DBRS Morningstar Places All Classes of Emerald Italy 2019 SRL Under Review with Negative Implications

DBRS Ratings GmbH (DBRS Morningstar) placed its ratings on the following classes of commercial mortgage-backed floating-rate notes due September 2030 issued by Emerald Italy 2019 SRL (the Issuer) Under Review with Negative Implications (UR-Neg.):

-- Class A rated A (low) (sf)
-- Class B rated BBB (low) (sf)
-- Class C rated B (high) (sf)
-- Class D rated B (low) (sf)

CREDIT RATING RATIONALE
The transaction is a securitisation of a EUR 105.8 million Italian commercial real estate loan, comprising a EUR 100.4 million term loan and a EUR 5.4 million capital expenditure (capex) loan, advanced by JPMorgan Chase Bank, N.A., Milan Branch and arranged by J.P. Morgan Securities PLC. The loan is secured against a portfolio of two retail malls and one shopping centre located in the Lombardy region of northern Italy. The borrower is Investire Società Di Gestione Del Risparmio S.P.A., acting on behalf of an Italian real estate alternative closed-end fund (fondo comune di investimento immobiliare alternative di tipo chiuso riservato) named Everest, which is ultimately owned by Kildare Partners.

The loan suffered cash flow deterioration as a result of the Coronavirus Disease (COVID-19) pandemic-related store closures and was transferred into special servicing in June 2020 following an uncured payment default. In October 2021, the noteholders approved a standstill agreement until the initial loan maturity date on 15 September 2022. The borrower intended to use this period to prepare an exit plan or meet the conditions for a maturity extension to 15 September 2023. However, the loan was not extended and not repaid at maturity on 15 September 2022 after the extension conditions, including appropriate in-place hedging, were not satisfied. Subsequently, the special servicer agreed to a standstill period with the borrower until 15 September 2023, during which the key terms of the loan will continue to apply, with default interest of 2% accruing on all overdue amounts (EUR 94.8 million). The floating-rate loan is now unhedged. The borrower appointed a sales broker whereas the special servicer appointed a sales monitor to monitor the progression of the marketing and sale of the properties.

The transaction suffered a substantial deterioration in the collateral value, when Savills Advisory Services Limited conducted a revaluation of the portfolio with a valuation date of 27 April 2023, and estimated the current market value of the properties at EUR 78,910,000. This is a decrease of 41% on Jones Lang LaSalle’s 30 June 2022 valuation, and a 51% decrease from the issuance value. As a result of the updated valuation, the loan-to-value has increased to 120% from 71% previously. Additionally, a Control Valuation Event has occurred with respect to the Class D notes following the revaluation of the portfolio, which now renders the Class C notes as the controlling class. Consequently, DBRS Morningstar placed its ratings on all classes of notes UR-Neg.

The loan matured on 15 September 2022. The legal final maturity of the notes is in September 2030. The sequential payment trigger has occurred and is continuing, with all principal in respect of the loan applied to the notes on a sequential basis. The Class X diversion trigger event has also occurred and is continuing.

The transaction benefits from a EUR 4.5 million liquidity facility (EUR 5.3 million at closing) available to cover interest payments on the Class A and Class B notes. The facility amortises in line with the amortisation of the Class A and Class B notes.

DBRS Morningstar’s credit ratings on Classes A to Class D of the commercial mortgage-backed floating-rate notes issued by Emerald Italy 2019 SRL address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this press release.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, pro-rata default interest, euribor excess amount, and prepayment fees.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit 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 is undertaking a review and will remove the credit rating from this status as soon as it is appropriate.

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 credit 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.

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 credit ratings include RIS Notification dated 28 June 2023 and quarterly servicer reports prepared by Securitisation Services 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 credit ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 30 September 2022, when DBRS Morningstar confirmed its A (low) (sf), BBB (low) (sf), B (high) (sf), and B (low) (sf) credit ratings on the Class A, Class B, Class C, and Class D notes with Negative 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the Base Case):

Class A Risk Sensitivity:
-- A 10% decline in DBRS Morningstar’s net cash flow (NCF), expected rating on the Class A notes at BBB (sf)
-- A 20% decline in DBRS Morningstar’s NCF, expected rating on the Class A notes at BBB (low) (sf)

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

Class C Risk Sensitivity:
-- A 10% decline in DBRS Morningstar’s NCF, expected rating on the Class C notes at B (low) (sf)
-- A 20% decline in DBRS Morningstar’s NCF, expected rating on the Class C notes at CCC (sf)

Class D Risk Sensitivity:
-- A 10% decline in DBRS Morningstar’s NCF, expected rating on the Class D notes at CCC (sf)
-- A 20% decline in DBRS Morningstar’s NCF, expected rating on the Class D notes at CC (sf)

These credit ratings are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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 credit 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: 9 October 2019

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The credit 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
-- Legal Criteria for European Structured Finance Transactions (30 June 2023)
https://www.dbrsmorningstar.com/research/416730/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
-- Derivative Criteria for European Structured Finance Transactions (16 June 2023),
https://www.dbrsmorningstar.com/research/415976/derivative-criteria-for-european-structured-finance-transactions
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023),
https://www.dbrsmorningstar.com/research/416784/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].