- We have reviewed Meadowhall Finance in light of an increasingly challenging environment for the retail sector, which continues to be exacerbated by the credit effects 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) Dec. 22, 2020--S&P Global Ratings today lowered to 'AA- (sf)' from 'AA+ (sf)' its credit ratings on Meadowhall Finance PLC's class A1 and A2 notes. At the same time, we have lowered to 'A- (sf)' from 'AA- (sf)', to 'BBB- (sf)' from 'A (sf)', and to 'BB (sf)' from 'BBB+ (sf)' our ratings on the class B, M1, and C1 notes, respectively.
Today's downgrades follow our updated review of the transaction's credit and cash flow characteristics. We believe that a continued decline 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. commercial mortgage-backed securities (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 £561.9 million. At closing, two reserve tranches (the M1 and C1 reserve notes) were created, but remain unissued. While the issuance of these reserve tranches are subject to certain conditions, our analysis assumes a full issuance of the class M1 and C1 reserve notes, which currently total £139.7 million.
As of Sept. 30, 2020, the property's reported market value was £936.5 million, which reflects a 19% decrease from the prior valuation in March 2020. Consequently, over the last six months, the whole loan-to-value (LTV) ratio has increased to 60.0% from 49.9% (or to 74.9% from 62.1% if including the reserve notes).
Over the same period, the annual gross passing rent has decreased by 6% to £74.6 million from £79.7 million, while the valuer's estimated rental value has decreased by 17% to £62.2 million from £74.8 million.
The tenant profile comprises a combination of internationally and nationally recognized retailers (such as Marks & Spencer, Primark, Next, Boots, Victoria's Secret, H&M Hennes, and Vue cinema). However, the shopping center remains exposed to significant ongoing challenges with regards to retailer occupier demand and performance. In the period since March 2020, we understand from the most recent reporting that overall passing rent has reduced by £5.1 million per year as a result of (i) lease surrenders, exercises of break clauses, and non-renewals (approximately £2 million per year), and (ii) administration and company voluntary arrangements (approximately £3 million per year).
In recent years, an increasing number of retailers have suffered financial difficulties, which continue to be exacerbated by the effects of the COVID-19 pandemic in the short to medium term, and the risk of increased vacancy levels and diminishing rental levels remains. However, the risk is somewhat mitigated in the longer term by being among one of the prime super-regional shopping centers in the U.K. Furthermore, the shopping center has benefitted from strong sponsor support and proactive asset management, including a £60 million capital investment to refurbish and upgrade the shopping center.
Since March 2020, the property has experienced a small decrease in occupancy and weighted-average unexpired lease term until first break to 95.2% (from 96.1%) and 4.5 years (from 4.9 years), respectively.
Since our previous review, our S&P Global Ratings value has declined by 18% to £757.1 million from £924.3 million, primarily due to a lower rental income assumption of the property, which we believe will be re-based over the long term. Therefore, we have reduced the S&P Global Ratings net cash flow (NCF) to £51.8 million from £62.3 million.
We have then applied a 6.5% capitalization (cap) rate against this S&P Global Ratings NCF (which is an increase from the 6.4% previously used) and deducted 5% of purchase costs to arrive at our S&P Global Ratings value.
