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)

All trends are Negative.

The confirmation reflects the transaction’s continued stable performance over the last year and improving debt yield (DY) metrics. However, the trends on all ratings remain Negative, reflecting the vulnerability of the retail sector to the current high-inflation environment and its effect on household spending.

The transaction is a securitisation of an approximately 95% interest in two Italian refinancing facilities ( 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) and are managed by Kryalos SGR S.p.A. The loans are interest-only prior to a permitted change of control and, as such, the 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 Ltd (“CBRE”) valued the Franciacorta property at EUR 257.3 million and the Palmanova property at 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, resulting in a decline in value of 11.4% and 13.2%, respectively.

In December 2021, CBRE revalued the collateral, resulting in market values of EUR 230.0 million for the Franciacorta asset and EUR 89.2 million for the Palmanova asset, in line with the October 2020 valuations. The loan-to-value (LTV) ratios based on the most recent valuations stand at 72.7% (Franciacorta) and 74.6% (Palmanova) as of the November 2022 interest payment date (IPD) and are below the cash trap level of 75.0%. At the time of DBRS Morningstar’s previous annual surveillance, the LTV ratios for Franciacorta and Palmanova stood at 73.3% and 74.8%, respectively, as of the November 2021 IPD.

Net rental income (NRI) showed an improvement for both loans between the November 2021 and the November 2022 IPDs. The NRI for the Franciacorta Outlet Village climbed to EUR 15.0 million from EUR 11.6 million (an increase of 29.6%) while the NRI for the Palmanova Outlet Village climbed to EUR 6.1 million from EUR 5.4 million (an increase of 13.8%). The increase in income for the collateral was mainly driven by an increase in the turnover component of rent and a decrease in arrears.

As a result of the increase in income, DY metrics for both loans also improved. The Franciacorta DY increased to 9.0% as of the November 2022 IPD from 6.9% on the November 2021 IPD while the Palmanova DY climbed to 9.2% from 8.1% over the same period. The cash trap covenants are set at 7.6% for Franciacorta and 9.6% for Palmanova. The Palmanova loan is therefore still in breach with respect to its DY cash trap covenant. However, the Franciacorta loan left cash trap on the February 2022 IPD, due to its improving DY.

DBRS Morningstar revised its underwriting assumptions based on the vacancy rates reported as of the November 2022 IPD. DBRS Morningstar adjusted its vacancy rate upward to 14.8% from 12.5% for the Franciacorta asset and to 16.2% from 12.5% for the Palmanova asset. DBRS Morningstar did not change its cap rate assumptions. The resulting DBRS Morningstar values are EUR 167.8 million for the Franciacorta asset and EUR 73.2 million for the Palmanova asset, representing a value haircut of -27.0% and -17.9% over the most recent appraised values for Franciacorta and Palmanova, respectively.

The transaction is supported by a EUR 10.5 million liquidity facility, which equals 6.5% of the total outstanding balance of the covered notes. 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 transaction additionally benefits from a prepaid cap agreement with HSBC Bank Plc. The agreement matures in August 2024 and has an interest cap strike rate of 0%. The aggregate notional amount under each hedging document is equal to 100% of the outstanding principal amount of the relevant loan.

The initial maturity of the loans was in August 2021, with three one-year extension options. Two extension options were exercised, extending the maturity date to August 2023. 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.

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 servicer reports and updated valuation reports provided by CBRE, and 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 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 Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class A notes of A (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class A notes of BBB (high) (sf)

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

Class C Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class C notes of B (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class C notes of CCC (sf)

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class D notes of CCC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class D notes of 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: 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 (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].