Morningstar DBRS Upgrades and Confirms Credit Ratings on Pietra Nera Uno S.R.L. with Stable Trends; Removes from Under Review with Positive Implications

DBRS Ratings GmbH (Morningstar DBRS) took the following credit rating actions on the commercial mortgage-backed security (CMBS) notes due May 2030 issued by Pietra Nera Uno S.R.L. (the Issuer):

-- Class A Notes upgraded to A (high) (sf) from A (sf)
-- Class B Notes upgraded to BBB (high) (sf) from BBB (sf)
-- Class C Notes upgraded to BBB (low) (sf) from BB (high) (sf)
-- Class D Notes upgraded to BB (high) (sf) from BB (sf)
-- Class E Notes confirmed at B (high) (sf)

The trend on all credit ratings is Stable. Morningstar DBRS also removed the credit ratings on the notes from Under Review with Positive Implications (UR-Pos.), where they were initially placed on 13 October 2023 and maintained on 21 December 2023.

CREDIT RATING RATIONALE
The credit rating upgrades on the Class A to Class D Notes result from the improved performance of the securitised senior commercial real estate (CRE) loans over the last 12 months (LTM), coupled with Morningstar DBRS’ removal of a stress scenario regime for sovereigns rated in the “A” category or below, as further detailed in the following press release: https://dbrs.morningstar.com/research/421863.

The transaction is an agency securitisation of three senior CRE loans (i.e., the Fashion District loan, the Palermo loan, and the Valdichiana loan) and two pari passu-ranking capital expenditure facilities for a total initial amount of EUR 403.8 million, which represented a weighted-average (WA) loan-to-value ratio (LTV) of 74.7% at issuance, based on an initial portfolio valuation of EUR 541.3 million. BRE/Europe 7NQ S.à.r.l. advanced the loans to four Italian borrowers, ultimately owned by the Blackstone Group LP (Blackstone or the Sponsor) and are backed by four retail properties spread across Italy. Deutsche Bank AG, London Branch (Deutsche Bank London) acted as arranger for the transaction.

The Fashion District loan is secured by two retail outlet villages—Mantova Outlet Village and Puglia Outlet Village—located in northern and southern Italy, respectively, and managed by Multi Outlet Management Italy S.R.L., Blackstone’s pan-European retail platform that is managing a total of five retail villages marketed under the ‘Land of Fashion’ brand. The platform also includes the Valdichiana Outlet Village, which backs the Valdichiana loan. The Palermo loan is secured by a major shopping centre in Sicily—the Forum Palermo—which is the largest property in the transaction.

As of November 2023, the total portfolio’s outstanding loan balance stood at EUR 383.3 million, with the EUR 123.1 million Fashion District loan and the EUR 94.3 million Valdichiana loan both amortising at 1.0% per annum (p.a.) and the EUR 165.9 Palermo loan amortising at 2.0% p.a.

As reported by the most recently published servicer report, as of November 2023 the whole portfolio’s WA debt yield (DY) improved slightly to 10.7% from 10.4% as of November 2022, which also compares favourably with the 9.0% figure at issuance. Contracted rent increased by 16.1% over the LTM to EUR 45.9 million as of November 2023 from EUR 39.6 million as of November 2022.

On 31 March 2023, Cushman & Wakefield (C&W) revalued the collateral portfolio at EUR 488.8 million, which represents a 6.4% decline from CBRE’s previous valuation of EUR 521.9 million at 31 March 2022, and a 9.7% decline from CBRE’s initial valuation of EUR 541.3 million. As a result, the aggregate portfolio LTV increased to 78.9% on the November 2023 interest payment date (IPD) from 75.3% on the November 2022 IPD and from 74.7% at issuance.

Each of the securitised loans bears interest at a floating rate equal to three-month Euribor (subject to a floor of zero) plus a margin resulting from the WA of the aggregate interest amounts payable to the notes. The loans are fully hedged against interest rate risk via cap agreements expiring in May 2024, with strike rates of 2.25% for the Fashion District loan, 2.30% for the Palermo loan, and 3.0% for the Valdichiana loan. The hedging counterparty is HSBC Bank plc.

There are no default covenants on the loans before a permitted change of control. No loans were in cash trap as of the November 2023 IPD and the maturity date of the loans is on 15 May 2024.

