DBRS Downgrades Two Junior Tranches of Deco 2014-Tulip Limited, Confirms Other Classes

DBRS Ratings Limited (DBRS) downgraded its ratings and maintained the Negative 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 D to BBB (sf) from A (low) (sf)
-- Class E to BB (high) (sf) from BBB (sf)

DBRS has also confirmed its ratings with Stable trends on the following classes of the Notes:

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

The downgrade of the two junior tranches comes as a result of the market value (MV) reduction of the property portfolio securing the Orange Loan, as evidenced in the latest valuation, and the deterioration of the asset performances that DBRS pointed out last year. The confirmation of the three senior tranches reflects the continuous amortisation of the loan, with Class A benefiting the most thanks to the sequential principal distribution (50% of the principal receipts).

The remaining loan securitised in this transaction, the Orange Loan, is secured by eight retail properties (11 at issuance) primarily located in suburban locations of the Netherlands; however, many of the individual assets are part of the main shopping area in town and are located close to the main public transit stations, or have parking available. Following the disposal of three properties (Slangenburg, Dordrecht; De Hovel, Goirle and Kerkstraat, Tegelen) and a portion of the Stadsplein, Spijkenisse property, the assets concentration is as follows: Heerlen (26.9%), Alphen aan den Rijn (18.8%) and Amsterdam (17.3%).

The projected annual gross rental income (GRI) of the property portfolio securing the Orange Loan has further decreased to EUR 13.6 million in July 2017, from EUR 16.1 million in July 2016. Although some of the GRI loss resulted from property disposals, on a like-for-like basis the performance of the remaining properties since inception has seen a GRI decline of 5.37%, excluding the Stadsplein property (which has been partially sold).

The vacancy rate of the Orange Loan properties has also significantly increased since issuance, from 1.8% to approximately 14% as of July 2017. The lease expiry profile shows that a further 22% of the leases are expected to expire in 2018, which may potentially drive the vacancy rate further up.

At issuance, DBRS commented on the negative trend of the Dutch retail market, with increasing vacancies and decreasing rental rates (realised as an over-renting correction) for small scale and neighbourhood strip centres. The market reports evidence that such trend is still on-going. Considering the recent occupancy performance, DBRS adjusted its net cash flow (NCF) assumption for the portfolio by increasing the vacancy rate assumption to 15%. Also, capital expenditure (capex) assumptions were reviewed to approximately EUR 1.5 million to account for major future capex projects, which, in DBRS’s view, are required in order to attract new tenants and improve the assets performance. The resulting DBRS NCF amounts to EUR 10.5 million and DBRS value is updated to EUR 127.5 million.

On a like-for-like basis the current portfolio MV has decreased by approx. 10%, to EUR 161.3 million from EUR 178.5 million at inception. In particular the two Spijkenisse properties (part of the Stadsplein property was disposed in January 2017) registered the most significant drop in value, with both properties currently showing a MV below their allocated loan amounts.

DBRS currently rates Deutsche Bank AG with a Long Term Critical Obligations rating of A (high) and Short Term Critical Obligations rating of R-1 (middle), both with Stable trends, which satisfies the minimum counterparty required rating laid out in DBRS’s Legal Criteria for European Structured Finance Transactions methodology.

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 surveillance section of 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 Situs Asset Management, CBRE Valuation Advisory B.V. and Deutsche Bank AG, London Branch.

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 14 October 2016, when DBRS confirmed all classes rating but changed the trends of class D and E to Negative.

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 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 AAA (sf)

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

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

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

Class E Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D at B (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class D at CCC (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 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 and US regulations only.

Lead Analyst: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 26/09/2014

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