DBRS Morningstar Confirms Ratings of ERNA S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the following classes of notes issued by ERNA S.r.l. (the Issuer):

-- Class A at A (high) (sf)
-- Class B at BBB (sf)
-- Class C at BB (high) (sf)

All trends are Stable.

The confirmations reflect minor variations in leverage of the transaction since issuance. DBRS Morningstar does not expect the transaction’s performance to be significantly disrupted from the Coronavirus Disease (COVID-19) pandemic as the two major tenants under the securitised loan are leading Italian utility companies (Telecom Italia and Enel), accounting for 58.9% and 35.1% of the gross rental income (GRI), respectively, with long lease terms.

The Issuer is the securitisation of four Italian senior commercial real estate loans: the Ermete loan, the Raissa loan, the Excelsia Nove/Nucleus loan, and the Aries loan. The loans were advanced by ERNA S.r.l. The loans were granted as refinancing facilities to four borrowers all ultimately owned and controlled by TPG Sixth Street Partners (the Sponsor).

The properties securing the four loans had a lower market value (MV) of EUR 714.5 million as of the April 2020 interest payment date (IPD) compared with the EUR 741.5 million MV at issuance. The EUR 27.0 million value drop is because of 30 property disposals, which amounted to EUR 22.9 million MV based on the valuation at issuance and the EUR 4.1 million like-for-like MV drop on the remaining assets. The portfolio’s gross rental income reduced to EUR 52.5 million from EUR 53.1 million at issuance. However, the like-for-like GRI increased by EUR 0.6 million when taking into account the EUR 1.1 million GRI (based on issuance data) from disposed assets.

The portfolio’s debt yield (DY) has remained above 12.5% since issuance. However, DBRS Morningstar notes that although the Telecom Italia loan’s DYs have increased since issuance, the Excelsia Nova loan’s DY decreased to 11.4% on April 2020 from 12.5% at the July 2019 IPD. This offsets the deleveraging effect from the property disposals, which are subjected to 15.0% release price premiums. The DY decrease is mostly attributed to the reduction of Enel Italia S.P.A.’s rent to EUR 17.3 million from EUR 19.4 million. Based on Enel’s master lease, the next major lease break is in 2030, six years after the loan maturity. In addition, as DBRS Morningstar noted at issuance, Enel’s lease is under corporate guarantee from the Enel Group, and Enel is permitted to terminate up to EUR 2 million of gross rent payments in aggregate between 2021 and 2027.

DBRS Morningstar estimates that the overall impact of the coronavirus on the transaction is limited because of the long lease terms of the main tenants and the limited impact on the main tenants’ day-to-day business. The servicer’s Q1 2020 investor report included a study conducted by the Sponsor’s advisor who concluded that there was a limited impact on the portfolio as consequence of the coronavirus pandemic. As such, DBRS Morningstar removed the disposed assets from its underwriting analysis but did not update its underwriting assumptions.

DBRS Morningstar updated its net cash flow (NCF) assumptions on the Aries, Ermete, Nucleus, and Raissa loans to EUR 7.1 million, EUR 3.3 million, EUR 12.2 million, and EUR 7.7 million, respectively. By applying the same cap rates (8% for the Aries, Ermete, and Raissa loans and 8.5% for the Nucleus loan), the stressed value of these four loans are EUR 89.2 million, EUR 41.1 million, EUR 143.1 million, and EUR 96.8 million, respectively and all below their respective vacant possession values.

The Sponsor subscribed to the unrated and junior-ranking Class Z notes. This retention note is fully subordinate within the structure and will not receive any principal payments until the Class A, B, and C notes are repaid in full.

At inception, DBRS Morningstar noted that there are potential tax-related liabilities on the Ermete and Excelsia Nove loans. However, DBRS Morningstar believes the tax liability risk to be non-material to the credit quality of the bonds and largely covered by the cash surplus generated by the portfolio.

COVID-19 CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many CMBS transactions, some meaningfully. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 1 June 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/361867/global-macroeconomic-scenarios-june-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings.

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.

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.

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 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 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 rating include April 2020 investor reports and disposed asset list from Securitisation Services S.p.A. and CBRE Loan Servicing Limited, and valuation reports from C&W (U.K.) LLP, CBRE Valuation S.p.A., and Colliers Real Estate Services Italia S.r.l.

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 5 June 2019, when DBRS Morningstar finalised its provisional ratings.

The lead analyst responsibilities for this transaction 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 ratings (the Base Case):

Class A Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at BBB (high) (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at BBB (low) (sf)

Class B Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at BB (high) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at BB (low) (sf)

Class C Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BB (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at B (low) (sf)

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.

Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 10 May 2019

DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction 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 this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].