Despite the general uncertainty in the Italian retail property market, mainly due to a bottomed-out investment activity and ongoing asset repricing, the market value decline of the underlying portfolio since issuance has been only modest, supported by a robust rental growth and solid cash flow metrics. The collateralised properties have continued to benefit from a high tenant demand and improved sales as well as footfall data over the LTM. Therefore, Morningstar DBRS considers that the strong quality and overall attractiveness of the underlying properties, along with their improved performances and the Sponsor’s demonstrated high commitment since issuance, might favourably support the securitised loans in being refinanced at their upcoming maturity.

FASHION DISTRICT
The Fashion District loan is secured by the Mantova Outlet Village and the Puglia Outlet Village located in the City of Mantova and in proximity to the City of Bari, respectively. As of November 2023, the loan’s outstanding balance was EUR 123.1 million, down 3.8% from its initial balance of EUR 127.9 million. According to C&W’s valuation report dated 31 March 2023, the underlying two properties were cumulatively worth EUR 149.8 million, which represents a 12.0% decline from CBRE’s previous valuation of EUR 170.2 million dated 31 March 2022. As a result, the loan’s LTV increased to 82.4% on the November 2023 IPD from 73.3% on the November 2022 IPD and from 74.9% at issuance.

Year over year (YOY), contracted rent increased by 16.7% to EUR 14.0 million as of November 2023 from EUR 12.0 million as of November 2022. According to the latest available servicer report in November 2023, the loan’s WA lease term (WALT) was 3.5 years and the loan’s DY increased slightly to 10.5% on the November 2023 IPD from 10.1% on the November 2022 IPD and from 9.3% at issuance.

Morningstar DBRS slightly revised its net cash flow (NCF) assumption to EUR 9.46 million from EUR 9.60 million at its last review, based on the September 2023 tenancy schedule received from the servicer. In addition, Morningstar DBRS increased its cap rate assumption by 50 basis points (bp) to 8.25% from 7.75% to reflect the prolonged uncertainty in the Italian retail property market. This resulted in a Morningstar DBRS value of EUR 114.7 million, which represents a 23.5% haircut to the most recent C&W valuation.

PALERMO
The Palermo loan is secured by a single asset known as the Forum Palermo, which is a major shopping centre located in Sicily. As of November 2023, the loan’s outstanding balance was EUR 165.9 million, down 6.8% from its initial balance of EUR 177.9 million. According to C&W’s valuation report dated 31 March 2023, the underlying property was worth EUR 207.5 million, which represents only a modest 0.8% decline from CBRE’s previous valuation of EUR 209.2 million dated 31 March 2022. As the loan amortises at 2.0% p.a., its LTV decreased to 80.4% at the November 2023 IPD from 81.4% at the November 2022 IPD. At issuance, it stood at 76.4%.

YOY, contracted rent increased by 16.8% to EUR 20.6 million as of November 2023 from EUR 17.6 million as of November 2022. According to the latest available servicer report in November 2023, the loan’s WALT was 5.1 years and the loan’s DY increased slightly to 10.5% on the November 2023 IPD from 10.3% on the November 2022 IPD and from 8.2% at issuance.

As of November 2023, the Forum Palermo property continued to benefit from excellent key performance metrics. In particular, according to the most recently published servicer report, footfall increased by 14.1% in Q3 2023 compared with Q3 2022 while sales recorded a 27.4% increase over the same period and a 15.1% increase compared with before the pandemic.

Morningstar DBRS increased its NCF assumption to EUR 12.5 million from EUR 11.3 million at its last review, based on the September 2023 tenancy schedule received from the servicer. In addition, Morningstar DBRS increased its cap rate assumption by 50 bp to 8.0% from 7.5% to reflect the prolonged uncertainty in the Italian retail property market. This resulted in a Morningstar DBRS value of EUR 156.3 million, which represents a 24.7% haircut to the most recent C&W valuation.

VALDICHIANA
The Valdichiana loan is secured by the Valdichiana Outlet Village located in the province of Tuscany in central Italy. As of November 2023, the loan’s outstanding balance was EUR 94.3 million, down 3.8% from its initial balance of EUR 98.0 million. According to C&W’s valuation report dated 31 March 2023, the underlying property was worth EUR 131.5 million, which represents a 7.8% decline from CBRE’s previous valuation of EUR 142.6 million dated 31 March 2022. As a result, the loan’s LTV increased to 71.7% on the November 2023 IPD from 66.8% on the November 2022 IPD and from 71.2% at issuance.

