DBRS Morningstar Downgrades Notes Issued by Deco 2019 - Vivaldi S.r.l. and Pietra Nera Uno S.r.l. and Assigns Negative Trend to All Classes

DBRS Ratings GmbH (DBRS Morningstar) downgraded seven ratings of notes issued by Deco 2019 -Vivaldi S.r.l. and Pietra Nera Uno S.R.L. (collectively, the Issuers) and confirmed the ratings of two tranches of Pietra Nera Uno S.R.L., removing the ratings from Under Review with Negative Implications (UR-Neg.). The ratings are now as follows:

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

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

The trends of all ratings are now Negative.

With these rating actions, all rating were removed from UR-Neg., where they were originally placed on 28 July 2020, following DBRS Morningstar’s analysis of the overall risk exposure of the European CMBS sector to the Coronavirus Disease (COVID-19) and its resulting conclusion that retail properties are more at risk and likely to be affected by the economic fallout of the pandemic than other property types.

The downgrades follow DBRS Morningstar revising its vacancy assumptions for the Franciacorta, Palmanova, and Forum Palermo properties to 12.5%.The Valdichiana property’s vacancy rate assumption was increased to 13.5%, matching the last reported in-place vacancy. DBRS Morningstar also revised its cap rate assumption on Forum Palermo to 7.5% from 6.75% to account for continuing widening yield in the subject property and a lack of liquidity in the submarket. The confirmations of two junior classes in Pietra Nera Uno S.r.l. are mainly the result of the scheduled amortisation of all three loans in the transaction.

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 and mature in 20241 but can be extended to 2024 using should all three extension options be exercised. 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. At issuance, the vacancies of Palmanova and Franciacorta were underwritten at 10% and 8.7% respectively but DBRS Morningstar increased its vacancy assumptions to 12.5%. The resulting DBRS Morningstar net cash flow (NCF) for the two loans are EUR 5.5 million for Palmanova and EUR 11.6 million for Franciacorta. The resulting DBRS Morningstar property value assumptions are EUR 78.5 million for Palmanova and EUR 175.0 million for Franciacorta, respectively representing haircuts of 23.5% and 32.0% to the latest published valuations. For DBRS Morningstar underwriting assumptions at issuance, please refer to the deal’s rating report..

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. As a result of scheduled amortisation, the outstanding balance has reduced to EUR 399,002,495 from EUR 403,810,000 and all loans were extended to 15 May 2021 with two more one-year extension options. Consistent with the approach taken in Deco 2019- Vivaldi S.r.l., DBRS Morningstar increased its vacancy assumptions on Palermo to 12.5% whereas the vacancy of Fashion District loan’s vacancy was kept at 18.6%, which is above the 17.5% vacancy rate in November 2020. Vacancy at the property securing the Valdichiana loan was increased to 13.5% to reflect the latest reported vacancy. DBRS Morningstar also revised its cap rate for Forum Palermo to 7.5% as the asset has seen a value decline since issuance and reflecting the expected longer recovery of the Southern Italy retail property market. The resulting DBRS Morningstar NCF for the Palermo and Valdichiana loans are EUR 11.3 million and EUR 7.5 million, respectively; their DBRS Morningstar values have dropped to EUR 150.6 million and EUR 107.2 million, respectively. The haircuts on all loans are around 30%. For DBRS Morningstar underwriting assumptions at issuance, please refer to the deal’s rating report.

As of the November 2020 loan payment date, all loans breached debt yield covenants and remain in cash trap mode . This is because the flexible payment arrangements agreed between Blackstone LLP (the Sponsor) and the tenants have led to a sharp decrease in net operating income. For the outlet village tenants, the relief package included 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. In Q3 and Q4 2020, the tenants only needed 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 affected tenants and it covered only the months of April and May 2020. In return of rent reliefs, the tenants normally need to agree with the removal of the lease breaks or the extension of the lease terms. Based on the current covenant calculation and with reinstated containment measures in Europe, DBRS Morningstar believes that the cash trap could continue to or beyond Q2 2021. Nevertheless, all five loans in the two transactions can be extended by purchasing hedging for the extended period, as a result DBRS Morningstar does not foresee any difficulties for the borrowers to extend the loans to 2023 for Pietra Nera Uno S.r.l. or 2024 for Deco 2019 – Vivaldi S.r.l.

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.

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 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.

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 these transactions 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 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 time frame from issuance until the November 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 not supplied with third-party assessments for Deco 2019 – Vivaldi S.r.l. but was supplied with third-party assessments for Pietra Nera Uno S.r.l.. 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 26 October 2020, when DBRS Morningstar extended the UR-Neg. status for both transactions.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

Deco 2019 - Vivaldi S.r.l.:
Class A Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A at A (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A at BBB (high) (sf)

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

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class C at BB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class C at B (low) (sf)

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

Pietra Nera Uno S.r.l.:
Class A Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class A at A (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A at BBB (sf)

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

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class C at BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class C at BB (low) (sf)

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

Class E Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class E at below B (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class E at below B (low) (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 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

DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.
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 these transactions 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 (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].