Morningstar DBRS Comments on Pietra Nera Uno S.R.L. Loans Restructuring

DBRS Ratings GmbH (Morningstar DBRS) reviewed the proposed loan amendments to Pietra Nero Uno S.R.L. (the Issuer) and concluded that the changes do not currently affect the credit ratings or trends on the notes.

The transaction is an agency securitisation of three senior commercial real estate (CRE) loans (i.e., the Fashion District loan, the Palermo loan, and the Valdichiana loan) and two pari passu-ranking capital expenditure (capex) 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., the originator, advanced the loans to four Italian borrowers ultimately owned by the Blackstone Group LP (Blackstone or the Sponsor), which are backed by four retail properties spread across Italy. Deutsche Bank AG, London Branch (Deutsche Bank) acted as sole 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. The Valdichiana loan is secured by one retail outlet village—Valdichiana Outlet Village—located in Tuscany. The three assets are managed by Land of Fashion Outlet Management Srl, Blackstone's Italian platform focusing on retail outlet villages. The Palermo loan is secured by a major shopping centre in Sicily—the Forum Palermo—which is the largest asset in the transaction and is managed by Multi Outlet Management Italy Srl, part of the pan-European retail manager Multi Corporation B.V.

As of February 2024, the total portfolio’s outstanding loan balance stood at EUR 381.9 million, with the EUR 122.8 million Fashion District loan and the EUR 94.1 million Valdichiana loan both amortising at 1.0% per annum (p.a.) of their respective initial balances and the EUR 165.0 Palermo loan amortising at 2.0% p.a. of its initial balance.

Based on the last available valuation report dated 29 February 2024 prepared by Cushman & Wakefield (C&W), the collateral portfolio value stood at EUR 469.0 million, which represents a moderate 4.1% decline from the previous valuation of EUR 488.8 million at 31 March 2023 and a 13.3% decline from CBRE’s initial valuation of EUR 541.3 million at issuance. After the February 2024 interest payment date (IPD) and based on Morningstar DBRS’ calculation, the current aggregate portfolio WA LTV increased to 81.4% from 74.7% at issuance.

As of the February 2024 investor reporting, the whole portfolio’s WA debt yield (DY) improved to 11.1% from 9.7% as of February 2023, which increased compared with the WA DY of 9.0% at issuance.

Morningstar DBRS’ net cash flow (NCF) assumption stood at EUR 8.1 million, in line with last review in January 2024. Morningstar DBRS’ cap rate is 7.5%, providing a Morningstar DBRS value of EUR 108.5 million, which represents a 19.1% haircut to C&W’s valuation.

On 30 April 2024, Class A noteholders passed an ordinary resolution enacting certain amendments to the facility agreements, including an extension of the original loan maturity date by three years to 15 May 2027. Morningstar DBRS expects the effective date of the resolution to be 15 May 2024 when documents will be executed.

In Morningstar DBRS’ view, the absence of the extension of the original notes maturity and consequently the reduction of the tail period to three years increases the uncertainty over the repayment of the notes within their final maturity in the event that legal proceedings are initiated in Italian courts. However, such risk is mitigated by the presence of the shares pledge over the holding companies domiciliated in Luxembourg for the Valdichiana and Fashion District assets and in the Netherlands for the Forum Palermo assets. In a default scenario, Morningstar DBRS expects that the special servicer would likely exercise the shares pledge over the holding companies to take rapid control over the assets and avoid the longer Italian court proceedings.

Among other amendments, the parties agreed to a requirement to enter into an interest rate cap agreement with a WA strike rate of no more than 3.92% on the 100% outstanding notional amount and no later than 20 business days from the maturity extension date and thereafter on or prior to the second anniversary of the maturity extension date, if exercised.

An amendment to the margin letter of each CRE loan sizing the increase of the note margin amount by 1.0%, the revenue excess amount, will be applied as follows: Class A Notes to 2.15% from 1.15%, Class B Notes to 2.75% from 1.75%, Class C Notes to 3.45% from 2.45%, Class D Notes to 5.65% from 4.65%, and Class E Notes to 7.75% from 6.75%. The revenue excess amount that would otherwise be payable to the originator will be allocated to each class of notes (other than the Class Z Notes) on a pro rata basis in sequential order. Morningstar DBRS does not consider the revenue excess amount as a financial obligation and therefore does not rate it. Morningstar DBRS notes that this amount ranks subordinated to the payment of the initial interest due to the noteholders in both the pre- and post-note enforcement notice priority of payments. Any revenue excess amounts not paid on a note payment date because of unavailability of funds will be deferred, will not accrue further interest, and will not trigger an event of default.

