DBRS Morningstar Confirms Ratings on ERNA S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of commercial mortgage-backed notes (due July 2031) issued by ERNA S.r.l.:

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

All trends are Stable.

The confirmation of the ratings reflects the transaction’s stable performance over the past 12 months, with no significant change in rental performance, as well as disposal-driven deleveraging.

ERNA S.r.l. is the securitisation of four Italian senior commercial real estate loans: the Aries loan, the Ermete loan, the Raissa loan, and the Excelsia Nove (Nucleus) loan. The loans are secured predominantly by telephone exchange properties, but the Nucleus loan portfolio also includes some office, warehouse, garage and residential spaces. The loans were granted as refinancing facilities to four borrowers, all ultimately owned and controlled by TPG Sixth Street Partners (the Sponsor).

The transaction’s balance stood at EUR 252.6 million as of the April 2022 interest payment date, decreasing by 14.8% from EUR 296.5 million at the last review. The reduction was driven by the disposal of 92 properties over the past year and six partial disposals, all subject to the release price of 115% the allocated loan amount, with the prepayment amounts allocated pro rata to the notes. In total, there have been 159 disposals since origination and 11 partial disposals.

CBRE Valuation S.p.A. (CBRE) and Colliers Valuation Italy S.r.l. (Colliers) revalued the 489 properties currently remaining in the portfolio at EUR 607.8 million as of 31 December 2021, representing a marginal decline in value on a like-for-like basis since origination. Deleveraging offset the decline in value, with the transaction-level loan-to-value (LTV) decreasing to 41.6% from 43.0% at the last review and 42.7% at origination. Meanwhile, the debt yield increased to 13.4% from 12.9% at the last review and is now above the issuance level of 13.0%.

The performance of the four loans has been stable over the past 12 months with credit quality generally preserved. The vacancy levels of the Ermete, Raissa, and Aries portfolios remained below 1% while the vacancy level of the Nucleus portfolio remained at 30%. Telecom Italia S.p.A. and Enel Italia S.p.A. remain the largest tenants, accounting for 60.1% and 32.6% of the EUR 43.8 million transaction-level gross rental income, respectively. Weighted-average lease term to expiry remains long, ranging between 12 and 17 years for all loans, with the majority of rent expiring post loan maturity.

As a result, DBRS Morningstar did not revise its underwriting assumptions, apart from updating the net cash flow (NCF) to account for the disposed properties. This led to NCFs of EUR 7.0 million, EUR 2.5 million, EUR 6.2 million, and EUR 10.0 million for the Aries, Ermete, Raissa, and Nucleus loans, respectively. By applying the same cap rates as at initial rating action of 8% for the Aries, Ermete, and Raissa loans and 8.5% for the Nucleus loan, the stressed values of these four loans are EUR 87.4 million, EUR 31.1 million, EUR 77.9 million, and EUR 117.0 million, respectively. This did not trigger any changes to the current ratings, which DBRS Morningstar confirmed with Stable trends. For DBRS Morningstar’s underwriting assumptions at issuance, please refer to the transaction’s rating report.

The Sponsor subscribed to the unrated and junior-ranking Class Z notes. This retention note is fully subordinated within the structure and will not receive any principal payments until the Class A, Class B, and Class C notes are repaid in full.

The transaction benefits from a EUR 12.0 million liquidity reserve (down from EUR 15.0 million at origination) provided by Bank of America Merrill Lynch International DAC, Milan Branch. The liquidity reserve facility can be only used to cover interest shortfalls on the Class A notes. According to DBRS Morningstar’s analysis, the commitment amount could provide the equivalent of approximately 19 months of interest coverage on the covered notes with a 2.25% weighted-average loan margin or approximately 11 months of coverage based on the Euribor cap of 5.00%.

At inception, DBRS Morningstar noted that there were potential tax-related liabilities on the Ermete and Nucleus loans. However, DBRS Morningstar considers the tax liability risk to be nonmaterial to the credit quality of the bonds and largely covered by the cash surplus generated by the portfolio.

There are no extension options, with the expected maturity for each loan in July 2024. The final maturity of the notes is in July 2031, approximately seven years after the loan termination date.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 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 investor reports prepared by Banca Finint S.p.A. and valuation reports prepared by CBRE and Colliers.

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 4 June 2021, when DBRS Morningstar confirmed its ratings on Class A, Class B, and Class C at A (high) (sf), BBB (sf), and BB (high) (sf), respectively, with Stable trends.

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 on www.dbrsmorningstar.com.

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:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at A (low) (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at BBB (high) (sf)

Class B Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at BB (high) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at BB (sf)

Class C Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BB (low) (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at B (low) (sf)

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.

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

Lead Analyst: Violetta Volovich, Senior Analyst
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 10 May 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 (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].