DBRS Morningstar Downgrades Ratings on Emerald Italy 2019 Srl, Maintains Negative Trends; Removes Under Review with Negative Implications Status of the Ratings

DBRS Ratings GmbH (DBRS Morningstar) downgraded its ratings on the commercial mortgage-backed floating-rate notes due September 2030 issued by Emerald Italy 2019 Srl (the Issuer) as follows:

-- Class A notes to BBB (low) (sf) from A (low) (sf)
-- Class B notes to BB (low) (sf) from BBB (low) (sf)
-- Class C notes to CCC (sf) from B (high) (sf)
-- Class D notes to CC (sf) from B (low) (sf)

The trends on all ratings are Negative. DBRS Morningstar also removed the Under Review with Negative Implications (UR-Neg.) of the ratings, where they were placed on 5 July 2023.

CREDIT RATING RATIONALE
The downgrades reflect deterioration in the market value of the underlying collateral, with the loan-to-value (LTV) increasing to 120.2% following the 2023 portfolio revaluation. The assets are experiencing downward pressure on their rental values due to their secondary location, and local competition. At the same time, higher interest rates and uncertainty in the investment market continue to push property yields outwards. The Negative trends reflect uncertainty around the outcome of the property disposal process after the loan defaulted in 2022.

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 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’s cash flow deteriorated as a result of the Coronavirus Disease (COVID-19) pandemic-related store closures and it was transferred into special servicing in June 2020 following an uncured payment default. The loan was not extended and not repaid at the initial maturity in 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 2.0% accruing on all overdue amounts (EUR 94.8 million). The floating-rate loan is now unhedged. DBRS Morningstar understands that following the marketing process the borrower is in receipt of offers for purchase of the properties, which are currently under considerations. The special servicer is in dialogue with the borrower to extend the standstill agreement to allow more time to pursue a sales process.

The loan balance has not changed since the last review and remains at EUR 94.8 million as of June 2023. In the absence of hedging, the increase in reference rate continues to negatively affect the transaction’s cash flow. As of June 2023, available funds after Issuer expenses were sufficient to cover interest and a partial payment of default interest at note level. DBRS Morningstar understands that the calculation agent is currently in discussions with the arranger on whether default interest that has been paid out to noteholders should have been used for sequential principal redemption of the notes.

The transaction suffered a substantial deterioration in the collateral value, when Savills Advisory Services Limited (Savills) 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 41.1% on Jones Lang LaSalle’s 30 June 2022 valuation, and a 51.1% decrease from the valuation at issuance. As a result of the updated valuation, the loan-to-value increased to 120.2% from 70.8% previously.

DBRS Morningstar revised its underwriting assumptions, which led to DBRS Morningstar net cash flow decreasing to EUR 7.5 million from EUR 8.6 million at last review. In addition, DBRS Morningstar revised its capitalisation rate assumption to 11.0% from 9.5%, largely reflecting the lack of liquidity in the Italian retail investment market and that the properties will likely be sold in the near term. These changes translate to a DBRS Morningstar value of EUR 67.7 million, representing a 14.2% haircut to Savills’ most recent valuation. The decline in the DBRS Morningstar value has resulted in DBRS Morningstar downgrading its credit ratings on all classes of notes. The trends on all tranches remain Negative, as the outcome of the sales process remains uncertain.

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 the Class 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.

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/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 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 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 credit 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/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 credit ratings include servicer reports, quarterly tenancy schedule, and quarterly investor reports provided by Securitisation Services S.p.A. and CBRE Loan Services Limited, as well as updated valuation report prepared by Savills.

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 5 July 2023, when DBRS Morningstar placed its credit ratings on the Class A, Class B, Class C, and Class D notes Under Review with Negative Implications.

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:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class A notes BBB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class A notes BB (sf)

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

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

Class D Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating on Class D notes CC (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating on Class D notes C (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://registers.esma.europa.eu/cerep-publication/.
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

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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.
-- Derivative Criteria for European Structured Finance Transactions (16 June 2023), https://www.dbrsmorningstar.com/research/415976/derivative-criteria-for-european-structured-finance-transactions
-- 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
-- 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].