DBRS Downgrades Debussy DTC Plc Class A Notes, Maintains Negative Trend
CMBSDBRS Ratings Limited (DBRS) downgraded its rating on the Class A Notes of the Commercial Real Estate Loan Backed Fixed-Rate Notes due July 2025 issued by Debussy DTC plc to B (sf) from BB (low) (sf). DBRS maintained its Negative trend on the rating.
The downgrade reflects the expected value decline of the portfolio following the insolvency of the sole tenant in the transaction, Toys R Us (TRU). DBRS’s new value assumption is GBP 191.0 million, which represents a 2.5% haircut to the most recent vacant possession value (VPV) of GBP 196.0 million by the independent appraiser, CBRE, and dated April 2017. The Negative trend expresses DBRS’s concerns about the likely cash flow fluctuations while TRU is wound down.
DBRS reviewed the transaction prior to the Company Voluntary Arrangement (CVA). On 13 December 2017, DBRS downgraded its rating to BB (low) (sf) and placed the transaction Under Review with Negative implications (see the relevant 13 December 2017 press release for more details).
The CVA has since been voted through and the rent payment from the OpCo has switched to monthly and, most importantly, has been reduced. Consequently, on 20 February 2018, the projected interest cover ratio (ICR) covenant ratio of 1.15X was breached and not remedied, triggering a loan event of default.
On 22 February, the TRU loan was transferred to special servicing. On 23 February, the special servicer, Situs Asset Management Limited, was replaced by Solutus Advisors Limited. TRU filed for insolvency on 28 February 2018 and administrators have been appointed to wind down the company.
In light of the new developments, DBRS expects that a prolonged period of time will be required by the special servicer to stabilise the property portfolio, providing further stress to the underlying assets’ cash flow. As a result, DBRS reduced its net cash flow (NCF) assumption to GBP 14.3 million. DBRS’s updated NCF reflects a higher vacancy assumption and increased tenant incentives as well as capex provisions. DBRS adjusted its value estimate to GBP 191.0 million, which assumes that the majority of assets can be re-let over time. However, DBRS notes that certain usage constraints limit the potential re-letting options.
DBRS also updated its loan-to-value (LTV) sizing parameters and property diversity credit to be consistent with the updated “European CMBS Rating and Surveillance Methodology” published 19 February 2018. For more details, see the press release, “DBRS Updates its European CMBS Rating and Surveillance Methodology.”
Based on the new DBRS value, which is only 3.7% higher than the Class A balance, the ultimate payment of the Class A Notes principal may become under pressure in the future, especially if the situation deteriorates further. In terms of interest on the Class A Notes, there is liquidity support provided by the security reserve account, which is currently fully funded at GBP 19.3 million. If not used for other purposes, DBRS estimates that the reserve could cover a little more than 18 months of interest payments to the Class A Notes and senior Class C Notes Senior Additional Payments. DBRS expects there to be rental cash flow uncertainties and fluctuations during the loan work-out period and therefore maintained the Negative trend on the rating.
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.
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 “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 Situs Asset Management Limited, Solutus Advisors Ltd and U.S. Bank Global Trust Services.
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 13 December 2017, when DBRS downgraded the Class A Notes and then placed the transaction 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”):
A decrease of 10% and 20% in the DBRS NCF, derived by looking at comparable properties, market rents and market occupancies, in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to the following ratings in the transaction:
Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A Notes of CCC (sf)
-- 20% decline in DBRS NCF, expected rating of Class A Notes of CC (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
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 19 July 2013
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.
-- European CMBS Rating and Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
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.
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