- We have reviewed Meadowhall Finance in light of an increasingly challenging environment for retail tenants, which will be exacerbated by the credit impact of COVID-19.
- Following our review, we have lowered our ratings on all classes of notes.
- Meadowhall Finance is a 2006-vintage secured U.K. CMBS transaction, which is secured by a single loan backed by Meadowhall Shopping Centre in Sheffield, South Yorkshire.
LONDON (S&P Global Ratings) June 24, 2020--S&P Global Ratings today lowered its credit ratings on all classes of Meadowhall Finance PLC's fixed and floating-rate notes.
Today's downgrades follow our updated review of the transaction's credit and cash flow characteristics. We believe that declines in cash flows from the property, combined with our view of an increasingly challenging environment for retail tenants, has weakened the notes' credit metrics.
Meadowhall Finance is a secured U.K. CMBS transaction that closed in 2006, with notes totaling £1.015 billion, which included £175.0 million in un-issued reserve notes. The single loan is secured on Meadowhall Shopping Centre, one of the U.K.'s largest shopping centers located in Sheffield, South Yorkshire. The center is owned by a joint venture between The British Land Company PLC and Norges Bank Investment Management. The current securitized loan balance is £576.5 million. In our analysis, we have also assumed a full issuance of the class M1 and C1 reserve notes, which currently total £140.2 million.
Major tenants include Debenhams, Marks & Spencer, Primark, Next, Boots, Topshop, Victoria's Secret, H&M Hennes, and Vue Cinema. The top 10 tenants contribute 19.9% of the total contracted rent.
As of the March 31, 2020, annual update, the reported loan-to-value (LTV) ratio was 49.9% (or 62.1% if including the reserve notes), which is based off a March 31, 2020, valuation of £1.15 billion.
Since April 2019, the annual gross passing rent has decreased by 4%, to £79.7 million from £82.9 million, while the estimated rental value has decreased by 16%, to £74.8 million from £89.5 million. As a result, the property is now considered over-rented. The property is 96.1% occupied compared to 98.5% in the prior year. The property's weighted-average unexpired lease term until first break has decreased to 4.9 years from 5.5 years.
At the same time, we have observed across comparable shopping centers a trend in rising operating costs due to increased void costs and landlord contributions to service charges, along with other nonrecoverable costs. We understand the assumed expense level in the most recent valuation of the property reflected approximately 9% of gross income.
In recent years, an increasing number of retailers have suffered financial difficulties, which will likely be exacerbated by the effects of the COVID-19 pandemic in the short to medium term, and there is the risk of increased vacancy levels and diminishing rental levels. However, the risk is somewhat mitigated for Meadowhall Shopping Centre in the longer term by being among the prime shopping centers in the U.K.
Since our last review, our S&P Global Ratings value has declined by 16%, to £924 million from £1.1 billion, due to our higher vacancy and nonrecoverable cost assumption, along with a lower rental income assumption of the property, which we believe are likely to persist over the long term. Therefore, we have reduced the S&P Global Ratings net cash flow (NCF) to £62.3 million from £75.8 million.
We have then applied our 6.4% capitalization (cap) rate against this S&P Global Ratings NCF, which is an increase from the 5.8% previously used, and deducted 5% of purchase costs to arrive at our S&P Global Ratings value.
Loan And Collateral Summary (As Of March 2020):
- Securitized loan balance: £576.5 million
- Securitized LTV ratio: 49.9%
- Securitized loan balance plus the class M1 and C1 reserve notes: £716.6 million
- Securitized loan balance plus the class M1 and C1 reserve notes LTV ratio: 62.1%
- Reported passing rent per annum: £79.7 million
- Vacancy rate: 3.9%
- Market value: £1.15 billion
- Net initial yield: 5.8%
S&P Global Ratings' Key Assumptions:
- S&P Global Ratings vacancy: 7.5%
- S&P Global Ratings expenses: 10.0%
- S&P Global Ratings NCF: £62.3 million
- S&P Global Ratings value: £924.3 million
- S&P Global Ratings cap rate: 6.4%
- Haircut–to-March 2020 market value: 19.9%
- S&P Global ratings LTV ratio (before recovery rate adjustments): 77.5%
Other analytical considerations
We also analyzed the transaction's payment structure and cash flow mechanics. We assessed whether the cash flow from the securitized asset would be sufficient, at the applicable rating, to make timely payments of interest and ultimate repayment of principal by the legal maturity date of the fixed and floating-rate notes, after considering available credit enhancement and allowing for transaction expenses and external liquidity support.
The risk of interest shortfalls is mitigated by a £75 million facility that provides liquidity support to service interest on the notes and scheduled principal repayments on class A, if needed. The amount of the facility available is restricted to 70% of the facility for class B, 45% for class M1, and 10% for class C1. However, interest does not accrue on the reserve tranches, class M1 and C1.
For the April 2020 interest payment date (IPD), cash rental income received for the quarter was £11.8 million. This was below that of prior quarters (approximately £20 million) as a result of COVID-19. To prevent a debt service shortfall for the April quarter, the owners of the joint venture provided top-up funds totaling £4.3 million for the April 2020 IPD.
Our analysis also included a full review of the legal and regulatory risks, operational and administrative risks, and counterparty risks. Our assessment of these risks remains unchanged since closing and is commensurate with the ratings.
In our view, the transaction's credit quality has declined due to operational disruption resulting from the spread of COVID-19. We believe this may continue to negatively affect the cash flows available to the issuer.
Our ratings in this transaction address the timely payment of interest, payable quarterly, and the payment of principal no later than the legal final maturity date in July 2037.
An increasingly challenging environment for retail tenants, which in our view will be exacerbated by the credit impact of COVID-19, is affecting this transaction as shown by the decreasing rental income and increasing costs. We have factored this into our analysis when we calculated our NCF, and also in our cap rate.
The combination of the above factors results in an S&P Global Ratings LTV ratio of 77.5%, which together with transaction-level considerations translates into a 'AA+ (sf)' rating for the class A notes, a 'AA- (sf)' rating for the class B notes, a 'A (sf)' rating for the class M1 notes, and a 'BBB+ (sf)' rating for the class C1 notes.
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions, but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Environmental, social, and governance (ESG) factors relevant to the rating action:
- Health and safety.
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015
- General Criteria: Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- Criteria | Structured Finance | CMBS: European CMBS Methodology And Assumptions, Nov. 7, 2012
- Criteria | Structured Finance | CMBS: CMBS Global Property Evaluation Methodology, Sept. 5, 2012
- Criteria | Structured Finance | General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012
- General Criteria: Methodology: Credit Stability Criteria, May 3, 2010
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
- Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28, 2009
- Criteria | Structured Finance | CMBS: Methodology For Analyzing Loan-Level Limited Purpose Entities In European CMBS, Sept. 1, 2004
- European CMBS: Assessing The Liquidity Risks Caused By COVID-19, May 6, 2020
- European CMBS Monitor Q1 2020, April 21, 2020
- Credit FAQ: A Deeper Dive Into The Potential Credit Effects Of COVID-19 On European CMBS, April 2, 2020
- European CMBS: Assessing The Credit Effects Of COVID-19, March 24, 2020
- S&P Global Ratings Definitions, Sept. 18, 2019
- 2017 EMEA CMBS Scenario And Sensitivity Analysis, July 6, 2017
- Application Of Property Evaluation Methodology In European CMBS Transactions, April 28, 2017
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
|Primary Credit Analyst:||Edward C Twort, London (44) 20-7176-3992;|
|Secondary Contact:||Mathias Herzog, Frankfurt (49) 69-33-999-112;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.