Overview
- We reviewed Longstone Finance's five key rating factors as part of our surveillance process.
- Following our review, we raised to 'A+ (sf)' from 'BBB+ (sf)' our rating on the class C notes. At the same time, we affirmed our 'A+ (sf)' ratings on the class A and B notes.
- Longstone Finance is a European CMBS transaction that closed in March 2006,comprising one loan secured on 48 supermarket properties located throughout the U.K. let to Sainsbury's Supermarkets.
LONDON (S&P Global Ratings) Dec. 5, 2022--S&P Global Ratings today raised to 'A+ (sf)' from 'BBB+ (sf)' its credit rating on Longstone Finance PLC's class C notes. At the same time, we affirmed our 'A+ (sf)' ratings on the class A and B notes.
Rating rationale
Today's rating actions follow our review of the transaction's five key rating factors (credit quality of the securitized assets, legal and regulatory risks, operational and administrative risks, counterparty risks, and payment structure and cash flow mechanisms).
The upgrade on the class C notes mainly reflects the de-leveraging of the transaction from scheduled amortization. While our S&P value is actually lower than what we had used during our previous review, this was outweighed by the repayments made under the loan and consequently the notes.
Based on our updated S&P value of £737.4 million and the transaction's characteristics, the class C leverage is commensurate with a 'A+ (sf)' rating under our criteria. Additionally, the underlying collateral's operating performance has improved since our previous review in July 2020. Rental income has increased by 7% as a direct result of the leases in place being index-linked to movements in the all-items retail price index.
The affirmations on the class A and B notes reflect the counterparty risk in this transaction. Based on the replacement frameworks currently in place for the hedge providers (Morgan Stanley & Co. International PLC and UBS AG) and the liquidity facility provider (Lloyds Bank PLC), these counterparties can only support ratings up to 'A+ (sf)' based on our counterparty criteria.
Transaction overview
Longstone Finance is a U.K. CMBS transaction that closed in 2006, with notes totaling £868 million. The loan has a current securitized loan balance of £551.8 million as of the October 2022 interest payment date and is secured on 48 properties.
The notes pay a fixed rate of interest, and the liquidity facility is currently linked to LIBOR. Due to the cessation of the LIBOR index in December 2021, the issuer launched a consent solicitation in 2022 to propose a change of index on the liquidity facility to SONIA. The class A noteholders rejected the consent solicitation.
The transaction was initially secured by 52 supermarkets located in the U.K. occupied by Sainsbury's Supermarkets Ltd. Sainsbury's Supermarkets is a subsidiary of the Sainsbury's Group, a leading U.K. food retailer comprising supermarkets, convenience stores, a home shopping service, and a bank in the U.K. At closing, Sainsbury's Supermarkets entered into a 30-year lease (approximately 13 years unexpired) for each property.
The borrower has extensive asset disposal and substitution rights. The borrower may withdraw a property without prepayment of debt, provided that following the withdrawal the loan-to-market value is not greater than 45% and the debt-service-coverage ratio is not lower than 1.5x. If a property is withdrawn or sold and the debt is prepaid, then an amount equal to 110% of the allocated loan amount (plus any applicable costs and fees) must be paid.
The borrower may substitute up to 30% of the mortgaged properties by vacant possession value if the loan-to-vacant-possession-value (LTVPV) is equal to or greater than 52%, up to 40% of the portfolio if the LTVPV ratio is lower than 52% but greater than 41.5%, up to 50% if the LTVPV ratio is lower than 41.5% but greater than 31.0%, and 60% if the LTVPV ratio is lower than 31.0%. During any rolling three-year period, up to 15% of the pool by vacant possession value may be substituted. Over the transaction's life, up to 60% of the property portfolio can be substituted. Within this limit, there are several tests at the asset and portfolio level that are designed to maintain the pool's average quality before and after substitution.
Since closing in 2006, three properties have been disposed of, five properties have become part of the portfolio, and six properties have been withdrawn from the transaction. Currently 48 supermarkets are securing the single loan. There have been no property acquisitions or disposals since our previous review in 2020, although there have been 20 new lettings to third parties that have taken space inside the stores. Tenants include Cobra Coffee Ltd., Starbucks, Barnardo's, and Timpson's.
Additional debt and further note issuance is permitted under the transaction documents subject to certain conditions being met and is subject to our review. Since closing, no additional debt or further notes have been issued.
Apart from the 56% loan-to-value (LTV) ratio restriction on the borrower acquiring additional properties and issuing further debt, there are no financial covenants.
The underlying loan has a 25-year term. Scheduled amortization made under the loan's terms is applied sequentially to the notes, reducing the LTV ratio to 18% at maturity. As of the October 2022 interest payment date, the notes had paid down by 36% and the current LTV ratio is 24%.
