Christian Aufsatz, Managing Director
Initial Rating Date: 28 June 2021

DBRS Ratings Limited
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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.

-- European CMBS Rating and Surveillance Methodology (4 March 2025)
https://dbrs.morningstar.com/research/449278.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024)
https://dbrs.morningstar.com/research/439913.
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024)
https://dbrs.morningstar.com/research/443196.
-- 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.