DBRS Morningstar Changes Trend to Negative from Stable on Four Italian Retail CMBS Transactions

DBRS Ratings GmbH (DBRS Morningstar) changed the trend to Negative from Stable on all classes of notes issued by Deco 2019 - Vivaldi S.R.L., Emerald Italy 2019 S.R.L., and Pietra Nera Uno S.R.L. Additionally, DBRS Morningstar changed the trend on the Class B, C, D, and E notes issued by Taurus 2018-1 IT S.R.L. to Negative from Stable. The trend on the Class A notes remains Stable. DBRS Morningstar currently rates the notes of the four transactions as follows:

Deco 2019 - Vivaldi S.r.l.:
-- Class A notes at AA (low) (sf)
-- Class B notes at A (low) (sf)
-- Class C notes at BBB (low) (sf)
-- Class D notes at BB (low) (sf)

Emerald Italy 2019 SRL
-- Class A notes at AA (low) (sf)
-- Class B notes at A (low) (sf)
-- Class C notes at BBB (low) (sf)
-- Class D notes at BB (high) (sf)

Pietra Nera Uno S.R.L.
-- Class A notes at AA (low) (sf)
-- Class B notes at A (low) (sf)
-- Class C notes at BBB (low) (sf)
-- Class D notes at BB (sf)
-- Class E notes at B (high) (sf)

Taurus 2018-1 IT S.R.L.
-- Class A notes at AA (low) (sf)
-- Class B notes at A (sf)
-- Class C notes at BBB (sf)
-- Class D notes at BB (high) (sf)
-- Class E notes at BB (low) (sf)

The trend change for the Italian commercial mortgage-backed securities (CMBS) transactions secured by retail properties (i.e., Deco 2019 - Vivaldi S.r.l., Emerald Italy 2019 SRL, and Pietra Nera Uno S.R.L.) is a result of the expected deterioration of the Italian retail sector following the recent outbreak of the Coronavirus Disease (COVID-19) across the country. For more information, please see the commentary, “Italian CMBS: COVID-19 Impact Negative For Italian CMBS Backed By Retail Assets”: https://www.dbrsmorningstar.com/research/357490/italian-cmbs-covid-19-impact-negative-for-italian-cmbs-backed-by-retail-asset. In DBRS Morningstar’s view, the assets’ rental income will be negatively affected by (1) the likely increase in tenants—especially small retailers—underperforming and (2) the expected requests from tenants for “rent holiday” or rent reduction.

In relation to Taurus 2018-1 IT S.R.L., the trend on the Class A notes remains Stable, as the retail exposure in the transaction is limited to the Bel Air loan, which represents only 31% of the securitised balance. This exposure is also substantially offset by the solid performance of the two logistics loans (i.e., the Camelot loan and the Logo loan).

DBRS Morningstar notes that current performance data for the transactions does not yet show the anticipated drop in rental income for the upcoming months. However, the public control measures put in place by the Italian authorities to mitigate the spread of the coronavirus, such as travel restrictions, closure of all shops (except food stores and pharmacies), and the public`s fear of attending crowded places (such as shopping centres or retail outlets), will undoubtedly put pressure on retail sales and consequently the ability of the tenants to keep paying their rent regularly.

Despite the likely decrease of rental income and the breach of loan covenants in the forthcoming months, even if all borrowers stopped paying interest due on the loans, DBRS Morningstar would not expect immediate transaction note events of default to materialise mainly because the transactions benefit from liquidity facilities. DBRS Morningstar expects liquidity facility providers to still be required to perform their obligations. The key exceptions would be (1) the operation of any force majeure clauses in the contract (which DBRS Morningstar could not identify in any of the liquidity facility agreements of the Italian retail CMBS transactions) and (2) the common law concept of frustration (which should not be relevant).

Force majeure clauses in a contract will usually deal specifically with how the party’s obligations are affected by an event that affects one of the party’s ability to perform the contract. Events such as a flu epidemic could, subject to the specific words of the clause, be covered by the standard force majeure clause; however, it is uncertain that a party will be able to rely on it to protect against claims of nonperformance as these clauses are interpreted strictly by the English courts. Typically a party will also need to satisfy a number of tests to the court. In the absence of a force majeure clause, the legal concept of frustration enables a party to be discharged from its contractual obligations if a significant change in circumstances makes it physically or commercially impossible to perform the contract or would mean performing radically different obligations from those originally agreed. Mere inconvenience, hardship, or financial loss involved in performing the contract is insufficient to amount to frustration.

Likewise, DBRS Morningstar does not expect many tenants to exercise a tenant's right, under Italian tenancy laws, to terminate a lease agreement at any time with six months' prior written notice for serious reasons (“gravi motivi”), including objectively and unpredictably worsened economic and market conditions, which make the lease permanently too onerous for the tenant. In the context of the coronavirus outbreak in Italy and the forced closure of many retail shops, DBRS Morningstar is of the view that a temporary reduction in income, which may be currently experienced by certain tenants due to the forced closure of their retail shops, is unlikely to provide per se, at this point in time sufficient grounds for terminating the lease agreements. A different conclusion could be reached in respect of those tenants whose businesses have already materially deteriorated or will do so in the future also as a consequence of a continued lockdown.

Deco 2019 – Vivaldi S.R.L. is a securitisation of two Italian refinancing facilities: the EUR 158.8 million Franciacorta loan and the EUR 63.3 million Palmanova loan, each backed by a retail outlet village in the North of Italy. As for the latest available investors report dated November 2019, the overall vacancy rate of the portfolio increased to 10.4% compared with 8.2% at issuance, whereas the interest service coverage (ICR) is estimated at 2.88 times (x) for the Franciacorta loan and 3.53x for the Palmanova loan. Both loans remain in compliance with the 75% loan-to-value (LTV) and debt yield (DY) cash trap covenants of 7.6% and 9.6%, respectively. The first loan maturity date for both two loans is in August 2021, and both loans have three one-year extension options subject to hedging and no continuing events of default (EOD).

