DBRS Morningstar Confirms Ratings on Deco 2019 - Vivaldi S.r.l. with Negative Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage-Backed Floating Rate Notes due August 2031 issued by Deco 2019 - Vivaldi S.r.l. as follows:

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

The trends on all ratings are Negative.

The rating confirmations reflect positive reletting dynamics and improvement in the transaction’s performance following gradual relaxation of the containment measures related to the Coronavrus Disease (COVID-19) pandemic. Nevertheless, the Negative trends continue to reflect ongoing uncertainty in the retail sector.

The transaction is a securitisation of approximately 95% interest in two Italian refinancing facilities (e.g., the Franciacorta loan and the Palmanova loan), each backed by a retail outlet village managed by Multi Outlet Management Italy S.r.l. The borrowers are ultimately owned by funds of the Blackstone Group L.P. (Blackstone; the Sponsor) and are managed by Kryalos SGR S.p.A. The loans are interest only prior to a permitted change of control; therefore, their loan balances remained unchanged since closing at EUR 167,245,000 (EUR 158,880,000 securitised) for the Franciacorta loan and at EUR 66,690,000 (EUR 63,350,000 securitised) for the Palmanova loan.

The collateral securing the loans comprises two retail outlet villages in northern Italy. These villages, together with another three properties securitised in the DBRS Morningstar-rated Pietra Nera Uno S.r.l. transaction, are marketed under the ‘Land of Fashion’ platform, which Blackstone established to collectively manage these five properties. CBRE (the appraiser) valued the Franciacorta property at EUR 257.3 million and the Palmanova property EUR 102.6 million at origination. CBRE undertook a new valuation in October 2020, revaluing the two assets at EUR 228.0 million and EUR 89.1 million, respectively. Thus resulting in a decline in value of 11.4% for the Franciacorta asset and 13.2% for the Palmanova asset. This led to the loan-to-value increasing to 73.3% and 74.8% for the Franciacorta and Palmanova loans, respectively, which are still below the cash trap level of 75.0%.

The disruption related to the coronavirus pandemic continued to challenge the transaction’s performance with some volatility observed in vacancy rates and net rental income. However, DBRS Morningstar notes positive reletting dynamics over the two last quarters as well as an improvement in the net rent levels. As of November 2021, vacancy stood at 14.0% and 14.9% for the Franciacorta and the Palmanova loans, respectively, with the servicer confirming that several additional leases were signed in December 2021. Net income almost doubled since the last review, increasing to EUR 11.6 million in November 2021 from EUR 5.7 million a year earlier for the Franciacorta loan and to EUR 5.4 million in November 2021 from EUR 2.8 million over the same period for the Palmanova loan. Despite these positive dynamics, both loans’ debt yields (DY) still remain below their respective cash trap levels of 7.6% and 9.6%, respectively. As of the latest interest payment date, the DY stood at 6.9% and 8.0% for the Franciacorta and the Palmanova loans, respectively.

As a result, DBRS Morningstar did not revise its underwriting assumptions and confirmed the ratings on all classes with Negative trends, reflecting the continued uncertainty in the retail market. For the Franciacorta loan, DBRS Morningstar’s Net Cash Flow (NCF) and Value remain at EUR 11.5 million and EUR 175.0 million, respectively. This represents a 23.2% haircut to the latest asset valuation. For the Palmanova loan, DBRS Morningstar’s NCF remains at EUR 5.5 million and DBRS Morningstar Value continues to stand at EUR 78.5 million, representing a 12.0% haircut to the latest asset valuation. For DBRS Morningstar’s underwriting assumptions at issuance, please refer to the transaction’s rating report.

The transaction is supported by a EUR 10.5 million liquidity facility, which equals 4.7% of the total outstanding balance of the covered bonds. The liquidity facility is provided by Deutsche Bank AG, London Branch and can be used to cover interest shortfalls on the Class A and B notes.

The initial loan maturity of the loans was in August 2021, with one of three one-year extension option exercised. The fully extended maturity of the loans is in August 2024 and the final legal maturity of the notes is in August 2031, seven 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 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 valuation reports, leasing and arrears breakdowns provided by CBRE Loan Services, as well as investor and payment reports provided by Zenith Service 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, Class C, and Class D notes to A (high) (sf), BBB (sf), and BB (high) (sf), and B (high) (sf) from AA (low) (sf), A (low) (sf), BBB (low) (sf), and BB (low) (sf), respectively, 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 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 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class B Notes to BBB (low) (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class B Notes to BB (high) (sf)

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

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class D Notes to CCC (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class D Notes to CCC (low) (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: 30 April 2019

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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].