DBRS Confirms Ratings on Tibet CMBS S.R.L.

DBRS Ratings Limited (DBRS) has today confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes Due December 2026 issued by Tibet CMBS S.R.L.:

-- Class A at AA (sf)
-- Class B at A (high) (sf)
-- Class C at A (low) (sf)
-- Class D at BB (low) (sf)

All trends are Stable.

The rating confirmations reflect the continued stable performance of the transaction since issuance in January 2015. The transaction is a securitisation of a single floating-rate loan granted by Banca IMI S.p.A. to the borrower, Montenapoleone Retail S.R.L. At closing, the loan had a securitised balance of EUR 203.0 million which, as of the November 2016 quarterly reporting, has been reduced to EUR 197.0 million, reflecting a 2.9% collateral reduction since issuance. The repayment is in accordance with a Facility Agreement clause (cash sweep of excess rental income).

The purpose of the loan was to refinance existing indebtedness, to partially pay closing costs for the loan and for general corporate purposes. The collateral securing this loan consists of a single retail property located on Via Monte Napoleone in central Milan, Italy. The property contains 5,738 square metres of leasable area situated across a lower ground level and five above-ground floors.

According to the November 2016 Investor Report, the property continues to be 100% leased to the same five tenants (five luxury retailers) as at issuance. An adjacent luxury hotel, which is not part of the collateral of this transaction, leased the top two floors of the building to be used as luxury suites. The remaining weighted-average (WA) lease term to expiry is 10.4 years and there are no expiration dates earlier than January 2024. The WA lease term to break option is 3.5 years; the earliest break option is January 2018.

At issuance, DBRS underwrote the portfolio using the in-place rents; however, as the tenants received significantly discounted rents in lieu of tenant improvement contributions when the leases were signed and, given the desirability of the location, DBRS gave credit to contractual rental uplifts over the term of the loan and used anticipated year 5 cash flows. Thus, the DBRS underwritten net cash flow (NCF) remains unchanged, which is 8.5% higher than the Issuer’s initially underwritten cash flow of EUR 11.7 million. As per the November 2016 Investor Report, the annual income for YE2016 is EUR 13.7 million, which represents a 7.5% increase from the YE2015 figure of EUR 12.7 million. The expiration of initial rental incentives and the rental uplifts led to this increase in annual income; however, the annual rent for 2016 is 3.1% below DBRS’s expected cash flow at issuance for this period and 1.6% lower than DBRS’s average cash flow over the term of the loan. This decrease is mainly a result of the lower-than-expected increase in rental uplifts.

DBRS calculated an issuance stressed interest coverage ratio (ICR) for the loan to be 1.35 times (x). As of November 2016, the ICR for the loan was 1.60x. The loan has event of default covenants (actual and prospective ICR) of 1.30x since year 2 of the loan. DBRS believes that the property’s cash flow will be sufficient for the loan to remain in compliance with the covenanted event of default ICR ratios during the remaining term.

DTZ valued the property in July 2014 and, at that time, estimated the market value of the property at EUR 314.7 million. To arrive at this valuation, DTZ applied a 5.5% discount rate to the property’s rental cash flow. DBRS applied a capitalisation rate of 5.75% to its stabilised cash flow. According to the November 2016 Investor Report, DTZ revalued the property in July 2016 and estimated a current market value of EUR 404.4 million, which represented a 28.5% increase since 2014. According to the valuer, this appreciation is caused by the increased interest and demand from international investors in Italian high-street retail, particularly in the prime/luxury segments. The DBRS value now represents a 44.6% haircut to DTZ’s July 2016 valuation. The current loan-to-value (LTV) of the loan is 49.0%. The loan has an LTV event of default covenant test at 70.0% and there is currently a low risk of this covenant being breached during the remaining loan term.

The final legal maturity of the Notes is in December 2026, seven years beyond loan maturity. If necessary, this is believed to be sufficient time, given the security structure and jurisdiction of the underlying loans, to enforce on the loan collateral and to repay bondholders.

At issuance, DBRS took the sovereign stress into consideration by adjusting the sizing hurdles used in its ratings. Recently, on 13 January 2017, DBRS downgraded the Republic of Italy (Italy) to BBB (high) and, consequently, an additional stress was applied to the sizing hurdles in this transaction. For a more detailed discussion of Italy’s rating downgrade, please refer to: http://dbrs.com/research/304610.

The rating assigned to Class D materially deviates from the lower ratings implied by direct sizing hurdles which are a substantial component of DBRS European CMBS Rating and Surveillance 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 the reported property value increase since issuance. These two factors offset the negative effect of Republic of Italy’s sovereign rating being downgraded to BBB (high) on 13 January 2017

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: European CMBS Rating and Surveillance Methodology

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 legal 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 data and information used for this rating include the Servicer, Credito Fondiario S.p.A.

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

At the time of the initial rating DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 22 January 2015, when all the classes of this transaction were confirmed.

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 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 the following ratings 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 to AA (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class A to A (low) (sf)

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

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

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

Lead Analyst: Jorge Lopez Herguido, Financial Analyst, EU CMBS
Rating Committee Chair: Christian Aufsatz, Managing Director, Global Structured Finance
Initial Rating Date: 23 January 2015

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 Rating and Surveillance 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