DBRS Finalises Provisional Ratings of Pietra Nera Uno S.R.L.

DBRS Ratings Limited (DBRS) finalised its provisional ratings of the following classes of Commercial Mortgage-Backed Floating-Rate Notes due May 2030 (collectively, the Notes) issued by Pietra Nera Uno S.R.L. (the Issuer):

-- Class A Notes rated AA (low) (sf)
-- Class B Notes rated A (low) (sf)
-- Class C Notes rated BBB (low) (sf)
-- Class D Notes rated BB (sf)
-- Class E Notes rated B (high) (sf)

All trends are Stable.

Pietra Nera Uno S.R.L. is a securitisation of three senior commercial real estate loans and two pari passu-ranking capital expenditure (capex) facilities advanced by Pietra Nera Uno S.R.L. (the Issuer) to four Italian borrowers: (1) Moma Fund, a regulated Italian real estate fund, is the borrower under the Fashion District Loan; (2) Multi Veste Italy 4 S.R.L. and (3) Multi Veste Holding Italy 4 B.V. are the borrowers under the Palermo Loan; and (4) Valdichiana Propco S.R.L. is the borrower under the Valdichiana Loan. The four borrowers are ultimately owned by the funds managed/advised by Blackstone (the Sponsor).

The aggregate initial balance of the securitised loans is EUR 403,810,000, including EUR 9,000,000 and EUR 6,500,000 pari passu-ranking capex facilities related to the Palermo Loan and the Fashion District Loan, respectively. Each loan has a two-year term with three one-year extension options, subject to certain conditions.

The Fashion District Loan and the Valdichiana Loan refinanced loans that were securitised Taurus 2015-1 IT S.r.l. and Moda 2014 S.r.l, respectively.

Each loan is limited in recourse to the borrower group and the underlying properties, with no additional recourse to the Sponsor. Also, there is no cross-collateralisation, and the assets and guarantees securing the loans only secure or guarantee the liabilities arising under the respective facility agreement.

Each loan bears interest at a floating rate equal to three-month Euribor (subject to zero floor) plus a margin that is a function of the weighted-average (WA) of the aggregate interest amounts payable on the Notes. As such, there is no excess spread in the transaction, while ongoing costs and expenses incurred by the Issuer will be paid directly by the borrowers. To hedge against increases in the interest payable under the loans due to fluctuations in the three-month Euribor, within ten business days of the Issue Date each Borrower will enter into hedging arrangements satisfying different conditions, including: (1) an aggregate notional amount covering not less than 95% of the relevant outstanding loan; (2) the hedge counterparty having the requisite rating; (3) the term of the hedging being in line with the maturity date of the loan; and (4) the projected interest coverage ratio at the strike rate not being less than 200% at the date on which the relevant hedging transaction is contracted. To maintain compliance with applicable regulatory requirements, Blackstone, acting through its group company BRE Europe 7 NQ S.a.r.l., has retained an ongoing material economic interest of not less than 5% by subscribing an unrated and junior-ranking EUR 20.2 million Class Z Notes.

The collateral securing the loans consists of four Italian retail assets: three regional outlets and one regionally dominant shopping centre, located respectively in Mantua (northern Italy), Valdichiana (central Italy), Molfetta and Palermo (southern Italy). Not considering the asset located in Molfetta, which is currently characterised by a relatively high vacancy rate of approximately 25% (including phase II, which is currently closed to the public), the portfolio benefits from a WA occupancy rate of over 93.4%. The rental income is contributed by over 360 tenants, predominantly well-known international retailers, with the largest tenant (UCI Cinemas) contributing 4.0% to the total gross rental income. The top ten tenants generate 18% of the total rent.

In DBRS’s view and based on the valuations instructed by the arranger, the loans (including the capex facilities) represent medium leverage financing with loan-to-value (LTV) ratios of 71.2% for Fashion District, 72.6% for Palermo and 67.6% for Valdichiana (the LTV figures are net of the 5%, or EUR 20.2 million, material economic interest retained in the transaction by the Sponsor). The relatively high DBRS LTV is mitigated by the debt yield, as the collateral currently generates a Net Operating Income (NOI) of approximately EUR 36.4 million, translating into a day-one senior debt yield of 9.0%.

