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 floating-rate notes due July 2031 (the notes) issued by ERNA S.r.l. (the Issuer):

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

All trends are Stable.

The confirmation of the ratings follows the transaction’s improved metrics over the past 12 months, tempered by an increase of exposure to the main tenant, Telecom Italia S.p.A. (Telecom Italia), whose risk profile has deteriorated since issuance.

The transaction 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 reduced by 29% to EUR 179.8 million as of the April 2023 interest payment date (IPD) from EUR 252.6 million at the last annual review and by 43% from EUR 315.8 million since the cut off in June 2019.

From the original portfolio of 648 properties, 122 have been sold since the last annual review and 282 since issuance, all subject to the release price of 115% of the allocated loan amount, with prepayment proceeds applied pro rata to the notes.

Colliers Valuation Italy Srl (Colliers) and CBRE Valuation & Advisory Services (CBRE) revalued the portfolios securing four loans as of 31 December 2022 and appraised the aggregate market value of the 366 properties in the transaction at EUR 511.1 million. On a like-for-like basis, this value is in line with the valuation of EUR 510.6 million at cut off. Following the revaluation, the weighted-average (WA) loan-to-value (LTV) ratio decreased to 35.5% from 41.6% at last year’s review and 42.6% at origination.

The transaction cash flow metrics showed a WA debt yield of 16.4% as of the April 2023 IPD, up from 13.4% at last year’s review and 13.0% at issuance. The vacancy level remained stable over the last year with a rate lower than 1% for the Aries, Ermete, and Raissa portfolios, where Telecom Italia is the sole tenant, and 28.6% for the Nucleus portfolio as of the April 2023 IPD. Overall, Telecom Italia is the largest tenant, contributing 59.1% in terms of gross rental income at the April 2023 IPD, up from 49.2% at cut off, while Enel S.p.A. is the second-largest tenant, contributing 35.7%, down from 43.6% at cut off. Albeit DBRS Morningstar did not treat Telecom Italia as a long-term credit tenant in its underwriting at issuance, we note that the largest tenant’s credit quality has been deteriorating over the past years, which could contribute to refinancing risk at maturity. The WA unexpired lease term remains long, ranging between 12 years and 16 years for all loans, with the majority of rent expiring after the notes’ maturity.

DBRS Morningstar did not change its assumptions, but updated the net cash flow (NCF) to account for the disposed properties. DBRS Morningstar NCFs resulted in EUR 7.0 million, EUR 2.4 million, EUR 5.0 million, and EUR 8.3 million for the Aries, Ermete, Raissa, and Nucleus loans, respectively. Based on the same cap rate of 8% at issuance for the Aries, Ermete, and Raissa loans and 8.5% for the Nucleus loan, the DBRS Morningstar values for the loans are EUR 57.4 million, EUR 30.2 million, EUR 62.9 million, and EUR 97.9 million, respectively. The aggregate DBRS Morningstar value of EUR 246.6 million represents a haircut of 49% to the aggregate market value of the four portfolios, unchanged from last year’s review.

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 8.7 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 20 months of interest coverage on the covered notes with a 2.0% cap strike rate 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, 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 (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 quarterly 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 2 June 2022, when DBRS Morningstar confirmed its ratings on the Class A, Class B, and Class C notes at A (high) (sf), BBB (sf), and BB (high) (sf), respectively, with Stable trends.

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 of Class A Notes of A (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A Notes of A (sf)

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

Class C Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class C Notes of BB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class C Notes of BB (high) (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 Limited for use in the United Kingdom.

Lead Analyst: Violetta Volovich, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
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 (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].