|Loan And Collateral Summary|
|Review as of December 2020||Review as of June 2020|
|Data as of||October 2020||April 2020|
|Securitized loan balance (mil. £)*||561.9||576.5|
|Securitized LTV ratio (%)*||60.0||49.9|
|Securitized loan balance plus the class M1 and C1 reserve notes (mil. £)*||701.6||716.6|
|Securitized loan balance plus the class M1 and C1 reserve notes LTV ratio (%)*||74.9||62.1|
|Reported passing rent per year (mil. £)||74.6||79.7|
|Vacancy rate (%)||4.8||3.9|
|Market value (mil. £)||936.5||1,154.0|
|Equivalent yield (%)||6.16||5.75|
|*Do not include the £6.9 million currently drawn from the liquidity facility.|
|S&P Global Ratings' Key Assumptions|
|Review as of December 2020||Review as of June 2020|
|S&P Global Ratings vacancy (%)||7.5||7.5|
|S&P Global Ratings expenses (%)||10.0||10.0|
|S&P Global Ratings net cash flow (NCF) (mil. £)||51.8||62.3|
|S&P Global Ratings value (mil. £)||757.1||924.3|
|S&P Global Ratings cap rate (%)||6.5||6.4|
|Haircut-to-market value (%)||19||20|
|Class A1 and A2 S&P Global Ratings LTV ratio (before recovery rate adjustments) (%)*||58.6||49.5|
|Class B S&P Global Ratings LTV ratio (before recovery rate adjustments) (%)*||74.2||62.4|
|Class M1 S&P Global Ratings LTV ratio (before recovery rate adjustments) (%)*||85.1||71.3|
|Class C1 S&P Global Ratings LTV ratio (before recovery rate adjustments) (%)*||92.7||77.5|
|*Do not include the £6.9 million currently drawn from the liquidity facility.|
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 the class A notes, if needed. The amount of the facility available is restricted to not greater than 70% of the facility for the class B notes, 45% for the class M1 notes, and 10% for the class C1 notes. However, interest does not accrue on the reserve tranches, the class M1 and C1 notes.
Considering the on-going effects of COVID-19, and to allow trading and rent payments to stabilize as Meadowhall fully re-opens, the borrower has agreed certain amendments and waivers to allow a 12-month suspension period ending on (and including) the April 2021 interest payment date (IPD). During the borrower suspension period, certain coverage ratios will be waived and any deferred amounts do not result in a loan event of default. An additional condition to these amendments and waivers is that the joint venture provides £4.5 million of top-up funds in total at each quarterly payment date.
Following the suspension period, there will be a further six-month recovery period (covering July 2021 and October 2021 IPDs) where overdue amounts brought forward are excluded from the coverage ratio calculations.
Reported rent cash collections for April 2020, July 2020, and most recently October 2020, were £11.8 million, £5.3 million, and £12.3 million, respectively. This compares with approximately £20.0 million per quarter before the onset of COVID-19. Given the lower collection rates over the last three quarters, the issuer has drawn on the liquidity facility in order to meet debt payments on each class of issued notes. At the October IPD, £6.9 million had been drawn on the liquidity facility, which we factored into our analysis. The remaining undrawn balance is therefore currently £68.1 million.
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.
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.
In our view, the transaction's credit quality has declined further due to the on-going structural shift in the physical retail sector, as well as the continued operational disruption resulting from the spread of COVID-19. We believe this may continue to negatively affect the cash flows available to the issuer.
The increasingly challenging environment for retail tenants is affecting this transaction, which is shown by the continued decline in reported operating performance and estimated rental values. We have factored this into our analysis when we calculated our S&P Global Ratings recovery value, together with other supporting features, such as the availability of the liquidity facility.
The combination of the above factors results in an S&P Global Ratings LTV ratio of 58.6%, 74.2%, 85.1%, and 92.7% for the class A1 and A2 (pari passu notes), B, M1, and C1 notes, respectively. Together with transaction-level considerations, these translate into 'AA- (sf)' ratings for the class A1 and A2 notes, a 'A- (sf)' rating for the class B notes, a 'BBB- (sf)' rating for the class M1 notes, and a 'BB (sf)' rating for the class C1 notes.
S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. While the early approval of a number of vaccines is a positive development, countries' approval of vaccines is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by mid-2021. We use 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) credit factors for this credit rating change:
- Health and safety.
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- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
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- European CMBS: The Lowdown On Liquidity Support, Oct. 28, 2020
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|Primary Credit Analyst:||Edward C Twort, London + 44 20 7176 3992;|
|Secondary Contact:||Mathias Herzog, Frankfurt + 49 693 399 9112;|
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