DBRS Confirms Ratings of Deco 2014-Tulip Limited

DBRS Ratings Limited (DBRS) has today confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes Due July 2024 issued by Deco 2014-Tulip Limited:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (sf)

All trends are Stable.

The rating confirmations reflect that the current performance of the transaction remains in line with DBRS’s expectations at issuance in October 2014. The transaction originally consisted of two loans, secured by a total of 20 office and retail properties throughout the Netherlands. With the April 2015 remittance, the Windmolen loan, which was secured by eight office properties and one retail property, was prepaid in full leaving the Orange loan, which is secured by 11 retail properties as the remaining collateral in the transaction. As a result of the prepayment of the Windmolen loan and scheduled amortisation of the Orange loan, the transaction has experienced collateral reduction of 51.9% since issuance.

In May 2015, DBRS placed Class A and Class B Under Review with Negative Implications as a result of the Deutsche Bank AG corporate rating being placed Under Review with Negative Implications by the Financial Institutions Group at DBRS. Deutsche Bank AG serves as liquidity provider and Operator Bank for the transaction. The transaction documents state that this party must have a rating of at least “A” or R-1 on the senior unsecured and short-term debt respectively.

On September 2015, DBRS’s Financial Institutions Group finalised its review of many banking institutions throughout Europe. As a result of the removal of the systemic support uplift to banking groups throughout Europe, the Deutsche Bank AG corporate rating was downgraded one notch to “A” on Senior Unsecured Debt & Deposits and R-1 (low) on Short-Term Debt & Deposits. Both downgrades were in line with DBRS’s expectations and both ratings continue to meet the thresholds outlined in the DECO 2014-Tulip Limited transaction documents.

As mentioned above, the Orange Loan is secured by 10 retail properties primarily located in suburban locations; however, many of the individual assets are the main shopping centre in town, are located near the main public transit station or have parking available. The largest concentration of assets is in Heerlen (23%), Alphen aan den Rijn (17%) and Spijkenisse (16%).

At issuance, DBRS highlighted the evolving Dutch retail market as a risk as there has been a trend of increasing vacancies and decreasing rental rates (realised as an over-renting correction) for small scale and neighbourhood strip centres. While most the of properties have exhibited stable performance since issuance, the vacancy rates at the two Spijkenisse assets have increased to 20.7% and 45.0%, respectively, compared with 17.5% and 13.0%, respectively, at issuance. The large increase in vacancy at the Stadsplein asset in Spijkenisse is a result of large tenants (formerly occupying 34.4% of the property’s net rentable area) vacating at lease expiration. According to the August 2015 Investor Report, the borrower is currently negotiating with a prospective tenant to assume this space, which would reduce the vacancy rate to 10.5%; however, no leasing agreement has been signed at this time.

In addition to the increases in vacancies at select properties, an increase in free rent periods and reduced rental rates associated with new and renewal leases have resulted in a decrease of the projected annual rental income. In total, projected rental income is expected to decrease by approximately EUR 500,000 or 2.8% since issuance.

Through 2016, 107 tenants providing 26.4% of the base rental revenue have lease expirations. While this may potentially have an additional negative impact on rental revenue, the portfolio experienced net positive absorption in Q2 2015 as 16 new leases were signed for 2,664 square metres (sqm) while 14 leases across 1,438 sqm were not renewed. Additionally, 17 leases across 12,667 sqm were renewed. As of August 2015 reporting, the portfolio wide occupancy rate is 87.0%, down from 92.8% at issuance.

Although performance of a few assets appears to have declined since issuance the current interest coverage ratio and debt service coverage ratio (DSCR) are 3.24 times (x) and 2.08x, respectively, down negligibly from last quarter’s figures of 3.34x and 2.15x, respectively. The DSCR covenant of 1.5x is not in danger of being triggered at this time.

The DBRS analysis at issuance applied corrections for above market rents and incorporated minimum vacancy assumptions as well as projected leasing and capital expenditure costs to account for the evolving Dutch retail market.

Notes:
All figures are in euros unless otherwise noted.

The principle methodology is European CMBS Surveillance Methodology.

The applicable methodologies are European CMBS Surveillance, European CMBS Rating Methodology, Legal Criteria for European Structured Finance Transactions, Derivative Criteria for European Structured Finance Transactions and Unified Interest Rate Model for European Securitisations, which can be found on www.dbrs.com under Methodologies.

Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

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

The sources of information used for this rating include the servicer, Situs Asset Management Limited.

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

DBRS does not rely upon third-party due diligence in order to conduct its analysis; however, Agreed Upon Procedures (AUP) are included in the requested documentation.

• DBRS was not supplied with AUP documents. Data checks were performed and DBRS did apply additional cash flow stresses in its scenarios.

DBRS considers the information available to it for the purposes of providing this rating was 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.

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

The last rating action on this transaction took place on 29 May 2015 when DBRS, Inc. (DBRS) 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.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

A decrease of 10% and 20% in the DBRS Net Cash Flow (NCF), derived by looking at comparable properties, market rents, market occupancies in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to a downgrade in the transaction, as noted below for each class respectively:

Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A at AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A at AA (high) (sf)

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B at A (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class B at BBB (high) (sf)

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C at A (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class C at BBB (low) (sf)

Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D at BBB (sf)
-- 20% decline in DBRS NCF, expected rating of Class D at BBB (low) (sf)

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are generally resolved within a 12-month period. DBRS’s outlooks and ratings are monitored.

For further information on DBRS 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.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Scott Goedken, Senior Vice President, Global CMBS
Initial Rating Date: 26 September 2014
Initial Rating Committee Chair: Erin Stafford, Managing Director, Global CMBS

Lead Surveillance Analyst: Jorge Lopez, Financial Analyst, Global CMBS

Rating Committee Chair: Mary Jane Potthoff, Managing Director, Global CMBS

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- European CMBS Surveillance
-- European CMBS Rating Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375