DBRS Morningstar Upgrades Ratings on Class A and Class B Notes Issued by Deco 2019-RAM DAC; Changes Trend to Stable

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the commercial mortgage-backed floating-rate notes issued by Deco 2019-RAM DAC (the Issuer):

-- Class A notes upgraded to AAA (sf) from BBB (high) (sf)
-- Class B notes upgraded to AA (high) (sf) from BBB (low) (sf)

Additionally, DBRS Morningstar changed the trends on the ratings to Stable from Negative.

The upgrades reflect a sizeable partial prepayment on the loan payment date in April 2023. The borrower made a GBP 71.0 million partial prepayment by way of equity contribution and made an additional voluntary prepayment of GBP 6.75 million, which was funded from amounts standing to the credit of the cash trap account and the debt service account. The significant deleveraging of the transaction led to the upgrades on both the Class A and Class B notes.

The transaction is a 95% securitisation of an originally GBP 150.0 million (42.7% loan-to-value (LTV) ratio) floating-rate senior commercial real estate loan that Deutsche Bank AG, London Branch (Deutsche Bank; the loan seller and arranger) advanced to The Wilmslow (No. 3) Limited Partnership (the borrower), which was at that time ultimately owned by a joint venture between Intu Properties plc (Intu) and Cale Street Investments LP (Cale Street). Cale Street is backed by the Kuwait Investment Authority, which was formed in 1953 and has approximately USD 750.0 billion in assets according to data from the Sovereign Wealth Fund Institute. Following Intu’s collapse into administration in June 2020, Cale Street purchased Intu’s interest, becoming the sole owner of the borrower in this transaction.

The loan is backed by Derbion (formerly Intu Derby), a 1.3 million-square foot shopping mall southeast of the city centre in Derby, England. Jones Lang LaSalle Incorporated (JLL or the appraiser) valued the shopping centre at GBP 351.0 million at origination. The appraiser undertook a new valuation in October 2020 and revalued the shopping centre at GBP 203.5 million, which implies a 42.0% decline from the issuance value. Following this and the deterioration in the transaction’s performance amid the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar downgraded its ratings on all classes of notes with Negative trends on 23 December 2020. The most recent valuation was undertaken by JLL in April 2022, which, at GBP 216.0 million, indicates a modest increase from the previous valuation of GBP 203.5 million.

The partial prepayment results in a loan balance of GBP 51.5 million and a securitised balance of GBP 48.9 million as of May 2023. As of the February 2023 Interest Payment Date (IPD), the whole loan balance and the securitised balance stood at GBP 129.3 million and GBP 122.7 million, respectively. While the May 2023 IPD servicer report is not available yet, the total GBP 77.75 million prepayment is anticipated to result in an LTV of 23.85% based on the last available valuation and a projected interest coverage ratio (ICR) of 4.86x per the RIS Notification detailing the borrower’s intention to prepay the loan in part. Given these metrics, the loan would no longer be in breach of cash trap covenants for LTV and ICR, which are 52.75% and 3.10x, respectively. When DBRS Morningstar conducted its annual surveillance in December 2022, the transaction was in breach of cash trap covenants as well as financial covenants for LTV and ICR at 58.5% and 2.5x based on the loan metrics reported on the November 2022 IPD servicer report. The breach of financial covenants did not result in an event of default due to the 2022 amendment, consent and waiver letter the borrower and the borrower facility agent had previously entered into. However, there was a cash trap event continuing at that time.

