DBRS Morningstar Confirms Class D and E Notes of Deco 2014-Tulip Limited; Assigns Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the Class D and Class E notes issued by Deco 2014-Tulip Limited (the Issuer) as follows:

-- Class D notes at BBB (sf)
-- Class E notes at BB (high) (sf)

DBRS Morningstar has also assigned a Stable trend to both classes of notes.

DBRS Morningstar placed its ratings of the Deco 2014-Tulip Limited’s outstanding classes of notes Under Review with Negative Implications (URN) in July 2020 following its analysis of the risk exposure of the CMBS sector to the Coronavirus Disease (COVID-19) and the resulting conclusion that certain underlying asset classes were more at risk and likely to be affected by the fallout of the pandemic on the economy. Resolving of the URN, confirming the ratings and assigning the Stable trend reflects resilient underlying loan performance amid the coronavirus outbreak and related containment measures.

The confirmations are driven by the transaction’s material deleveraging and the constraining impact resulting from the defaulted status of the underlying loan, which is aggravated by the ongoing uncertainties caused by the coronavirus pandemic. In DBRS Morningstar’s view, the gradually approaching final legal maturity of the notes exerts downward pressure on the ratings, thus limiting the highest achievable rating for the transaction.

Deco 2014-Tulip Limited was originally secured by the Windmolen loan, which was repaid in Q1 2015, and the Orange loan, currently the only remaining loan in the transaction. At issuance, the Orange loan was secured by 11 regional retail properties in the Netherlands. In July 2019, the Orange loan was transferred into special servicing after failing to repay at its maturity in July 2019 as a result of the Orange loan’s borrower being unable to secure a refinancing or finalise the disposal of the then remaining five properties.

The workout strategy contemplated a collaborative properties disposal in agreement with the Orange loan’s borrower. To implement this strategy, the special servicer and the borrower entered into a standstill agreement, whereby they agreed to, among other conditions, not take any steps to accelerate and enforce the loan before the earlier of (1) 29 November 2019, (2) a further loan event of default, or (3) a breach of any term of the standstill agreement.

Two of the assets in the portfolio were successfully disposed in the second half of 2019. The three remaining assets, Corio Center in Heerlen, Meubelplein in Leiderdorp, and Balcour in Zeist, have been actively marketed for sale since the loan defaulted; however, the coronavirus outbreak slowed down the marketing process this year. Consequently, the initial standstill period has been extended several times, most recently until 20 January 2021.

Despite the current challenging environment, the special servicer anticipates that the sales may be achieved as early as the end of this year. DBRS Morningstar notes that the final maturity of the notes in July 2024 is expected to provide sufficient time to complete the disposal process.

The coronavirus crisis has caused a disruption in trade and made a number of tenants temporarily close their activities; however, the majority of shops in the properties have reopened from 1 June 2020. The Orange borrower, in agreement with the special servicer, has granted some tenant concessions on a case-by-case basis, either to defer rental payments or grant rent-free in exchange for a lease extension. While DBRS Morningstar has noted the resiliency of the rental income stream from the properties so far and sufficient excess spread generated by the structure, DBRS Morningstar’s underwriting assumptions were updated to reflect the most recently reported rental income. Additionally, to reflect the risk of a deterioration in performance because of the reinstated containment measures and business closures, DBRS Morningstar increased its assumed aggregated vacancy to 18% from 16.8% in its latest review conducted in October 2019.

In line with the updated assumptions, DBRS Morningstar’s net cash flow (NCF) is EUR 3.5 million, representing a 20% haircut to the most recently reported net rental income. The DBRS Morningstar stressed market value is now EUR 40.5 million, which is 15% below the latest valuation of EUR 47.8 million conducted in August 2019 and 42% below the valuation at the transaction’s inception. Based on the revised and more conservative inputs, DBRS Morningstar’s sizing outcome still shows some upgrade pressure on the notes, which is, however, limited by the tail period and the defaulted status of the loan.

The outstanding notes benefit from the amortising liquidity facility of EUR 2,383,693.47 to cover any potential interest payment shortfalls. The facility is fully cash collateralised, with the funds being held at the account bank Citibank N.A. London branch. DBRS Morningstar has a private rating on Citibank N.A. London branch, which meets its criteria to act in such capacity. The transaction documents contain downgrade provisions consistent with DBRS Morningstar criteria with respect to the ratings assigned to the Class D and Class E notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology. According to DBRS Morningstar’s analysis, the commitment under the facility sufficient to withstand liquidity stresses for more than 18 months.

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 tenants and borrowers. DBRS Morningstar anticipates that vacancy rate increases and cash flow reductions may arise for many CMBS borrowers, some meaningfully. In addition, commercial real estate values will be negatively affected, at least in the short-term, impacting refinancing prospects for maturing loans and expected recoveries for defaulted loans. The ratings are based on additional analysis as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar adjusted its NCF assumptions as outlined above.

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 last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366543/dbrs-morningstar-global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 16 June 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated CMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/362693/european-cmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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: https://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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include servicer reports provided by Deutsche Bank AG, London Branch and Situs Asset Management Limited since issuance.

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

At the time of the initial ratings, 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 28 July 2020 when DBRS Morningstar placed all outstanding classes of Deco 2014-Tulip Limited Under Review with Negative implications.

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

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

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

Class E Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class E at BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class E at BB (high) (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’s historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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: David Lautier, Senior Vice President
Initial Rating Date: 25 September 2014

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://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 (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/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: https://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].