Emerald Italy 2019 S.R.L. is a securitisation of EUR 100.4 million term facility and a EUR 5.4 million capital expenditure (capex) facility advanced by J.P. Morgan Chase Bank, N.A., Milan branch, to Kildare Partners (the Sponsor) for the acquisition of two retail malls and one shopping centre located in the Lombardy region of Northern Italy. The transaction was issued in November 2019. As per the latest available information from December 2019, the transaction figures are mostly in line with the figures at issuance, with the loan’s LTV, debt-service-coverage ratio (DSCR), and DY reported at 65%, 1.68x, and 8.7%, respectively and still in compliance with its 75% LTV, 138% DSCR, and 10.7% DY default covenants. There is currently no refinancing pressure, with the first loan maturity date in June 2022, one-year extension options subject to hedging, and no continuing EOD.

Pietra Nera Uno S.R.L. is a EUR 403.8 securitisation of three senior commercial real estate loans (i.e., the Fashion District loan, the Palermo loan, and the Valdichiana loan) and two pari passu-ranking capex facilities advanced by Pietra Nera Uno S.R.L. (the Issuer). The collateral securing the three loans consists of three regional outlets and one regionally dominant shopping centre in Italy. As of the new valuations conducted in March 2019, the Fashion District loan, the Palermo loan, and Valdichiana loan reported LTVs of 68.9%, 82.0%, and 62.9%, respectively, which represents an overall decrease of the aggregate LTV to 73.2% vs. 74.6% at issuance. Although the Palermo loan’s LTV has increased to 82.0% from 76.4% at issuance, it remains in compliance of its 86% LTV cash trap covenant. As of November 2019, the overall DSCR of the transaction is estimated at 2.79x. The three loans have an initial maturity date in May 2020, but they also have three one-year extension options, provided they meet the hedging requirements and no event of default is continuing.

Taurus 2018-1 IT S.r.l. is a EUR 336.6 million securitisation of three floating-rate senior commercial real estate loans including the (1) EUR 215 million Camelot loan (backed by 16 industrial assets), (2) EUR 110 million Bel Air loan (secured by six shopping centres), and (3) EUR 34.6 million Logo loan (backed by three logistic assets), which were advanced by BAML International Limited, Milan Branch in the cases of the Camelot and Bel Air loan and BAML International Limited for the Logo loan. Based on the February 2020 investors report, the three loans have varying LTVs with the Bel-Air being the lowest leveraged loan at 48.2%, the Logo loan at 56.2%, and the Camelot loan at the highest leverage of 65.8%, for a combined leverage of 62%. The Camelot loan recently exercised the first of three one-year extension options available, postponing the initial maturity date to February 2021. The Logo loan has a maturity date in May 2020 and benefits from three one-year conditional extension options (nonpayment default and borrower is compliant with the hedging requirements). Finally, the Bel-Air loan benefits from a strong liquidity, with a reported DSCR at 2.73x as November 2019 and has a maturity date in May 2021 with two one-year extension options (subject to a 60.0% LTV and 11.0% debt yield).

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology” (13 December 2019).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions 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 these transactions are listed at the end of this press release.

These may be found at: http://www.dbrsmorningstar.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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include servicer reports from CBRE Loan Services, and cash manager reports from Securitisation Services S.P.A. and Zenith Service S.p.A.

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

At the time of the initial rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on Deco 2019 – Vivaldi S.r.l. took place on 12 June 2019 when DBRS Morningstar finalised its provisional ratings on the notes. The last rating action on Emerald Italy 2019 Srl took place on 8 November 2019 when DBRS Morningstar finalised its provisional ratings on the notes. The last rating action on Pietra Nera Uno S.R.L. took place on 22 January 2020 when DBRS Morningstar confirmed its ratings of the notes. The last rating action on Taurus 2018-IT S.r.l. took place on 17 May 2019 when DBRS Morningstar confirmed its ratings on the notes.

The lead analyst responsibilities for all four transactions have been transferred to Rick Shi.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

Taurus 2018-1 IT Srl
Class A Notes Risk Sensitivity:
--10% decline in DBRS Morningstar net cash flow (NCF), expected rating of Class A Notes to A (low) (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class A Notes to BBB (sf)

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

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

Class D Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class D Notes to B (high) (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class D Notes to CCC (high) (sf)

Class E Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class E Notes to B (low) (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class E Notes to CC (high) (sf)

Pietra Nera Uno Srl
Class A Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A at A (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A at A (low) (sf)

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

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

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

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

Deco 2019 – Vivaldi Srl
Class A Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A at A (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A at A (low) (sf)

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

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

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

Emerald Italy 2019 Srl
Class A Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A at A (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A at BBB (high) (sf)

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

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

Class D Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class D at BB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class D to 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 Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar 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 U.S. regulations only.

Taurus 2018-1 IT S.R.L.
Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 24 April 2018

Pietra Nera Uno S.R.L.
Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 February 2018

Deco 2019 – Vivaldi Srl
Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 30 April 2019

Emerald Italy 2019 SRL
Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 9 October 2019

DBRS Ratings GmbH
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The rating methodologies used in the analysis of these transactions can be found at: http://www.dbrsmorningstar.com/about/methodologies/.

-- European CMBS Rating and Surveillance Methodology (13 December 2019), https://www.dbrsmorningstar.com/research/354637/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019), https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.

For more information on these credits or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].