DBRS Downgrades Deco 8 – UK Conduit Plc Swap Rating to CCC (low) (sf) with Stable Trend

DBRS Ratings Limited (DBRS) downgraded the rating of the interest rate swap (IRS) termination amount that is owed by Deco 8 – UK Conduit 2 P.L.C. (the Issuer or Deco 8) to CCC (low) from B (low) with a Stable trend. This termination amount, payable to Deutsche Bank AG (Deutsche Bank or the Swap Counterparty), amounts to approximately £31 million.

DBRS put the swap rating under review in August 2017 after the swap counterparty declared a potential event of default (EOD) on the swap due to failure to pay. Since then, the failure to pay was not remedied and an interest swap EOD occurred. Consequently, the swap counterparty terminated the swap crystallising a swap mark to market (MtM) of £31,255,852.51 as of 11 August 2017. Meanwhile, the special servicer has reported that the first attempt to work out the Fairhold loan via a loan sale fell through and that it has since been approached by the Fairhold Borrowers who have proposed to buy the whole loan for £56.5 million (Discounted Pay Off or DPO) representing a discount of £28.35 million (based on property portfolio market value as of July 2017). The DPO consists of an £8 million deposit with the remainder due by the Q1 2018 interest payment day (IPD).

DBRS’s analysis focused on whether the swap counterparty could suffer a loss on the MtM due in three different scenarios. In the first scenario, the DPO amount will be fully paid and the notes will not be accelerated by January’s IPD. In this case, the DPO amount would flow through the pre-enforcement priority of payments (PoP) and should be sufficient to repay the swap MtM. In the second scenario, the swap counterparty may agree, after negotiating with relevant parties, a settlement on the MtM and not claim the full MtM, resulting in a loss according to DBRS’s rating definition. In the third scenario, the noteholder(s) will direct to trustee to accelerate the notes thus switching the PoP to post-enforcement. As detailed in DBRS’s previous press releases, under the post-enforcement PoP, the DBRS-rated swap MtM would rank pro rata and pari passu with class A2 principal and interest and would highly likely incur a loss.

In DBRS’s view, based on the limited publicly available information and considering the potential outcomes a CCC (low) (sf) rating is warranted for the swap. Consequently, DBRS has downgraded the rating to CCC (low) (sf).

The IRS in the CMBS are issuer-level swaps that provide for a fixed-rate payment to Deutsche Bank in exchange for a floating-rate (LIBOR) payment by Deutsche Bank to the bond. The swaps were intended to protect the individual loans and the capital structure in the CMBS against interest rate rises. As part of its rating analysis, DBRS considers the adequacy of the collateral backing the respective loan and the CMBS to cover the swap termination payments, the performance of the collateral and the quality of the legal and financial structure. When rating swap termination payments, DBRS is assessing the ability of the securities to make the swap termination payments to the counterparty by the legal final maturity date of the transaction. DBRS also takes into account the position of swap payment in the pre- and post-enforcement priorities of payment. DBRS uses its “European CMBS Rating and Surveillance Methodology” to assess the recoverability of the value of the swap termination fees to determine if there is sufficient coverage to make these termination payments by the legal final maturity of the CMBS.

Notes:
All figures are in British pound sterling 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.

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 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” at: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of data and information used for this rating include the Irish Stock Exchange, Deutsche Bank AG, London Branch, Situs Asset Management Limited and Solutus Advisors Limited.

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 4 August 2017, when DBRS put the swap rating Under review with Negative Implications.

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”):

Swap ref 1475920L Sensitivity:
-- 10% decrease in DBRS NCF: CCC (low) (sf)
-- 20% decrease in DBRS NCF: CCC (low) (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 and US regulations only.

Lead Surveillance Analyst: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 30 June 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