DBRS Finalises Provisional Ratings on Deco 2019 – Vivaldi S.r.l.

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

-- Class A at AA (low) (sf)
-- Class B at A (low) (sf)
-- Class C at BBB (low) (sf)
-- Class D at BB (low) (sf)

All trends remain Stable.

The transaction is a securitisation of approximately 95% interest of two Italian refinancing facilities (e.g., the Palmanova loan and the Franciacorta loan) each backed by a retail outlet village managed by Multi Outlet Management Italy. The borrowers of Franciacorta are the combination of the property company (PropCo) and holding company (HoldCo) borrowers: Franciacorta Retail Srl and Frankie Retail HoldCo Srl. 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 Valdichiana loan was removed from the transaction prior to closing.

The aggregate balance of the senior loans at closing has been brought down to EUR 233.9 million from EUR 360.99 million after the removal of the Valdichiana loan and downsizing of the loan amounts. The securitised balance at closing is EUR 222.2 million or 95% of the total senior loan amounts. The senior loan for Franciacorta is divided into two tranches, term facilities A and B, which will be advanced to the relevant PropCo and HoldCo. Each securitised loan has a two-year term with three one-year extension options, subject to certain conditions being met.

The sponsor has planned to restructure the borrower structure of the Franciacorta loan 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 HoldCo will not have sufficient cash to service its 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 Italian law, the Holdco debt will rank junior to any unsecured creditors of the relevant PropCos. To mitigate such risk, the Sponsor will establish irrevocable letters of credit provided by Wells Fargo and Bank of America N.A. in favour of Frankie Retail Holdco Srl for a total amount of EUR 5.5 million commitment, which is expected to cover the HoldCo portion’s fully extended five-year interest payments. The letters of credit will expire on 28 May 2020, but can be renewed at least three months prior to its expiration.

The collateral securing the loans comprises two retail outlet villages located in northern Italy. These retail outlet villages, together with another three properties in Valdichiana, 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,” which provides access to all 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 91.8% physical occupancy and generated a total EUR 20.6 million gross rental income, together with another EUR 1.3 million sundry income. The total rental income amounts to EUR 21.9 million, translating into a day-one gross debt yield (DY) of 8.8% based on the EUR 233.9 million senior loans. It should be noted that the Franciacorta asset 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 359.9 million on 28 February 2019, bringing the overall loan-to-value (LTV) ratio to 65.0%, 55.0% of which is from the PropCo debts and 10.0% from the HoldCo debts.

The DBRS net cash flow (NCF) for the entire portfolio is EUR 14.5 million, which represents a 29.9% 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 215.1 million, which represents a 40.2% haircut to the market value provided by the appraiser.

The loan structure now includes financial default covenants applicable after the occurrence of a permitted change of control. LTV default covenants are set at the lower of 15 percentage points higher than the LTV at the time of a permitted change of control and 80% while the DY covenants are set at 85% of the DY at permitted change of control. Following the reduction of debt amount, the cash trap default covenants are revised to 75% LTV for both loans while the DY cash trap covenants are set at 7.6% for the Franciacorta loan and 9.6% for the Palmanova loan.

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 to satisfy DBRS’s criteria; (3) the term of the hedging is in line with the maturity date of the loan; and (4) the projected interest coverage ratio at the strike rate is not less than 200% at the date on which the relevant hedging transaction is contracted.

The transaction is supported by a EUR 10.5 million liquidity facility to be provided by Deutsche Bank AG, London Branch (Deutsche Bank). 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 into an account under the control of the Issuer.

Class D 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, Deutsche Bank 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 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: 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.

The ratings were disclosed to the Deutsche Bank AG, London Branch and amended following that disclosure before being assigned.

The last rating action on this transaction took place on May 21, 2019, when DBRS confirmed all provisional ratings following the downsizing of the debt amount.

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 (high) (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 (sf)
-- 20% decline in DBRS NCF, expected rating of Class D 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
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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.