DBRS Morningstar Confirms Ratings on Deco 2019-RAM DAC with Negative Trends

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes due August 2030 issued by Deco 2019-RAM DAC (the Issuer):

-- Class A at A (low) (sf)
-- Class B at BBB (low) (sf)

The trends on all ratings remain Negative.

The rating confirmations reflect positive reletting dynamics and the transaction’s relatively stable performance over the last 12 months. The ratings are based on information provided to DBRS Morningstar by the servicer as of the date of this press release.

The transaction is a 95% securitisation of an originally GBP 150.0 million (42.7% loan-to-value (LTV) ratio) floating-rate senior commercial real estate (CRE) loan advanced by Deutsche Bank A.G., London Branch (Deutsche Bank, the loan seller and arranger) to The Wilmslow (No.3) L.P. (the borrower), which was ultimately owned by a newly formed joint venture between the Intu Properties plc (Intu) and Cale Street Investments LP (Cale Street). Cale Street is backed by the Kuwait Investment Authority, which was formed in 1953 and has approximately USD 692.9 billion in assets according to data from the Sovereign Wealth Fund Institute. Following Intu’s collapse into administration in June 2020, Cale Street purchased Intu’s interest, becoming the sole owner of the borrowing entity.

The loan is backed by Derbion (formerly Intu Derby), a 1.3 million square foot shopping mall located southeast of the Derby city centre in England. Jones Lang LaSalle (JLL or the appraiser) valued the shopping centre at GBP 351.0 million at origination. A new lender valuation was undertaken in October 2020 where the appraiser, JLL, valued the shopping centre at GBP 203.5 million, representing a 42.0% decline from the issuance value. Following this and deterioration in the transactions performance amid Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar downgraded its ratings on all classes of notes with Negative trends on 23 December 2020.

In April 2020, one of the anchor tenants, Debenhams, appointed administrators, which triggered a Major Tenant Event under the Facility Agreement. Subsequently, 0.25% of the original loan balance (GBP 375,000) was accumulated in the Cash Trap Account each quarter. The former Debenhams’ space was let to the Frasers Group plc (Frasers) in the latest quarter, rendering the Major Tenant Event no longer applicable with accumulated funds used toward repayment of the loan.

An additional paydown of GBP 2,386,875 was applied in the latest quarter in line with the agreement reached in respect of the waivers of interest coverage ratio (ICR) and LTV covenants until April 2022. The aggregate loan prepayment totaled GBP 6,625,000 (GBP 6,319,875 at a securitised level) since the last review, which reduced the loan balance to GBP 143.4 million (GBP 136.2 million for the securitised part). This resulted in the whole-loan LTV decreasing to 70.5% from 73.7% while the ICR moved to 1.78 times (x) from 1.47x at last review. Despite positive dynamics, both covenants are still below their respective threshold levels of 58.5% and 2.5x, respectively.

The disruption related to the COVID-19 pandemic continued to challenge the transaction’s performance with some volatility observed in contracted rent levels due to incentives offered to new tenants. However, DBRS Morningstar notes a decline in the level of rent arrears as well as positive letting dynamics, with the borrower agreeing to a long-term lease with Frasers. As a result, DBRS Morningstar did not revise its underwriting assumptions and confirmed the ratings on all classes of notes with Negative trends, reflecting continued uncertainty in the retail market. DBRS Morningstar’s Net Cash Flow (NCF) and DBRS Morningstar’s Stabilised Cap Rate remain at GBP 19.1 million and 10.0%, respectively. This results in a DBRS Morningstar Value of GBP 191.1 million, which represents a 6.1% haircut to the latest asset valuation and a 45.5% haircut to valuation at issuance.

The transaction benefits from a liquidity facility of GBP 4.8 million (GBP 5.0 million at issuance), which equals 3.5% of the total outstanding balance of the covered notes. The liquidity facility is provided by Deutsche Bank and can be used to cover any potential shortfalls on the Issuer’s senior expenses, Class A and B interest, and property protection loans. According to DBRS Morningstar’s analysis, the commitment amount could provide interest payments on the covered notes of up to 12 months based on the hedging term.

The initial loan maturity of the loan is August 2024, with a one-year extension option subject to certain conditions, 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.

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 continue to arise for many commercial mortgage-backed security (CMBS) borrowers, some meaningfully. In addition, CRE values will be negatively affected, at least in the short term, affecting refinancing prospects for maturing loans and expected recoveries for defaulted loans. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology” (17 December 2021).

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.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction 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.

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 these ratings mainly include servicer reports provided by Situs Asset Management Ltd. since issuance.

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 this transaction took place on 23 December 2020, when DBRS Morningstar downgraded the ratings on all notes with Negative trends.

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

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

Class B 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)

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.
These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 September 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 (17 December 2021), https://www.dbrsmorningstar.com/research/389947/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.
-- 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: 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].