DBRS Places Four Classes in Two CMBS Transactions Under Review with Negative Implications

DBRS, Inc. (DBRS) has today placed four classes across two European CMBS transactions Under Review with Negative Implications as a result of the potential impact on certain counterparty ratings within the transactions stemming from the review of the credit DBRS gives to systemic support when assigning and monitoring financial institutions in Europe. The potentially affected transactions and classes are listed below.

DECO 2012-MHILL Limited
-- Class A, rated AAA (sf)
-- Class B, rated AA (high) (sf)

DECO 2014-TULIP Limited
-- Class A, rated AAA (sf)
-- Class B, rated AA (sf)

The Bank Recovery and Resolution Directive (BRRD) was enacted on May 15, 2014, and has been effective in European Union countries since January 2015, with the bail-in option to be available from January 2016. To date, Germany, the United Kingdom and Austria have enacted BRRD into national legislation. Other countries are expected to complete the process within the next few months. Under the BRRD, the requirement that at least 8% of total liabilities absorbs losses before any funding can be provided by resolution funds means that the risk of senior bondholders absorbing losses at the point of failure is, in DBRS’s opinion, greater than before the directive was enacted.

On May 20, 2015, DBRS placed 38 European banking groups’ senior debt and deposit ratings Under Review with Negative Implications (see DBRS Places 38 European Banking Groups Under Review Negative due to Systemic Support). This rating action reflects DBRS’s view that recent developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support for these systemically important banks.

Currently, the ratings of 41 European banks benefit from an uplift of one or more notches above their intrinsic assessment (IA). The banking groups that could see their ratings downgraded include 39 banking groups that currently have one notch of uplift in their senior debt and deposit rating, and two banking groups with two notches of uplift. DBRS expects to resolve the Under Review with Negative Implications status of the 38 European banking groups in September 2015. Ratings Under Review with Negative Implications may either be downgraded or confirmed.

Should the ratings of these banks be subsequently downgraded below the guidelines outlined in DBRS’s Legal or Derivative Criteria for European Structured Finance, at the time of the downgrade of the bank, DBRS shall conduct a further analysis in accordance with the relevant rating methodology and take the appropriate rating action, resolving the current Under Review with Negative Implications status.

One bank that has had its rating placed Under Review with Negative Implications is a named counterparty within the two aforementioned CMBS transactions rated by DBRS. The potential subsequent downgrade of the rating of this bank may possibly affect the CMBS transactions, as this entity serves as an account bank, liquidity facility provider or in another capacity that exposes the transactions to credit risk. The transaction documentation for these CMBS transactions sets forth thresholds for various remedies upon a downgrade of the entity below a certain level. If upon review DBRS downgrades the affected bank one notch and the transaction performance remains stable, a confirmation is expected; however, if DBRS downgrades the bank’s rating two notches, further action may be taken by the Issuer to replace the affected entity and/or a downgrade may be warranted.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Legal Criteria for Structured Finance Transactions” and “European CMBS Rating Methodology. Other methodologies and criteria referenced in this transaction are listed at the end of this press release and may be found at http://www.dbrs.com/about/methodologies.

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate. A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include the issuers, originators, and other public sources.

DBRS considers the information made available to it for the purposes of providing this rating to have been of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third party assessments. However, this did not have any impact on these rating actions.

As this is an Under Review Rating Action, sensitivity analysis is not applicable.

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This credit rating has been issued outside the European Union (EU) and is endorsed by DBRS Ratings Limited. It may be used for regulatory purposes by financial institutions in the EU.

DECO 2012-MHILL

Initial Lead Analyst: Scott Goedken
Initial Rating Date: 16 February 2012
Initial Rating Committee Chair: Mary Jane Potthoff
Most Recent Rating Update: 20 June 2014

Lead Surveillance Analyst: Stephen Koehler
Rating Committee Chair: Erin Stafford

DECO 2014-TULIP Limited

Initial Lead Analyst: Dan Kastilahn
Initial Rating Date: 16 October 2014
Initial Rating Committee Chair: Mary Jane Potthoff
Most Recent Rating Update: 16 October 2014

Lead Surveillance Analyst: Stephen Koehler
Rating Committee Chair: Erin Stafford
The rating methodologies and criteria used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions
-- European CMBS Rating Methodology

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.