DBRS Morningstar Changes Trend on Deco 2019-RAM DAC to Negative from Stable

DBRS Ratings Limited (DBRS Morningstar) changed the trend on the ratings of the Class A notes and Class B notes issued by Deco 2019-RAM DAC (the Issuer) to Negative from Stable. DBRS Morningstar currently rates the classes of notes as follows:

-- Class A notes at AAA (sf)
-- Class B notes at AA (sf)

The trend change is a result of the expected further deterioration of the UK retail sector, following the recent outbreak of the Coronavirus Disease (COVID-19) across the country. In an industry that is already facing strong competition from online sales and rising costs pressures (including property costs, increased staff costs, the devaluation of the British pound sterling etc.), the spread of the coronavirus in the UK will negatively affect the asset’s rental income by (1) the likely increase in tenants—especially small retailers—underperforming, and (2) the expected requests from tenants for company voluntary agreements or “rent holidays”.

Deco 2019-RAM DAC is the securitisation of 95.0% of a commercial real estate loan backed by Intu Derby, a regional shopping centre in Derby, England. The GBP 150.0 million senior loan was advanced by Deutsche Bank A.G., London Branch (Deutsche Bank, the loan seller, and arranger) to The Wilmslow (No.3) L.P. (the borrower), which is ultimately owned by a newly formed joint venture between the Intu Group and Cale Street Investments LP (together with Intu Group, the sponsors). The Intu Group acts as property manager for the asset as well.

DBRS Morningstar expects a significant decrease in the property’s rental income in the upcoming months and potentially the breach of the loan’s loan-to-value (LTV) or interest coverage ratio (ICR) cash trap covenants, set at 52,7% and 3.1 times (x), respectively. However, in DBRS Morningstar’s opinion, liquidity issues for the transaction are unlikely in the foreseeable future because of the strong cash flow, 4.16x ICR as of the latest investors report dated February 2020, and the GBP 5 million liquidity facility provided by Deutsche Bank, covering any potential shortfalls on the issuer’s senior expenses, Class A and B interest, and property protection loans. According to DBRS Morningstar’s analysis, the commitment amount will be approximately 12 months of coverage based on the hedging term and in line with similar liquidity facility agreements, DBRS Morningstar could not identify any force majeure clause that could prevent the liquidity facility provider to perform its contractual obligations.

In the last quarter vacancy levels marginally increased, to 7.57% from 7.33%, with the number of tenants departing exceeding new leases. There is currently no refinancing pressure, with the LTV stable at 42.74% since issuance and the loan expected maturity date in July 2024.

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 British pound sterling 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 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 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 cash manager report from Deutsche Bank AG, London Branch and investor report from Situs Asset Management.

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 this transaction took place on 4 October 2019 when DBRS Morningstar finalised the provisional ratings of the notes.

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):

Class A Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar net cash flow (NCF), expected rating of the Class A notes at AA (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class A notes at A (high) (sf)

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of the Class B notes at A (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of the Class B notes at A (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 Limited are subject to EU and US regulations only.

Lead Analyst: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 September 2019

DBRS Ratings Limited
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Registered and incorporated under the laws of England and Wales: Company No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (11 September 2019) https://www.dbrsmorningstar.com/research/350234/legal-criteria-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
-- 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
-- European CMBS Rating and Surveillance Methodology (13 December 2019)
https://www.dbrsmorningstar.com/research/354637/european-cmbs-rating-and-surveillance-methodology

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 this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].