Morningstar DBRS Finalises Provisional Credit Ratings on Sage AR Funding No. 1 PLC

DBRS Ratings Limited (Morningstar DBRS) finalised its provisional credit ratings on the following bonds issued by Sage AR Funding 2025 No.1 PLC (the Issuer):

-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)

All trends are Stable.

CREDIT RATING RATIONALE
Sage AR Funding 2025 No.1 PLC is the securitisation of a floating-rate loan (the loan) advanced by the Issuer to a single borrower, Sage Borrower AR4 Limited. The loan is on-lent by the borrower to its parent, Sage Rented Limited (SRL), a for-profit registered provider of social housing, and was used to (1) refinance Sage AR Funding No.1 PLC, a previous securitisation that was also rated by Morningstar DBRS, and (2) refinance the additional properties. The loan is backed by 2,123 social housing units composed mostly of houses and flats across England. The loan has an initial five-year term with two one-year extension options. The initial loan repayment date is 15 May 2030.

The Sage Homes Group (Sage or the Sponsor) was established in May 2017 and is majority owned by Blackstone Inc. (Blackstone). Sage's core business is the provision of new affordable homes, which are rented at discounts to the prevailing open market rate and are let only to people on local authority housing waiting lists who are in housing need. Leases entered into by Sage with its affordable rent tenants usually include a one-year probationary period, with a long-term (usually five years) tenancy granted thereafter. Sage's leases with social rent tenants usually include a one-year probationary period and a lifetime (assured) tenancy granted thereafter. The transaction represents the third securitisation by the Sponsor following Sage AR Funding No.1 PLC and SAGE AR Funding 2021 PLC, both of which are rated by Morningstar DBRS.

The portfolio comprises 2,123 new-build social housing units across 119 development sites in England. The units were completed between November 2017 and May 2023 and include 1,267 houses and 856 apartment units. Jones Lang LaSalle Limited (JLL or the appraiser) valued the 2,123 units on the basis of Existing Use Value for Social Housing (EUV-SH) at GBP 369.5 million as of 13 February 2025. JLL also provides a Market Value subject to Tenancies (MV-T) of 1,952 units at GBP 431.3 million. The market value of the portfolio as referenced in this report is GBP 452.2 million and represents the aggregate of 1,952 units valued on a MV-T basis and the remaining 171 units valued on a EUV-SH basis. Based on this market value, the GBP 270.0 million balance of the rated notes represents a loan-to-value ratio (LTV) of 59.7%. The LTV and note-to-value ratios provided in this press release are calculated based on the aggregate GBP 452.2 million portfolio value unless stated otherwise.

The collateral portfolio includes 1,609 units previously secured in the Sage AR Funding No.1 PLC issuance and 514 additional units of similar quality. The portfolio is highly granular and accounts for GBP 19.8 million in total annual income as of 31 December 2024 (the cut-off date). The borrower reports a net income for the portfolio at GBP 15.4 million, which represents a debt yield (DY) of 5.71% based on the rated notes. Registered providers are required to set rent levels and rental increases for social and affordable rents in compliance with UK government policy. Rent increases from April 2024 remain limited to the CPI plus 1%, a trend that is currently expected to continue through the loan term.

Morningstar DBRS concluded a net cash flow (NCF) of GBP 14.7 million and a capitalisation rate (cap rate) of 4.5% for the collateral, resulting in a Morningstar DBRS value of GBP 326.4 million. The Morningstar DBRS value represents an LTV of 82.7% based on the rated notes and equates to a haircut of 27.8% to the JLL valuation. The Morningstar DBRS DY at the cut-off date was 5.4% for the rated notes.

The proceeds of the notes will be advanced to a wholly owned, newly incorporated subsidiary of SRL, and on-lent to SRL. SRL in turn grants third-party security by way of mortgages and a share pledge over the shares in the borrower to secure the borrower's obligations under the facility agreement. SRL also grants security as a fixed charge over its segregated bank account, into which rent is paid, and over the right to receive rental income under the occupational leases. The borrower will maintain full signing rights and full discretion over operating the segregated account.

The final legal maturity of the notes is expected to be 17 May 2037, five years after the second extended loan maturity 15 May 2032. Given the security structure and jurisdiction of the underlying loan, Morningstar DBRS believes this provides sufficient time to enforce on the loan collateral, if necessary, and repay the bondholders.

The loan bears interest at a floating rate equal to three-month Sterling Overnight Index Average (Sonia), subject to zero floor, plus a loan margin equivalent to the percentage rate per annum (p.a.), which is the weighted-average (WA) margin of the rated notes. There is no interest payable on the portion corresponding to the Class R notes. The loan is interest only with no scheduled amortisation.

