DBRS Morningstar Confirms Ratings on Emerald Italy 2019 SRL with Negative Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating Rate Notes due September 2030 issued by Emerald Italy 2019 SRL as follows:

-- Class A at A (low) (sf)
-- Class B at BBB (low) (sf)
-- Class C at B (high) (sf)
-- Class D at B (low) (sf)

DBRS Morningstar maintains the Negative trend on the ratings. DBRS Morningstar also removed the interest in arrears designation for the Class C and Class D notes following repayment of deferred interest.

The ratings confirmation reflects the portfolio’s relatively stable performance over the last 12 months and the recent borrower’s efforts to remedy some of the loan breaches through the repayment of the deferred interest and the deleveraging of the transaction. The Negative trend on all tranches reflects remaining uncertainties around the public health crisis and retail environment, which could result in potential disruptions in the rent collection process.

The transaction is a securitisation of 100% of an Italian commercial real estate loan advanced by J.P. Morgan Chase Bank, N.A., Milan Branch and arranged by J.P. Morgan Securities PLC. The securitised loan comprises a EUR 99.1 million term facility (EUR 100.4 million at inception) and a EUR 2.4 million capital expenditure (capex) facility (EUR 5.4 million at inception). The loan is secured against a portfolio of two retail malls and one shopping centre located in the Lombardy region of northern Italy. The borrower is Investire Società Di Gestione Del Risparmio S.P.A., acting on behalf of an Italian real estate alternative closed-end fund (fondo comune di investimento immobiliare alternative di tipo chiuso riservato) named Everest, which is ultimately owned by Kildare Partners (the sponsor).

As a result of the tenant rent disruption caused by the Coronavirus Disease (COVID-19) pandemic, the borrower has suffered cash flow deterioration and, as a result, has been unable to comply with a number of its obligations, including interest payment and financial covenants. The loan was transferred into special servicing on 19 June 2020, with the event of default still continuing.

With the borrower expecting to continue to breach certain provisions of the Facility Agreement during at least part of 2021 and potentially part of 2022, the borrower has requested to enter into the Standstill Agreement until the Initial Termination Date on 15 September 2022. DBRS Morningstar understands that the Standstill Agreement will be shortly put to noteholder vote. Together with the Standstill Agreement, the borrower has provided a cash flow forecast, a capex investment plan, and a payment schedule throughout to Q3 2022.

On the September 2021 loan payment date, the borrower fully met its debt service obligations and the commitments outlined in the payment schedule. Namely, the borrower paid EUR 1.5 million in interest this quarter, including EUR 491,000 to pay off the unpaid interest, as well as EUR 3.0 million to amortise the capex loan principal.

As a result, the loan-to-value (LTV) ratio currently stands at 61.4% (net of the funds deposited on the capex account), or 62.9% including the capex facility. DBRS Morningstar notes that the LTV value is still based on the EUR 161.4 million initial valuation provided by Cushman & Wakefield plc (C&W) in March 2019, as the valuation update has differed on the basis of volatile market conditions.

As of June 2021, the total portfolio vacancy rate stood at 14.4% compared with the 17.9% rate at a time of last surveillance and 8.5% at issuance. Meanwhile, the weighted-average unexpired lease term (WAULT) remains at 3.1 years, unchanged since issuance. Although the incentives granted to the tenants to compensate for the negative impact on turnover and footfall have influenced the rent collection process, DBRS Morningstar notes that there is no significant deviation in the portfolio’s performance since the last surveillance.

In its underwriting, DBRS Morningstar assumed a vacancy of 20.0%, which resulted in a DBRS Morningstar net cash flow (NCF) of EUR 8.6 million and a 35.1% haircut to the estimated rental value of EUR 13.3 million. DBRS Morningstar applied a capitalisation rate of 9.0% to the underwritten NCF and arrived at a DBRS Morningstar-stressed value of EUR 95.7 million, which represents a 40.1% haircut to the EUR 161.4 million market value provided by C&W.

The first loan maturity is on 15 September 2022, with a one-year extension option provided that the loan is fully hedged and there are no continuing events of default. The legal final maturity of the notes is in September 2030, seven years after the latest possible loan maturity on 15 September 2023. In DBRS Morningstar’s view, such tail period provides the special servicer with sufficient time to work on a recovery of the collateral value and mitigates the refinancing risk of the transaction.

The transaction benefits from a liquidity facility of EUR 5,007,474.05 (EUR 5,290,000.00 committed at closing) to cover any potential interest payment shortfalls on the Class A and Class B notes, including the corresponding retention tranches. The liquidity facility was drawn once on 23 December 2020 in the amount of EUR 396,054.16 and repaid on 24 March 2021. According to DBRS Morningstar’s analysis, the commitment amount at closing was equivalent to approximately 23 months of coverage based on the hedging term or approximately 10 months of coverage and the 5% Euribor cap. DBRS Morningstar does not rate the liquidity provider, but maintains public ratings on JPMorgan Chase Bank, N.A. at AA/R-1 (middle) with Stable trends.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to 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 commercial mortgage-backed security (CMBS) borrowers, some meaningfully. In addition, commercial real estate values will be negatively affected, at least in the short term, affecting refinancing prospects for maturing loans and expected recoveries for defaulted loans.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns
and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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-coronaviruscovid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “European CMBS Rating and Surveillance Methodology” (26 February 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

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.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include servicer reports and notices provided by Securitisation Services S.p.A. and CBRE Loan Services Ltd.

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 2 October 2020 when DBRS Morningstar downgraded its ratings on the notes with a Negative trend.

The lead analyst responsibilities for this transaction have been transferred to Daniel Rakhamimov.

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

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

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

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

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

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

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 9 October 2019

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: http://www.dbrsmorningstar.com/about/methodologies.

-- European CMBS Rating and Surveillance Methodology (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Currency Stresses for Global Structured Finance Transactions (18 February 2021), https://www.dbrsmorningstar.com/research/373856/currency-stresses-for-global-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://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].