The borrower made the GBP 71.0 million prepayment pursuant to entering into a waiver termination letter, according to which certain provisions of the 2022 amendment, consent, and waiver letter terminated with effect from the loan payment date falling in April 2023. According to the 2022 amendment, consent, and waiver letter that the borrower facility agent and the borrower had entered into in May 2022, any breach of the LTV and ICR covenants prior to a loan payment date falling before (or in) July 2023 could not give rise to a loan default. As part of the amendments included in the letter, the borrower would make partial prepayments of the loan in amounts laid out in the letter. The first prepayment took place in July 2022 and the last prepayment would take place in July 2023. The prepayment schedule laid out in the amendment totaled GBP 7.5 million over five equal installments. As part of the 2022 amendment, consent, and waiver letter, the obligors would also have to ensure the balance of the debt service account, on any day prior to the loan payment date falling in July 2023, is at least equal to the debt service amounts (excluding the partial prepayment amounts referenced above), in each case on the next two loan payment dates immediately succeeding that day but not including any loan payment date falling after July 2023. A cash trap event would also be deemed to be continuing until and including the IPD in July 2023. The above-mentioned clauses are no longer in effect due to the GBP 71.0 million prepayment having taken place in April 2023 per the cash management report.

While the collateral’s most recently reported performance still compares unfavourably with its performance at issuance, net income, LTV, and ICR showed improvement over 2022 and 2023. Since DBRS Morningstar’s last review, LTV declined to 59.8% as of the February 2023 IPD from 60.54% as of the November 2022 IPD due to a GBP 1.5 million prepayment of the loan that took place in January 2023 in accordance with the 2022 amendment, consent, and waiver letter. LTV previously stood at 70.45% as of the November 2021 IPD. With the recent repayment, LTV will decline considerably to 23.85%. Meanwhile the ICR increased to 1.96x as of the February 2023 IPD from 1.81x as of the November 2022 IPD. The increase in ICR was assisted by the GBP 1.5 million deleveraging of the loan as well as higher net income, which increased by approximately GBP 576,000 between the two quarters. The RIS Notice detailing the partial prepayment of the loan anticipates a projected interest cover of 4.86x. The GBP 77.75 million decline in the outstanding loan balance results in a considerable improvement in both LTV and ICR metrics, which in turn leads to the rating upgrades.

DBRS Morningstar adjusted its NCF assumption downward to GBP 15.8 million from GBP 19.1 million as part of its annual surveillance in December 2022 and did not make further adjustments in this round of surveillance. DBRS Morningstar maintained its cap rate assumption of 10%, which was most recently changed in December 2020 from 7.4% at issuance. Based on this NCF and cap rate, the DBRS Morningstar value is approximately GBP 158.4 million, which represents a 26.6% haircut to the most recent valuation of GBP 216.0 million.

The transaction benefits from a liquidity facility of GBP 1.7 million (GBP 5.0 million at issuance), which equals 3.5% of the total outstanding balance of the covered notes. The liquidity facility is provided by Deutsche Bank and can be used to cover any potential shortfalls on the Issuer’s senior expenses, Class A, and Class B interest, and property protection loans. According to DBRS Morningstar’s analysis, the commitment amount could provide interest payments on the covered notes of up to 12 months based on the hedging term.

The initial loan maturity of the loan is July 2024 with a one-year extension option subject to certain conditions, which brings the fully extended maturity of the loan to July 2025. The legal final maturity of the notes is in August 2030, five 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 British pound sterling 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.

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 tenancy schedules provided by Situs Asset Management and cash management reports provided by Deutsche Bank AG.

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 20 December 2022 when DBRS Morningstar downgraded its rating on the Class A notes to BBB (high) from A (low) and confirmed its rating on the Class B notes at BBB (low) while maintaining the Negative trends on both ratings.

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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

Class A Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, no change to sizing output of Class A Notes at AAA (sf)
-- 20% decline in DBRS Morningstar NCF, no change to sizing output of Class A Notes at AAA (sf)

Class B Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, no change to sizing output of Class B Notes at AAA (sf)
-- 20% decline in DBRS Morningstar NCF, no change to sizing output of Class B Notes at AAA (sf)

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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Dinesh Thapar, Vice President, Credit Ratings
Rating Committee Chair: David Lautier , Senior Vice President, Global Esoteric Finance
Initial Rating Date: 13 September 2019

DBRS Ratings Limited
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Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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].