Class A1 and Class A2 notes rank pari passu and collectively form the Class A notes. The Issuer will be able to issue further Class A2 notes upon the direction of SRL and with the written consent of the Class A1 noteholder(s) after the closing date provided that the proceeds of such further issuance will be used solely to redeem, in full or part, the Class A1 notes.

The borrower is expected to purchase an interest rate cap from a hedge provider, with a credit rating as at the cut-off date commensurate to that of Morningstar DBRS' credit rating criteria, to hedge against increases in the interest payable under the loan resulting from fluctuations in Sonia. Morningstar DBRS notes there are certain hedging conditions in place per the facility agreement, such that the interest rate cap(s) on any day must not be more than the higher of : (1) 2.5% and (2) the rate that ensures that, as at the date on which the relevant hedging transaction is contracted, the hedged interest coverage ratio (ICR) is not less than 1.2 times (x). The initial hedging agreement is required to be in placed prior to the first interest payment date (IPD) and is expected to expire on or after the IPD falling after the second anniversary of the utilisation date. Morningstar DBRS anticipates that the hedge will be extended for the full duration of the loan term. If the hedge is not extended in compliance with the facility agreement, there will be a loan event of default and sequential payment trigger event on the notes. The borrower will also have to extend hedging to exercise the two extension options.

For each note interest period occurring on or after the final loan repayment date, the Sonia component of the rate of interest payable on the rated notes will be capped at 5.0% p.a., subject to a floor of zero.

A cash trap event occurs if the rated LTV exceeds 76.92% and/or rated DY is less than 4.675% prior to a permitted change of control (PCOC). On or after a PCOC, a cash trap event occurs if the rated LTV exceeds the sum of (1) the rated LTV on the PCOC date and (2) 10%, and/or rated DY is less than 90% of the rated DY on the PCOC date. There are no LTV and DY financial covenants prior to a PCOC. Following a PCOC, the rated LTV financial covenant is set at the sum of (1) the rated LTV on the PCOC date and (2) 15%, and the rated DY financial covenant is set at 85% of the rated DY on the PCOC date.

On the closing date, Goldman Sachs Bank USA provided a liquidity facility of GBP 9.4 million. The liquidity facility can be used to cover interest shortfalls on the Class A, Class B, Class C, and Class D notes. Morningstar DBRS estimates that the liquidity facility support is equivalent to approximately nine months of coverage based on an interest rate cap that would ensure a hedged ICR of 1.2x or approximately six months of coverage based on the 5.0% Sonia cap. The liquidity commitment will be reduced based on the reduction in the outstanding balance of liquidity supported notes (Class A through Class D), if any, provided that there are no liquidity drawings outstanding under the liquidity facility. The liquidity commitment will also be reduced in the event of an appraisal reduction or if a lower liquidity commitment is consistent with any updated criteria published by the credit rating agencies then rating the notes.

To satisfy risk retention requirements, an entity within the Sage Group retains a residual interest consisting of no less than 5% of the nominal value of the loan and fair market value of the overall capital structure by subscribing to the unrated and junior-ranking Class R notes. This retention note ranks junior in relation to interest and principal payments to all rated notes in the transaction.

Morningstar DBRS' credit ratings on the Class A, Class B, Class C, Class D, and Class E notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the initial principal amounts and the interest amounts.

Morningstar DBRS' credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Sonia Excess Amounts, Exit Payment Amounts, Pro Rata Default Interest Amounts, and Pro Rata Extension Step-Up Amounts payable to the noteholders.

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 (16 May 2025), https://dbrs.morningstar.com/research/454196.

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 has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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 data tape dated 31 December 2024. In addition, Morningstar DBRS received valuation reports dated February 2025 and a credit rating agency presentation dated January 2025 as well as legal documents.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned securities are subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalise the credit ratings.

These credit ratings concern an expected-to-be-issued new financial instrument. These are the first Morningstar DBRS credit ratings on this financial instrument.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

Class A1 Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class A notes of AAA (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on the Class A notes of AAA (sf)

Class A2 Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class A notes of AAA (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on the Class A notes of AAA (sf)

Class B Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class B notes of AA (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on the Class B notes of A (sf)

Class C Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class C notes of BBB (high) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on the Class C notes of BB (high) (sf)

Class D Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class C notes of BB (high) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on the Class C notes of B (sf)

Class E Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on the Class C notes of BB (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on the Class C notes of Below B (low) (sf)

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: Petter Wetterstad, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 15 May 2025

DBRS Ratings Limited
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Registered and incorporated under the laws of England and Wales: Company No. 7139960

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
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025), https://dbrs.morningstar.com/research/454196

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.