DBRS Morningstar Downgrades Class A and B Notes Issued by Deco 2019 RAM DAC; Assigns Negative Trends

DBRS Ratings Limited (DBRS Morningstar) downgraded the ratings of the Class A and B of the Commercial Mortgage-Backed Floating Rate Notes due August 2030 issued by Deco 2019 RAM DAC (the Issuer) as follows:

-- Class A to A (low) (sf) from AAA (sf)
-- Class B to BBB (low) from AA (sf)

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

Deco 2019-RAM DAC (the Issuer) 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.

DBRS Morningstar placed 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). The resulting conclusion was that certain asset classes were more at risk and likely to be affected by the fallout of the pandemic on the economy.

On 9 September 2020, Cale Street consolidated its ownership of the asset, following Intu’s administration. Consequently, Intu Properties plc was removed from the list of approved asset managers and the servicer , Situs Asset Management, informed the Issuer that Savills (UK) Limited (Savills) had been appointed by the limited partnership as managing agent and asset manager, respectively, under a new property management and asset management agreement dated 8 September 2020.

The acquisition of Intu’s 50% interest into the borrower should have triggered the loan change of control clause and subsequently the obligation of repaying the whole facility by the new borrower. However, the borrower facility agent and the servicer decided to waive such provision until April 2021 in exchange for the sponsor continuing to support the transaction and service its debt. All rated classes of notes continue to pay interest as of the November 2020 interest payment date.

The downgrade action is driven by the performance deterioration of the asset since issuance, which is crystallised by the material value decline of the property as reflected in the most recent valuation dated September 2020 by Jones Lang LaSalle’s (JLL). According to the figure provided by the servicer the value has fallen by 42% to GBP 203.5 million from GBP 351.0 million at issuance. DBRS Morningstar notes that the full valuation report was not shared by the servicer and the information provided was limited to the valuation figure and rental income.

Troubled by the ongoing restrictions imposed by the government as a result of the pandemic, the 90+days arrears in collections increased whilst rental income continued to fall in the last August-November reported quarter period. During the quarter, 12 tenants surrendered their lease whilst 7 new leases were agreed. Notable new additions included Zara who agreed a new turnover based lease for 14 months paying GBP 285k for the quarter and Home Bargains who agreed on a new 5 year lease paying GBP 25k per annum. 9 waivers and concessions were given to the likes of New Look, Poundstretcher, Pizza Express and Debenhams. The total rent collected for the quarter was GBP 6.4 million versus GBP 10.4 million in the previous reporting period.

Debenhams, one of the anchor tenants appointed administrators in April 2020, which triggered a Major Tenant Event under the Facility Agreement consequently a further 0.25 percent of the Original Loan Balance (GBP375,000) was paid into the Cash Trap Account. If this amount is standing to the credit of the Cash Trap Account for four Interest Payment Dates (including April 2020) on the fourth Interest Payment Date (Jan 2021) the agent will withdraw these funds and apply them towards repayment of the loan.

DBRS Morningstar has revised its underwriting assumptions. Net cash flow is now GBP 19.1 million versus GBP 21.3 million and the cap rate has been adjusted to 10% from 7.4% at inception, resulting in DBRS Morningstar’s new value assumption of GBP 191.1 million and a DBRS loan-to-value ratio of 79%. This represents a 6.1% haircut to the new asset value and a 34% haircut to DBRS Morningstar’s value assumption at issuance.

The initial loan maturity of the loan is August 2024, with a one-year extension option, which brings the fully extended maturity of the loan to August 2025. The final legal maturity of the notes is in August 2030, five years after the fully extended loan maturity date. DBRS Morningstar believes that this provides sufficient time, given the security structure and jurisdiction of the underlying loan, to enforce on the loan collateral and repay bondholders.

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 continue 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 revised its property value assumption as outlined above, considering an updated valuation and rental income development.

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 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-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 transactions in accordance with the principal methodology.

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 investors reports provided 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 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 on these transactions took place on 20 October 2020 when DBRS Morningstar maintained its ratings under review with negative implications on all tranches.

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):

A decrease of 10% and 20% in the DBRS Morningstar net cash flow (NCF), derived by looking at comparable market rents, market occupancies in addition to expense ratios, and capital expenditure, would lead to a downgrade in the transaction, as noted below for each class, respectively.
Class A Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class A Notes to BBB (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class A Notes to BB (high) (sf)
Class B Notes Risk Sensitivity:
--10% decline in DBRS Morningstar NCF, expected rating of Class B Notes to BB (sf)
--20% decline in DBRS Morningstar NCF, expected rating of Class B Notes to B (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.

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

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: 23 October 2019

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
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: 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].