DBRS Assigns Provisional Ratings to Deco 2019 – Vivaldi S.R.L.

DBRS Ratings GmbH (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage-Backed Floating-Rate Notes due August 2031 (collectively, the Notes) to be issued by Deco 2019 - Vivaldi S.R.L. (the Issuer):

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

All trends are Stable.

The transaction is a securitisation of approximately 95% interest of three Italian refinancing facilities (e.g., the Palmanova loan, the Valdichiana loan and the Franciacorta loan) each backed by a retail outlet village managed by Multi Outlet Management Italy (Momi). The borrowers of Franciacorta and Valdichiana loans are the combination of the property company (PropCo) and holding company (HoldCo) borrowers, which are Franciacorta Retail Srl and Valdichiana Propco Srl as PropCo borrowers and Frankie Retail HoldCo Srl and Valdichiana HoldCo Srl as HoldCo borrowers. The Palmanova loan’s borrower is the Palmanova PropCo Srl alone. The borrowers are ultimately owned by the funds of Blackstone LLP (the Sponsor) and are managed by Kryalos SGR S.P.A.

The aggregate balance of the senior loans is EUR 360.99 million, the majority of which (EUR 342.9 million or 95% of the total senior loan amount) will be funded via the CMBS issuance. The senior loans for Valdichiana and Franciacorta are divided into two tranches, term facilities A and B, which will be advanced to the relevant PropCo and HoldCo of the respective loan. Each loan has a two-year term with three one-year extension options, subject to certain conditions and that there is no default covenant for a loan’s event of default.

The sponsor has planned to restructure the borrower structure of the Valdichiana and Franciacorta loans within six months after issuance; however, the first interest payment will be paid out as usual in August 2019, three months after the expected closing date. Until the restructuring is completed, the HoldCos will not have sufficient cash to service their portion of the loan and will not benefit from the security on the assets. In the unlikely scenario of a loan defaulting during that time and the start of an insolvency proceeding under the Italian law, they will rank junior to any unsecured creditors of the relevant PropCos. To mitigate such risk, the sponsor will establish two irrevocable letters of credit, which will be provided by Wells Fargo and Bank of America Merrill Lynch in the favour of Frankie Retail Holdco Srl and Valdichiana Holdco Srl, respectively. These commitments will be sized to cover the HoldCo portion’s fully extended five-year interest payments based on the final pricing of the CMBS bonds to be issued. The letters of credit will expire on 26 April 2020 but can be renewed at least three months prior of its expiration.

The collateral securing the loans comprises three retail outlet villages located in northern Italy. These retail outlet villages, together with another two properties in Mantua and Puglia, are marketed under the “Land of Fashion” brand. The retailers in the outlet villages are predominately mid- or high-level national and international brands with little presence of high-end luxury brands. The majority of the retailers are fashion retailers complemented by accessory, food and beverage and homeware retailers. In each outlet village, one retailer occupies one unit, which is generally located on the shopping route within the outlet village. The build-out of each retail village is very similar, featuring a two-floor facade decorated with windows and a variety of bright colours and an open-air “shopping-street” linking all the retail units. There are also facilities such as an information point and playground available on site for the convenience of the shoppers.

As of 1 February 2019 (the cut-off date), the outlet villages were well let at 93.4% physical occupancy and generated a total EUR 31.0 million gross rental income (GRI), together with another EUR 2.0 million sundry income. The total rental income amounts to EUR 33.1 million. Translating into a day-1 gross debt yield (DY) of 9.2% based on the EUR 360.99 million senior loans. It should be noted that the Franciacorta asset has recently opened its Phase III (12.5% of the asset’s total lettable area) and according to the sponsor its occupancy is expected to reach 90%+ by year-end 2019. CBRE has valued the portfolio at a total EUR 515.7 million on 28 February 2019 bringing the overall loan-to-value ratio to 70.0%, of which 58.4% is from the PropCo debts and 11.6% from the HoldCo debts.

The DBRS net cash flow (NCF) for the entire portfolio is EUR 26.6 million, which represents a 19.7% haircut to the sponsor’s total gross rent. DBRS applied the capitalisation rates ranging from 6.65% to 7.0% to the underwritten NCF and arrived at a DBRS stressed value of EUR 388.7 million, which represents a 24.6% haircut to the market value provided by the appraiser.

The loan structure does not include any financial default covenant and only the non-payment and major damage can trigger a loan event of default. The cash trap covenants are set at 80% LTV for all three loans while the DY cash trap covenants are set with 10% headroom based on day-1 DY.

There is no amortisation scheduled before the permitted change of control, after which a 1% annual amortisation will take effect. The permitted change of control is defined as a property/platform sale to a qualified transferee without repaying the loan/transaction provided that the transferee has a total market capitalisation or asset under management of no less than EUR 5 billion or the transferee with an advisor with an aggregate commercial real estate market value of (1) no less than EUR 2 billion in Europe, or (2) EUR 5 billion worldwide.

It is expected that to hedge against increases in the interest payable under the loans resulting from 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) 100% of then outstanding principal amount; (2) the hedge counterparty having the requisite rating satisfying DBRS’ criteria; (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 150% at the date on which the relevant hedging transaction is contracted.

The transaction is supported by a EUR 15 million liquidity facility to be provided by Deutsche Bank AG, London Branch. The liquidity facility can be used to cover interest shortfalls on the Class A and B notes. At issuance, it is expected that the liquidity reserve facility will be fully drawn and deposited on an account under the control of the Issuer.

Class E is subject to an available funds cap where the shortfall is attributable to an increase in the weighted-average margin of the notes.

The final legal maturity of the Notes is expected to be in August 2031, seven years after the third one-year maturity extension option under the loans’ agreements. If necessary, DBRS believes that this provides sufficient time, given the security structure and jurisdiction of the underlying loan, to enforce on the loan collateral and repay the bondholders.

To maintain compliance with applicable regulatory requirements, DB, will retain an ongoing material interest of not less than 5% by selling 95% interest of the securitised senior loans.

Notes:
All figures are in euros 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 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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for these ratings include Deutsche Bank AG, London Branch, Blackstone LLP and their delegates.

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.

These ratings concern a newly issued financial instrument. These are the first DBRS ratings 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”):

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

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

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

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

Class E Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class E at NR
-- 20% decline in DBRS NCF, expected rating of Class E at NR

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: Rick Shi, Assistant Vice President
Rating Committee Chair: Erin Stafford, Managing Director
Initial Rating Date: 30 April 2019

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
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria 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.