DBRS Confirms Debussy DTC Class A Notes, Maintains Negative Trend

DBRS Ratings Limited (DBRS) confirmed its B (sf) rating of the Class A Notes of the Commercial Real Estate Loan Backed Fixed-Rate Notes due July 2025 (the loan) issued by Debussy DTC plc. DBRS maintained its Negative trend on the rating.

The rating confirmation and maintenance of the Negative trend reflect the continued uncertainty of the loan after the single tenant, Toys “R” Us (TRU), vacated all the properties, not just in the portfolio but across the United Kingdom, following its administration. As of the latest valuation conducted by Colliers in June 2018, the tenant vacating led to a subsequent decrease in value to a value of GBP 248.5 million compared with the previous GBP 359.4 million valuation in April 2017, before the TRU vacancy occurred. The current appraised value of GBP 248,490,000 also reflects the disposal of six assets, as discussed below.

The loan was transferred to special servicing in February 2018, with the special servicer changing from Situs Asset Management Limited to Solutus Advisors Limited. The same month, TRU filed for insolvency with the company going into administration. In August 2018, the special servicer was changed again to CBRE Loan Services Limited (CBRE), which terminated the current receiver and appointed a new receiver. In September 2018, CBRE submitted a claim to the High Court of Justice in England disputing the validity of the previous standstill agreement, the purchase option and the continuing appointment of the original receiver made by the previous special servicer. In subsequent court hearings between November and December 2018, the court was held to determine the application for interim relief give directions to determine the administration application. However, the court did not provide further direction of the administration application and decided that the application should be managed with the main claim together at the case management conference in February 2019.

According to the special servicer, the outcome of the February 2019 case management conference was for the judge to reject the proposal of amending the application, which was to have administrators appointed over the property-owing companies. This would have allowed an accelerated hearing in May 2019. The judge stated that the amendment had merit, however, and should be heard as part of the main claim which is now set to be heard in February 2020.

As mentioned previously, six assets were disposed of under the previous special servicer, with total gross proceeds of GBP 30.5 million. The proceeds were used to pay down GBP 3.68 million of principal on Tranche A to GBP 180.5 million, as well as increase the reserves. As there is currently no cash being generated from the underlying properties collateral, the reserve balances had been decreasing. As of the January 2019 interest payment date, the reserves totalled GBP 28.07 million, with the security reserve totalling GBP 19.0 million. DBRS believes this security reserve to be sufficient to allow for continuing payments of both the Class A interest and the Class C note senior additional payment (which ranks senior to both the Class A and B notes) for approximately 18 months, which would be at least until the scheduled hearing of the main claim in February 2020. Additionally, there is a GBP 6.34 million disposal reserve and a GBP 2.63 million cost reserve to cover any possible capex required at the collateral to maintain the properties in order for eventual sale.

The special servicer has stated that it will not dispose of any assets until given further direction by the courts. It noted, however, that there are interested parties for both the sale of some of the assets, as well as interest from prospective tenants in letting some of the vacant space.

DBRS believes that full repayment of the Class A Notes’ principal depends on the length of the litigation process. If prolonged, the security reserve would continue to deplete. Such a delay would also prolong the vacancy of the properties, which could increase the need of a possible significant injection of capex and/or reduce the value of the property portfolio.

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

The sources of data and information used for this rating include CBRE Loan Services Limited 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 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 9 March 2018, when DBRS downgraded its rating of the Class A Notes from BB (low) (sf) to B (sf) and maintained its Negative trend.

The lead analyst responsibilities for this transaction have been transferred to Mattia Pauciullo.

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 A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A at below B(low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class A at below B(low) (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: Mattia Pauciullo, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Head of European Structured Finance
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.