DBRS Morningstar Maintains Ratings Under Review With Negative Implications on Deco 2019-RAM DAC

DBRS Ratings Limited (DBRS Morningstar) maintained its Under Review with Negative Implications status on the Class A and Class B notes issued by Deco 2019-RAM DAC (the Issuer). The notes are currently rated as follows:

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

The rating actions follow DBRS Morningstar placing the notes Under Review with Negative Implications on 27 July 2020 after carrying out an analysis of the overall risk exposure of the European CMBS sector to the Coronavirus Disease (COVID-19) and the resulting conclusion being that certain asset classes are more at risk and likely to be affected by the fallout of the pandemic on the economy.

Deco 2019-RAM DAC is the securitisation of 95.0% of a commercial real estate loan backed by Intu Derby (the asset), 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) to The Wilmslow (No.3) L.P. (the borrower), which was ultimately owned by a joint venture between the Intu Group and Cale Street Investments LP (Cale Street, together with Intu Group, the sponsors). The Intu Group was also the property manager of the asset.

Following the administration of the Intu Group, Savills has been appointed as new property manager of the property, whereas Cale Street has indicated its intention to acquire Intu’s interest in the borrower entity to become the sole beneficial owner of the asset. The facility agent confirmed that as a result of this acquisition, it will not enforce any of the lender’s rights under the loan change of control provisions.

As of August 2020, Situs Asset Management (the servicer) reported that there was a significant impact on sales as a result of the coronavirus pandemic. The interest coverage ratio for the quarter fell to 2.36x from 3.66x in the previous quarter. The levels are now below both the cash trap level of 3.10x and default levels of 2.50x; however, the borrower and the facility agent agreed on certain amendments and waivers until April 2021, including, inter alia, that any breach of projected interest cover covenant shall not give rise to a loan default or a loan event of default.

DBRS Morningstar has extended the under review status of the transaction until a new valuation becomes available to better assess the impact on the asset as a result of the persisting economic uncertainty and market volatility.

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.

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/366542/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 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 principal methodology.

DBRS Morningstar is undertaking a review and will remove the ratings from this status as soon as it is appropriate.

A review of the transactions’ 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 the data tape provided by Deutsche Bank AG London Branch, various due diligence reports prepared by the delegates of Deutsche Bank AG London Branch, and servicer investor reports prepared by 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 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-RAM DAC took place on 27 July 2020 when DBRS Morningstar placed its ratings Under Review with Negative Implications.

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

The ratings are Under Review with the Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. If heightened market uncertainty and volatility persist, DBRS Morningstar may extend the Under Review status for a longer period of time. A sensitivity analysis is not applicable.

For further information on DBRS Morningstar 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 Limited are subject to EU and U.S. regulations only.

Lead Analyst: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 July 2020

DBRS Ratings Limited
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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].