DBRS Confirms Ratings of Deco 2014 - Gondola S.R.L.

DBRS Ratings GmbH (DBRS) confirmed its ratings on the classes of Commercial Mortgage-Backed Floating-Rate Notes Due February 2026 (the Notes) issued by Deco 2014 – Gondola S.R.L., as follows:

-- EUR 16.9 million Class C notes at AAA (sf)
-- EUR 52.0 million Class D notes at BBB (high) (sf)
-- EUR 21.9 million Class E notes at BB (high) (sf)

DBRS changed the trends on the Class C and Class D notes to Negative and maintained the Negative trend on the Class E notes.

The confirmations reflect the transaction’s overall strong credit quality since issuance. Legal risks however surrounding the Delphine loan, warrant the Negative trends on all the classes as the Notes are unlikely to be paid down at their expected maturity date in February 2019, thus pushing the Notes into their tail period (time period between expected maturity and legal maturity of the Notes).

Deco 2014 – Gondola S.R.L. is a securitisation of three senior commercial real estate loans originated in Italy. Following the prepayment of the Gateway loan in 2016 and the Mazer loan in 2017, the Delphine loan is the only remaining loan in the pool. As of the November 2018 Interest Payment Date (IPD) the total outstanding note balance has decreased to EUR 90.8 million from EUR 354.9 million at issuance. As such, both the Class A and B notes have been fully repaid and the principal balance of the most senior remaining note, Class C, has reduced to EUR 16.9 million.

As per the November 2018 IPD, the current gross rental income (GRI) was reported at EUR 10.4 million, a significant decrease compared to the November 2017 IPD figure of EUR 16.9 million. The decrease is largely due to the former sole tenant, Telecom Italia, vacating the Parco de Medici property in July 2018. However, the tenant Loro Piana is currently in a free rent period which ends in February 2019 when GRI will increase to approximately EUR 11.6 million.

Both remaining Delphine properties were recently valued in November 2018 and due to the loss of the single tenant Telecom Italia, the value of the Parco de Medici property declined from EUR 49.1 million to EUR 31.5 million. Although the value has significantly decreased, it would still cover the initial allocated loan amount of EUR 30.3 million. As of November 2018, the RCS asset has increased in value to EUR 192.3 million from EUR 173.2 million, which offsets the value decline of the Parco de Medici asset, as the portfolio has increased in aggregate value by EUR 1.5 million since the previous valuation, resulting in a loan-to-value ratio of 40.6%.

The Negative trends on the Notes is due to DBRS’s opinion that the Notes are unlikely to repay on their upcoming expected maturity date in February 2019. The Delphine loan has not been repaid yet as a property sale fell through between the sponsor, Blackstone, and the potential buyer Allianz, after the former owner of the RCS asset, the RCS group, filed a claim against the sponsor that their purchase of the property in 2013 was below fair value and RCS were unfairly taken advantage of due to their financial difficulties back in 2013. In November 2018, Blackstone launched a subsequent claim through a New York court against the RCS group as their claim against the RCS property caused the agreed sale to Allianz to fall through. At the time of the purchase, the property was sold through a tender process in which Blackstone was the highest bidder. Therefore, DBRS assumes in its rating analysis that the RCS claim will be ruled in favor of Blackstone.

On 14 February 2019, the noteholders will vote to agree on the extension of the Delphine loan maturity date to the earlier of a) 15 February 2021; or b) the first IPD falling six months after the date on which the latter of: i.) the Arbitration Demand; or ii.) the New York Claim, is finally determined in the relevant forum and no longer subject to any right of appeal or reconsideration. Regardless of the noteholders’ decision, DBRS believes a Class X trigger event will occur, which will put the remaining rated notes interest payments senior to the Class X interest payments. However, DBRS understands that, given that CMBS note principal will not be due unless the borrower repays loan principal, Class X is still expected to receive any excess interest remaining, as long as the loan interest is paid in full (but in a subordinated position in the waterfall). The investor notice does not detail whether the borrower would enter in new hedging arrangements following the potential loan extension, nor does it mention to what extent the borrower would partially repay the loan during the extension period. If the noteholders do not agree to extend the loan’s maturity date, the loan would likely transfer into special servicing amid non-payment at maturity.

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 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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for these ratings include Securitisation Services S.p.A. and Situs Asset Management Ltd.

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

At the time of the initial ratings, 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 March 2018 when DBRS upgraded the Class C notes and Class D notes with Stable trends and confirmed the Class E notes with a Negative trend.

The lead analyst responsibilities for this transaction have been transferred to Christopher Horst.

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):

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

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

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Christopher Horst, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 July 2014

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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
-- 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.