DBRS Morningstar Confirms Ratings on Pietra Nera Uno S.R.L. with Negative Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage-Backed Floating Rate Notes due May 2030 issued by Pietra Nera Uno S.R.L. as follows:

-- Class A Notes at A (sf)
-- Class B Notes at BBB (sf)
-- Class C Notes at BB (high) (sf)
-- Class D Notes at BB (sf)
-- Class E Notes at B (high) (sf)

All trends are Negative.

The rating confirmations reflect the solid performance of the underlying pool over the last 12 months, with improving year-end properties’ results thanks to a gradual relaxation of in-place restrictive measures related to the Coronavirus Disease (COVID-19) pandemic. Nevertheless, the Negative trend reflects the continued uncertainty about whether this performance will be sustained, given that the retail sector is one of the most vulnerable to the pandemic.

The transaction is an agency securitisation of three senior commercial real estate loans (i.e., the Fashion District loan, the Palermo loan, and the Valdichiana loan) and two pari passu-ranking capital expenditure (capex) facilities for a total amount of EUR 403,810,000, which represents a weighted-average (WA) loan-to-value ratio (LTV) of 74.7% at issuance. The loans were advanced by BRE/Europe 7NQ S.à.r.l. to four Italian borrowers, ultimately owned by the Blackstone Group LP (Blackstone; the Sponsor), and are backed by four retail properties across Italy. Deutsche Bank AG, London Branch (the Arranger and Liquidity Reserve Facility Provider) acted as sole arranger of the transaction.

The Fashion District loan is secured by two retail outlet villages—Mantova Outlet Village and Puglia Outlet Village—located in northern and southern Italy, respectively, and managed by Multi Outlet Management Italy S.R.L., Blackstone’s pan-European retail platform managing a total of five retail villages marketed under the ‘Land of Fashion’ brand. The platform also includes the Valdichiana Outlet Village, which backs the Valdichiana loan, while the Palermo loan is secured by a major shopping centre in Sicily—the Forum Palermo—which is the largest asset in the transaction.

As a result of scheduled amortisation, as of November 2021, the total loans’ outstanding balance reduced to EUR 394,964,325 and all loans were extended to 15 May 2022, with another one-year extension option available. The WA debt yield for the whole portfolio increased by 4.6 percentage points (pp) over the last 12 months, according to the most recently published investor report. All three loans’ debt yields recorded increases of between 3.0 and 6.0 pp, though two loans remain below their cash trap trigger levels. In particular, the EUR 173.0 million Palermo loan left cash trap in August 2021, showing a debt yield annual increase to 10.2% from 5.2%. The EUR 125.7 million Fashion District loan's debt yield rose to 7.7% from 4.1% while the EUR 96.3 million Valdichiana loan’s debt yield climbed to 9.0% from 3.7%.

The increase in debt yields is mainly due to increases in net operating income which, in many cases, exceeded budget, according to the latest investor reports. This was largely attributed to the positive impact of 2020’s deferred rent having been collected during 2021 and reduced capex and service charges throughout the closure periods.

CBRE Loan Services Ltd. (CBRE) revalued the four properties in December 2020 at EUR 505.5 million, representing an overall drop of 9.2% from the previous valuation. On an individual-loan basis, the values of the two Fashion District properties—Mantova Outlet Village and Puglia Outlet Village—fell to EUR 165.8 million from a combined valuation of EUR 185.6 million, thus resulting in a 10.7% decline. Forum Palermo saw its value decline by 6.3% to EUR 201.9 million from the previous valuation of EUR 215.4 million. The decline in value of the Valdichiana Outlet Village was more pronounced, as the latest valuation report estimated the asset’s worth at EUR 137.8 million, which is a 11.6% decline from the previous valuation of EUR 155.8 million. As a result, the aggregate portfolio’s LTV increased to 77.9% compared with 72.5% last year and 74.7% at issuance, with the highest individual-loan LTV currently standing at 83.8% for Forum Palermo.

Each of the loans bears interest at a floating rate equal to three-month Euribor (subject to a floor of zero) plus a margin resulting from the WA of the aggregate interest amounts payable to the notes. There are no default covenants on the loans before a change of control.

The transaction benefits from a liquidity reserve facility of EUR 14.7 million (EUR 15.0 at origination), which equals 15.6% of the total outstanding balance of the covered notes and is provided by Deutsche Bank AG, London Branch. The liquidity reserve facility can be used to cover interest shortfalls on the Class A and Class B Notes.

DBRS Morningstar maintained its underwriting assumptions since the last annual review. In particular, DBRS Morningstar maintained its net cash flow (NCF) assumptions at EUR 9.6 million, EUR 11.3 million, and EUR 7.5 million for the Fashion District loan, the Palermo loan, and the Valdichiana loan, respectively. DBRS Morningstar also maintained its property value assumptions at EUR 123.8 million for the Fashion District loan, EUR 150.6 million for the Palermo loan, and EUR 107.2 million for the Valdichiana loan, respectively, representing haircuts of 25.3%, 25.4%, and 22.2% to the most updated valuations, respectively. For DBRS Morningstar’s underwriting assumptions at issuance, please refer to the transaction’s rating report.

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 CMBS borrowers. In addition, commercial real estate values could 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 euros 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 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 these ratings include servicer reports, updated rent roll and valuation reports provided by CBRE as well as investor and cash management reports provided by Securitisation Services S.p.A.

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 27 January 2021, when DBRS Morningstar downgraded its ratings on the Class A, Class B, and Class C Notes to A (sf), BBB (sf), and BB (high) (sf) from AA (low) (sf), A (low) (sf), and BBB (low) (sf), respectively. DBRS Morningstar also confirmed its ratings on the Class D and Class E Notes at BB (sf) and B (high) (sf) and assigned a Negative trend to the ratings on all Notes.

The lead analyst responsibilities for this transaction have been transferred to Violetta Volovich.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at 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 ratings (the Base Case):

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

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

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

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

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

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.

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 Limited for use in the United Kingdom.

Lead Analyst: Violetta Volovich, Senior Analyst
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 (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].