Since our previous full review, the properties' market valuation increased by 15.0% to £2.3 billion (March 2022) from £2.0 billion (March 2020). Based on this information, the loan exhibits a reported securitized LTV of 24.0% (down from 31.5% in April 2020). The interest coverage ratio has increased to 4.2x (from 3.5x at April 2020).
Rental income has increased by 7% since our previous review, as a direct result of the leases in place being index-linked to movements in the all-items retail price index, subject to it being contained within a band of 0% to 5%. At the same time, the estimated market rental value has been relatively stable so the portfolio remains significantly overrented.
Although sales have increased due to inflationary adjustment, sales of food items will likely be under pressure in the near time as a direct result of the increase in households' cost of living and energy bills having a direct impact on consumers' disposable income. There is the risk of increased vacancy levels and diminishing rental levels for retail properties as retailers adapt to changes in consumer spending trends.
We have therefore calculated the S&P Global Ratings net cash flow (NCF) based on the ERVs and have assumed a higher vacancy.
We have then applied our 7.6% capitalization (cap) rate against this S&P Global Ratings NCF and deducted 5% of purchase costs to arrive at our S&P Global Ratings value.
Table 1
| Loan And Collateral Summary | ||
|---|---|---|
| Review as of November 2022 | Review as of July 2020 | |
| Data as of | October 2022 | April 2020 |
| Senior loan balance (mil. £) | 551.8 | 615.2 |
| Senior loan-to-value ratio (%) | 24.0 | 31.5 |
| Trailing 12 months net rental income per year (mil. £) | 111.6 | 104.6 |
| Vacancy rate (%) | 0.0 | 0.0 |
| Investment value (bil. £) |
2.3 (as of March 2022) |
2.0 (as of March 2020) |
Given the single tenant risk, our analysis assumes the default of the tenant. Therefore, we calculate the S&P Value as if the portfolio of properties became fully vacant and the rents revert to ERV, along with deductions for downtime (void costs/rent-free periods) and 15% reletting costs.
Table 2
| S&P Global Ratings' Key Assumptions | ||||||
|---|---|---|---|---|---|---|
| Review as of November 2022 | Review as at July 2020 | |||||
| S&P Global Ratings gross rent (mil. £) | 82.6 | 81.4 | ||||
| S&P Global Ratings vacancy (%) | 10.0 | 5.0 | ||||
| S&P Global Ratings expenses (%) | 5.0 | 5.0 | ||||
| S&P Global Ratings net cash flow (mil. £) | 70.6 | 73.5 | ||||
| S&P Global ratings value (mil. £)* | 737.4 | 765.0 | ||||
| S&P Global Ratings cap rate (%) | 7.6 | 7.6 | ||||
| Haircut-to-Investment value (%) | 67.9 | 61.8 | ||||
| *Reflects downtime and reletting costs. | ||||||
Other analytical considerations
We also analyzed the transaction's payment structure and cash flow mechanics. We assessed whether the cash flow from the securitized assets would be sufficient, at the applicable ratings, to make timely payments of interest and ultimate repayment of principal by the legal maturity date for each class of notes, after considering available credit enhancement and allowing for transaction expenses and liquidity support. Our assessment of the payment structure and cash flow mechanics does not constrain our ratings on this transaction.
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 our previous review and is commensurate with the ratings assigned.
Rating actions
Our ratings on this transaction address the timely payment of interest, payable quarterly, and the payment of principal no later than the legal final maturity dates in April 2036.
The transaction has deleveraged due to the amount of amortization paid in this transaction since our previous review. Given the stable trend in ERV over the past two years and the operating performance of the underlying collateral, we have raised our rating on the class C notes to 'A+ (sf)' from 'BBB+ (sf)'.
The ratings on the class A and B notes are constrained by the hedge providers and the liquidity facility provider as their replacement framework is not in line with our current counterparty criteria. We have therefore affirmed our 'A+ (sf)' ratings on these notes.
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- 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: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- General Criteria: Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013
- Criteria | Structured Finance | CMBS: European CMBS Methodology And Assumptions, Nov. 7, 2012
- Criteria | Structured Finance | CMBS: CMBS Global Property Evaluation Methodology, Sept. 5, 2012
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
- 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
Related Research
- European CMBS Monitor Q3 2022, Oct. 17, 2022
- S&P Global Ratings Definitions, Nov. 10, 2021
- Longstone Finance Class C U.K. CMBS Notes Rating Raised; Class A And B Affirmed, July 29, 2020
- 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: | Carenn K Chu, London + 44 20 7176 3854; carenn.chu@spglobal.com |
| Secondary Contact: | Mathias Herzog, Frankfurt + 49 693 399 9112; mathias.herzog@spglobal.com |
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