DBRS Morningstar Maintains Ratings Under Review With Negative Implications on Deco 2019 - Vivaldi S.r.l. and Pietra Nera Uno S.R.L.

DBRS Ratings GmbH (DBRS Morningstar) extended its Under Review with Negative Implications (UR-Neg.) status on all the notes issued by Deco 2019 -Vivaldi S.r.l. and Pietra Nera Uno S.R.L. (collectively, the Issuers). The notes are currently rated as follows:

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

Pietra Nera Uno Srl:
--Class A at AA (low) (sf)
--Class B at A (low) (sf)
--Class C at BBB (low) (sf)
--Class D at BB (sf)
--Class E at B (high) (sf)

The rating actions follow DBRS Morningstar placing the notes UR-Neg. on 28 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 -Vivaldi S.r.l. is a securitisation of approximately 95% interest of two refinancing facilities, the Palmanova loan and the Franciacorta loan, backed by two retail outlet villages located in Northern Italy. The Palmanova loan’s borrower is Palmanova PropCo Srl. Following the completion of the Franciacorta group reorganisation, the borrower of the Franciacorta loan has changed to Frankie Retail Holdco S.r.l. The borrowers are ultimately owned by the funds controlled by Blackstone LLP (the Sponsor). The loans are interest only prior to a permitted change of control, therefore their aggregate outstanding balance remains unchanged since closing at EUR 233,935,000.

Pietra Nera Uno S.R.L. is an agency securitisation of three floating-rate senior commercial real estate loans (i.e., the Fashion District loan, the Palermo loan, and the Vanguard loan) and two pari passu-ranking capital expenditure (capex) facilities. The loans were advanced to refinance the existing indebtedness of the borrowers, and in the case of the capex loans, to finance the planned capital improvement projects at the Palermo and the Puglia assets. The loans are backed by four properties (the Fashion District loan is secured by two properties) and are ultimately owned and managed by the Sponsor. As a result of the amortisation, the outstanding balance has reduced to EUR 400,011,950 from EUR 403,810,000and all loans have been extended to 15 May 2021.

As of the August 2020 loan payment date, all loans are in cash traps as a result of the relief package provided by the Sponsor. For the outlet village tenants, the relief package includes the exemption from the payment of any base rent during the lockdown period (11 March to 18 May 2020) and the payment of only 50% of the service charges. For Q3-Q4 2020, the tenants will only need to pay turnover rent or 50% of base rent if the former is lower together with 100% of service charges. For tenants in the Forum Palermo shopping centre, the Sponsor offered rent discounts, but the offering was only granted to the more severely impacted tenants and covers only the months of April and May 2020. In return of rent reliefs, the tenants need to agree with the removal of the lease breaks or the extension of the lease terms.

However, in the context of the second wave of the coronavirus outbreak, European countries are regularly reevaluating their lockdown rules and may enforce more restrictions in the near term. As such, DBRS Morningstar has extended its URN status of the transactions for another 90 days. The extension of URN is also supported by the uncertainty of whether the cash trapped proceeds will be used to prepay the loans as this is at the borrower’s discretion (unless there is a shortfall in debt service paid) compared with traditional structure where cash trapped proceeds will be used to prepay the loan after continuing over two consecutive payment dates. Based on the current covenant calculation, DBRS Morningstar believes that the cash trap could continue to or beyond Q2 2021. Moreover, given both transactions’ valuations are more than one-year old, new valuations may become available in the coming 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.

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 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 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 these transactions 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 investor reports provided by CBRE Loan Services Limited, Zenith Service S.p.a., and Securitisation Services S.p.A covering the timeframe from issuance until the August 2020 note payment date.

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 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 for Deco 2019 – Vivaldi S.r.l. and Pietra Nera Uno S.R.L. took place on 28 July 2020, when DBRS Morningstar placed both transactions UR-Neg.

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 GmbH are subject to EU and U.S. regulations only.

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

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

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