The loan margin caps are amended as follows: Valdichiana loan at 3.5503%, Fashion District loan at 3.7268%, and Palermo loan at 3.8639%.

The amendments also include a voluntary equity paydown from the borrowers for an aggregate amount of EUR 34.28 million to significantly deleverage the loans balances as follows: EUR 15.84 million for the Fashion District loan to reduce the loan to EUR 106.6 million from EUR 122.5 million, resulting in an LTV of 74.3%; EUR 13.51 million for the Forum Palermo loan to reduce the loan to EUR 150.6 million from EUR 164.1 million, resulting in an LTV of 76.6%; and EUR 4.93 million for the Valdichiana loan to reduce the loan to EUR 88.9 million from EUR 93.8 million, resulting in an LTV of 69.0%. The principal receipts received in respect of the voluntary prepayments are applied on a pro rata basis to each class of notes in accordance with the pre-note enforcement notice priority of payments. Morningstar DBRS notes that the paydown deleverages the overall transaction at the LTV level slightly lower than at issuance (73.8% versus 74.7%) and increases the transaction’s DY, improving its ability to meet debt service obligations. The resulting WA DY would be 12.2% based on the Issuer NCF at the February 2024 IPD compared with 9.0% at origination.

In addition, the borrowers agreed to advance an equity contribution into each of the CRE loans’ cash trap accounts as follows: EUR 5.2 million for the Fashion District loan, EUR 2.3 million for the Forum Palermo loan, and EUR 0.1 million for the Valdichiana loan. Funds are to be used to meet any shortfalls of debt service amounts and certain costs and expenses, including asset management fees, corporate/legal expenses, taxes, and capex. All surplus net rental income is paid into the cash trap account for each loan. Corporate expenses and management fees are capped p.a. as follows: EUR 1.9 million for the Valdichiana loan, EUR 2.5 million for the Fashion District loan, and EUR 3.1 million for the Forum Palermo loan.

Morningstar DBRS notes that the cash trap reserves allow for further financial flexibility and ensure the implementation of the capex program in line with the Sponsor’s intention for active management initiatives.

Following the completion of a disposal of the first property securing the Fashion District loan, all net proceeds will be applied to pay down the Fashion District loan. On a full repayment of each loan either following the sale of the second property secured under the Fashion District loan or the sale of the property secured in the Valdichiana loan or the Forum Palermo loan, surplus sales proceeds will be repaid to the respective borrowers. The disposal proceeds will be applied pro rata to all the classes of notes.

The noteholders that approved these amendments will receive a consent fee of 0.1% of the adjusted principal amount outstanding of the notes subject to such voting. A further lock-up fee becomes payable by the borrowers in case the approval of the amendments was provided prior to the meeting. Fees are contributed via equity injection and deemed neutral in Morningstar DBRS’ cash flow analysis.

In addition, within 28 days of the passing of the ordinary resolution, the Servicer also agreed to procure that the Issuer proposes a further resolution of the noteholders of each class of notes. Once approved, the resolution will trigger the following amendments: (1) the final maturity of the notes extended to May 2034, (2) a ban for the delegated primary servicer to grant any further extension to the repayment date of the loans without the direction of the noteholders, and (3) a compliance update to risk retention and reporting requirements under the European Union and United Kingdom securitisation regulations.

Morningstar DBRS did not take any credit rating actions as a result of these amendments. The trend on all classes remains Stable, reflecting good performance in the key credit metrics as reported in the last credit rating action on 23 January 2024, when Morningstar DBRS upgraded its credit ratings on the Class A to D Notes and confirmed its rating on the Class E Notes (see https://dbrs.morningstar.com/issuers/22997).

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. The Issuer can use the liquidity reserve facility to cover interest shortfalls on the Class A and Class B Notes. There had been no liquidity facility drawing as of the February 2024 IPD. According to Morningstar DBRS, the outstanding balance of the liquidity reserve facility as at the February 2024 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.

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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in euros unless otherwise noted.

For more information on this credit, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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