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 confirmation reflects the transaction’s continued stable performance over the last year and improving leverage and debt yield (DY) metrics. The trends on all ratings remain Negative as retail as an asset class is one of the most vulnerable to the current high-inflation environment and its impact on household spending.

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 facilities for a total amount of EUR 403.8 million, which represented a weighted-average (WA) loan-to-value (LTV) ratio of 74.7% at issuance. BRE/Europe 7NQ S.à.r.l. advanced the loans to four Italian borrowers ultimately owned by the Blackstone Group LP (Blackstone or the sponsor) and 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 Village and Puglia 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 in terms of leasable area and market value (MV).

As a result of scheduled amortisation, as of the November 2022 interest payment date (IPD), the total loans’ outstanding balance reduced to EUR 389.2 million since issuance. CBRE revalued the collateral in March 2022. As of that date, the portfolio’s market value stood at EUR 522.0 million, representing a 3.3% increase over the last valuation of EUR 505.6 million in December 2020. By DBRS Morningstar's calculations, the revised valuation takes the aggregate LTV to 75.2% as of the November 2022 IPD from 77.9% as of the November 2021 IPD.

At a portfolio level, according to the recently published investor report, DY increased by 1.3 percentage points to 10.4% as of November 2022 since DBRS Morningstar’s last review. The Fashion District and Vanguard loans’ DYs increased by more than 2% and the Palermo loan’s DY remained in line with last year’s review. The increase in operating income and the amortisation on the loan balance drove the climb in DY. Since DBRS Morningstar’s last review, total contracted rent increased by 5.4% to EUR 39.6 million as of the November 2022 IPD from EUR 37.6 million as of the November 2021 IPD. The most recently reported DY of 10.4% compares favourably with the DY of 9.0% at issuance. None of the loans were in cash trap as of the November 2022 IPD.

FASHION DISTRICT
The Fashion District loan is secured by two properties, Mantova Village and Puglia Village, located in the City of Mantova and in proximity to City of Bari, respectively. The loan was previously securitised in the DBRS Morningstar-rated Taurus 2015-1 IT S.R.L. transaction.

Mantova Village provides a total leasable area of 25,635 square metres (sqm) across 122 individual units, including kiosks. It benefits from a large catchment area with 8.5 million people living within a 90-minute drive based on the appraisal dated March 2022. Puglia Village provides a total leasable area of 38,134 sqm across 135 individual units. It serves a catchment area with 2.3 million people living within a 90-minute drive based on the most recent appraisal.

The MV for the two assets increased to EUR 170.2 million from EUR 165.8 million at DBRS Morningstar’s last review as a result of the most recent valuation conducted in March 2022. The loan balance stood at EUR 124.4 million as of the November 2022 IPD. The LTV ratio for the Fashion District portfolio was reported at 73.3% as of November 2022 IPD, which is an improvement over the LTV of 76.0% reported as of November 2021. This is due to the increase in valuation as well as the loan’s amortisation over the year.

The contracted rent for the portfolio climbed to EUR 12.0 million as of the November 2022 IPD from EUR 11.8 million at DBRS Morningstar’s last review in spite of the increase in vacancy to 26.4% from 23.5%. Owing to increased income and the loan’s amortisation at 1% per annum (p.a.), the portfolio’s DY showed improvement, increasing to 10.1% from 7.7% between the November 2021 IPD and the November 2022 IPD.

PALERMO
The Palermo loan is secured by a single asset, the Forum Palermo, which is a major shopping centre in Sicily. The Forum Palermo provides a total leasable area of 49,400 sqm across 132 retail units. It serves a catchment area with more than 850,000 people within a 30-minute drive based on the appraisal dated March 2022.

While the property historically benefited from very high and stable occupancy levels, it experienced an increase in vacancy to 11.8% as of the November 2022 IPD from 2.2% as of the August 2022 IPD. This was due to the reduction to Ipercoop’s area, which previously anchored the collateral. After Ipercoop vacated its space, the hypermarket space underwent a refurbishment to downsize the existing hypermarket and create three new stores. The servicer informed DBRS Morningstar that the project was finalised and a new tenant, Decò, took occupancy in the hypermarket space early in December 2022.

The Palermo loan exhibited an improving LTV ratio, which reduced to 81.4% from 83.8% at DBRS Morningstar’s last annual review as a result of the loan’s amortisation and the new valuation dated March 2022, which puts the collateral at a MV of EUR 209.2 million. The Palermo loan amortised at 1% p.a. between the May 2019 IPD and May 2022 IPD, after which it started to amortise at 2.0% p.a. The loan balance stood at EUR 169.4 million as of the November 2022 IPD. Contracted rent increased by about 4.0% since DBRS Morningstar’s last annual review and the DY remained around the same level at 10.3% as of the November 2022 IPD versus 10.2% as of the November 2021 IPD.

VALDICHIANA
The Valdichiana loan is secured by the Valdichiana Outlet Village located in the province of Tuscany in central Italy. The Valdichiana Outlet Village provides a total leasable area of 31,100 sqm across 135 retail units. According to CBRE, it serves a catchment area of 2.9 million people within a 90-minute drive of the property.

Since issuance occupancy at the collateral has been on a downward trend; however, occupancy started to improve between the November 2021 IPD and the November 2022 IPD, with vacancy falling to 12.0% from 13.7%. Over the same period, contracted rent increased by EUR 1.1 million to EUR 9.9 million, the DY rose to 11.1% from 9.0%, and the LTV declined to 66.8% from 69.8%.

The collateral’s MV stood at EUR 142.6 million per the appraisal dated March 2022, representing an increase of 3.4% over the previous valuation of EUR 137.8 million. The loan amortises at 1% p.a. and had an outstanding balance of EUR 95.3 million as of the November 2022 IPD.

PIETRA NERA UNO S.R.L
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 14.5 million (EUR 15.0 at origination), which equals 5.6% 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. There had been no liquidity facility drawing as of the November 2022 IPD.

The initial extended maturity date of the loans was in May 2023 and the final legal maturity of the notes is in May 2030, seven years after the initial maturity date. The servicer announced in November 2022 that it allowed a further Extension Option to May 2024, which could be exercised provided the borrower satisfies the regular extension option conditions and provides an extension notice. The Extension Option was granted in line with the powers stipulated in the servicing agreement. While DBRS Morningstar sees the reduced tail period to six years from seven years as a risk factor, it considers six years to be sufficient to enforce on the loan collateral and repay noteholders, if necessary. DBRS Morningstar accounted for this risk factor as part of its analysis for this review, and considered this risk factor commensurate with the current ratings assigned to the notes.

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 (14 December 2022), https://www.dbrsmorningstar.com/research/407379/european-cmbs-rating-and-surveillance-methodology.

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/401817/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 valuation reports provided by CBRE as well as investor and cash management reports provided by Banca Finanziaria Internazionale 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 2022, when DBRS Morningstar confirmed its ratings on all classes of notes with Negative trends.

The lead analyst responsibilities for this transaction have been transferred to Andrea Selvarolo.

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

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

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

Class D Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class D Notes at BB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class D Notes at B (low) (sf)

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

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.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Andrea Selvarolo, 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 (14 December 2022), https://www.dbrsmorningstar.com/research/407379/european-cmbs-rating-and-surveillance-methodology.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-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].