Each loan has a two-year term with three one-year extension options, provided the following conditions have been met: (1) there is no payment default and (2) the transaction is compliant with the required hedging conditions. Assuming the exercise of the extension options by the Sponsor, two of the three loans, the Fashion District Loan and the Valdichiana Loan, will amortise 1.0% per annum starting from the second anniversary of the loan. The Palermo Loan will amortise 1.0% per annum starting from the first anniversary of the loan and 2.0% per annum in the last year.

On the issue date, the Capex Facilities of the Fashion District Loan and the Palermo Loan has been fully drawn and deposited on two different accounts under the control of the respective borrowers.

The facility agreements provide the Sponsor with the opportunity to sell the borrower and respective property portfolio without repaying the loan if it is sold to a company owning (directly or indirectly) commercial real estate assets with an aggregate market value of (1) no less than EUR 2 billion in Europe, or (2) no less than EUR 5 billion worldwide.

The loan structure does not include financial default covenants prior to a permitted change of control, but provides other standard events of default, including: (1) any missing payment, including failure to repay the loan at maturity date; (2) borrower insolvency; and (3) a loan default arising as a result of any creditors’ process or cross-default. In DBRS’s view, potential performance deteriorations would be captured and mitigated by the presence of the following cash trap covenants: (1) an LTV cash trap covenant set at 85% for the Fashion District Loan, 86% for the Palermo Loan and 81% for the Valdichiana Loan; and (2) a debt yield cash trap covenant set at 8.1% in years one to three and 8.6% in years four and five for the Fashion District Loan, 7.4% in years one to three and 7.8% in years four and five for the Palermo Loan, and 9.1% in in years one to three and 9.6% in years four and five for the Valdichiana Loan.

The DBRS net cash flow (NCF) for the entire portfolio is EUR 30.1 million, which represents a 17.2% haircut to the sponsor’s NOI. DBRS applied a blended capitalisation rate of 7.1% to the aggregate NCF to arrive at a DBRS stressed value of GBP 423.5 million, which represents a 21.7% haircut to the market value provided by CBRE’s valuation completed in September 2017. The DBRS LTV of the transaction is 95.3%.

The transaction is supported by a EUR 15.0 million liquidity reserve facility, which is provided by Deutsche Bank AG, London Branch. The liquidity reserve facility can be used by the Issuer to fund expense shortfalls (including any amounts owing to third-party creditors and service providers that rank senior to the Notes), property protection shortfalls and interest shortfalls (including with respect to deferred interest, but excluding default interest and exit payment amounts) in connection with interest due on the Class A Notes and Class B Notes. The liquidity reserve facility cannot be used to fund interest shortfalls on other classes of notes, including the Class Z Notes. At issuance, the liquidity reserve facility will be fully drawn and deposited on an account under the control of the Issuer at BNP Paribas Securities Services, Milan Branch. DBRS currently estimates that the commitment amount is equivalent to approximately 23 months of interest coverage on the covered notes.

Potential interest shortfall on Class E and Class Z, due to loan prepayments or insufficient loan recovery proceeds, are subject to an Available Funds Cap.

The final legal maturity of the Notes is in May 2030, seven years after the third one-year maturity extension option under the loans agreements. If necessary, DBRS believes this provides sufficient time, given the security structure and jurisdiction of the underlying loan, to enforce on the loan collateral and repay the bondholders.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings 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.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include information provided by CBRE, Deutsche Bank AG, London Branch and its delegates.

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

DBRS was 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

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 market rents, market occupancies in addition to expense ratios, and capital expenditure, 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 Notes to A (high) (sf)
--20% decline in DBRS NCF, expected rating of Class A Notes to BBB (high) (sf)

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

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

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

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

Lead Analyst: Rick Shi, Senior Financial Analyst, Global Structured Finance
Rating Committee Chair: Christian Aufsatz, Managing Director, Global Structured Finance
Initial Rating Date: 2 February 2018

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.

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.