YOY, contracted rent increased by 14.1% to EUR 11.3 million as of November 2023 from EUR 9.9 million as of November 2022. According to the latest available servicer report in November 2023, the loan’s WALT was 3.8 years and the loan’s DY increased slightly to 11.4% at the November 2023 IPD from 11.1% at the November 2022 IPD and from 10.2% at issuance.

As of Q3 2023, the Valdichiana Outlet Village’s year-to-date sales increased by 9.1% compared with Q3 2022. Data on car traffic also showed a 3.4% increase in Q3 2023 over Q3 2022.

Morningstar DBRS increased its NCF assumption to EUR 8.1 million from EUR 7.5 million at its last review, based on the September 2023 tenancy schedule received from the servicer. In addition, Morningstar DBRS increased its cap rate assumption by 50 bp to 7.5% from 7.0% to reflect the prolonged uncertainty in the Italian retail property market. This resulted in a Morningstar DBRS value of EUR 108.5 million, which represents a 17.5% haircut to the most recent C&W’s valuation.

PIETRA NERA UNO S.R.L.
The transaction benefits from a liquidity reserve facility of EUR 14.2 million (compared with EUR 15.0 million at origination), which represents 5.6% of the total outstanding balance of the covered notes, provided by Deutsche Bank London. The Issuer can use the liquidity reserve facility to cover interest shortfalls on the Class A and Class B Notes. There has been no liquidity facility drawing as of the November 2023 IPD. According to Morningstar DBRS, the outstanding balance of the liquidity reserve facility as at the November 2023 IPD would be sufficient to provide 16.5 months of coverage based on the WA cap strike rate across the three loans and 11.5 months based on the Euribor cap of 5.0% payable on the notes after their maturity date.

The loans were due to mature on 15 May 2023, with the notes’ final maturity date scheduled on 22 May 2030 (i.e., seven years after the fully extended loan maturity date). In November 2022, the servicer agreed to extend the loans for another year to 15 May 2024. The notes’ maturity date remained unchanged, with the transaction’s tail period reducing to six years as a result. The CMBS transaction documents permitted the one-year extension into the tail period, provided the borrowers had satisfied the regular extension option conditions and had released an extension notice. The extension was granted in line with the powers stipulated in the servicing agreement. While Morningstar DBRS saw the reduced tail period to six years from seven years as a risk factor, it considered six years to be sufficient to enforce on the loan collateral and repay noteholders, if necessary.

Morningstar DBRS’ credit ratings on the Issuer address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Interest Payment Amounts and the related Class Balances.

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the credit ratings on the notes do not address Euribor Excess Amounts, Default Interest Amounts and Prepayment Fees.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” at https://dbrs.morningstar.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 (17 January 2024), https://dbrs.morningstar.com/research/426818.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS 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 Morningstar DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include the quarterly servicer reports provided by Securitisation Services S.p.A. from issuance to the November 2023 IPD. Morningstar DBRS also received C&W’s valuation report dated 31 March 2023 and the latest tenancy schedules provided by the servicer dated 30 September 2023.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit ratings, Morningstar DBRS was not supplied with third-party assessments. However, this did not affect the credit rating analysis.

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

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

The last credit rating actions on this transaction took place on 21 December 2023, when Morningstar DBRS maintained the UR-Pos. status on all classes of notes, where they were initially placed on 13 October 2023.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

Class A Notes Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on Class A Notes at A (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on Class A Notes at BBB (high) (sf)

Class B Notes Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on Class B Notes at BBB (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on Class B Notes at BB (high) (sf)

Class C Notes Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on Class C Notes at BB (high) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on Class C Notes at BB (sf)

Class D Notes Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on Class D Notes at BB (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on Class D Notes at B (sf)

Class E Notes Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on Class E Notes at B (low) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on Class E Notes at below B (low) (sf)

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Andrea Selvarolo, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 February 2018

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Tel. +49 (69) 8088 3500
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- European CMBS Rating and Surveillance Methodology (17 January 2024),
https://dbrs.morningstar.com/research/426818
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023),
https://dbrs.morningstar.com/research/416784

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].