Senior UK CMBS noteholders face losses after property sale

The full write-down of the outstanding balance of the class B to E notes and a partial loss on the class A notes issued by Elizabeth Finance 2018 is anticipated on the October IPD, marking the first post-crisis loss on a triple-A rated (at closing) European CMBS tranche. The move comes after the special servicer Mount Street accepted a bid of £35m for the sale of the three UK shopping centre properties securing the £69.6m (original balance) Maroon loan securitised in the transaction.

The selected bid is expected to deliver net proceeds of around £31.5m to noteholders once fees - including three sales fees, special servicing fees and administration fees - and VAT have been paid and funds have been allocated towards unwinding the securitisation, resulting in an approximately 50% principal loss on the loan (which has an outstanding balance of £62.8m). At transaction level, this would result in a loss of the whole remaining notional balance across all non-senior notes, according to Morningstar DBRS. The rating agency projects that the class A notes (with an outstanding balance of £33.6m) will incur a partial principal loss of 6.4% or more, depending on transaction-level senior ranking items, including interest due on the notes.

The offer is in the form of a cash purchase and represents the highest portfolio bid received during the sales process. The special servicer and the selected purchaser - which will remain anonymous until exchange - signed a heads of terms agreement for the proposed sale, with exchange expected next month and completion a month later.

Elizabeth Finance 2018 is a securitisation of initially two senior commercial real estate loans that Goldman Sachs International Bank advanced in August 2018. The £21.2m MCR loan - which refinanced an office asset, Universal Square, located in Manchester - was repaid in full on the October 2020 IPD.

Meanwhile, the Maroon loan breached its LTV covenant in January 2020 after a revaluation. The initial special servicer, CBRE, subsequently agreed to a standstill until the initial loan maturity in January 2021 to allow the borrower time to provide an exit strategy.

However, CBRE considered the exit strategy to be unsatisfactory and accelerated the loan in October 2020, with the common security agent appointing fixed-charge receivers to dispose of the three assets securing the loan. Following the appointment of the receivers, the controlling class D noteholders exercised their right to replace CBRE with Mount Street as the special servicer, which temporarily suspended the sale of the portfolio and implement asset management initiatives. Waypoint Asset Management 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 £68.9m, representing a 34% drop in value from £104.7m at origination in 2018, resulting in the LTV covenant breach. The special servicer began marketing the properties in 1Q24, with the agreed sales price representing a 49% decline from the 2020 valuation and a 67% decline from the 2018 valuation.

Morningstar DBRS has downgraded its credit ratings to single-C on the class A to D notes to reflect the near-certainty of principal losses on the transaction. The agency had previously assigned the class A notes a single-A rating, while S&P last month downgraded them from single-A minus to triple-B minus.

Mount Street is currently finalising an updated valuation commissioned in respect of the Maroon properties and will disclose the results in due course.

Corinne Smith