DBRS Confirms All Classes' Ratings and Changes Trends on Deco Tulip – 2014 Limited

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

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)

DBRS has also confirmed its ratings but assigned Negative trends to the following classes of the fNotes:
-- Class D at A (low) (sf)
-- Class E at BBB (sf)

The rating confirmations mirror the overall performance of the transaction which is still, despite a slight deterioration, in line with DBRS’s expectations. The trend changes for classes D and E reflect, however, the downward pressures on the junior classes caused by a lower reported Net Rental Income (NRI) which was then extrapolated by the structure of the transaction – only the Orange loan is still outstanding in the transaction (the Windmolen loan has repaid in early 2015) thus exposing the noteholders directly to the performance risk of the Orange loan Borrower (MKS5 CRE Holding B.V.).

The Orange Loan is secured by ten retail properties (11 at issuance, the property in Slangenburg has been sold) primarily located in suburban locations in The Netherlands; 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%). The sponsors of the loan are Mount Kellett and Sectie5.

The projected annual NRI of the property portfolio securing the Orange loan has decreased to EUR 16.0 million in July 2016 from EUR 17.1 million in July 2015. The reduction is caused mainly by leasing activities such as rent reduction for lease renewal, rent-free period and other leasing costs. Compared with the EUR 4.1 million annualised rent that was set to expire in 2016, the reduction in NRI seems to be, as of Q2 2016, relatively modest. A further EUR 4.3 million in annualised rent sees expiration dates fall between Q3 2016 and end-2017; based on the asset manager’s previous leasing performance and the granularity of the expiring leases, in DBRS’s view, this would be unlikely to lead to a further significant drop in NRI.

The vacancy rate of the Orange properties has increased significantly from issuance but has reduced slightly since last year. At issuance, the transaction prospectus has reported a vacancy rate of 1.8%, which jumped to 13.0% in July 2015 and then went down to 12.6% by July 2016. At issuance, DBRS commented on the evolving Dutch retail market as a carrying 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. Considering the recent occupancy performance, DBRS has adjusted its Net Cash-Flow (NCF) assumption for the property portfolio by increasing the vacancy rate to 12%.

DBRS has noted that a Liquidity Facility Stand-by Drawing has been made as the current Liquidity Facility Provider – Deutsche Bank AG – no longer satisfies the Liquidity Facility Required Rating.

DBRS currently rates Deutsche Bank AG with a Long Term Critical Obligations (COR) rating of A (high) and Short Term Critical Obligations rating of R-1 (middle) which is consistent with the minimum institution rating laid out in DBRS’s Legal Criteria for European Structured Finance Transactions.

The ratings assigned to Class C, D and E materially deviate from the lower ratings implied by the direct sizing hurdles which are a substantial component of DBRS European CMBS Rating methodology. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by a substantial component of a rating methodology; in this case, the assigned ratings reflect that the loan’s performance remains in line with the initial expectations and that occupancy has improved recently. DBRS amended this press release on 6 October 2017 to reflect that the aforementioned material deviation is from a substantial component of the European CMBS Rating methodology, as opposed to a material deviation from a quantitative model.

Notes:
All figures are in euros unless otherwise noted. The principal methodology applicable is: European CMBS Surveillance.

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

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action

Other methodologies referenced in this transaction are listed at the end of this press release.

These 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 Situs Asset Management Ltd and Deutsche Bank AG.

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 impact the rating analysis.

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

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.

The lead responsibilities for this transaction have been transferred to Rick Shi.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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 (sf)

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

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

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

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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: Rick Shi, Senior Financial Analyst, Global CMBS
Rating Committee Chair: Christian Aufsatz, Senior Vice President, Global CMBS

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

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

European CMBS Surveillance
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 analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375