Morningstar DBRS Comments on Deco 2019 - Vivaldi S.r.l. Loans Restructuring

On 18 June 2024, Deco 2019 – Vivaldi S.r.l.’s (the Issuer) Class A noteholders passed an ordinary resolution enacting certain amendments to the facility agreements, including an extension of the original loan maturity date, 15 August 2024, by three years to 15 August 2027. The extension was requested by the sponsor to complete an orderly disposal of the portfolio.

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

The transaction is a securitisation of an approximately 95% interest in two refinancing facilities, the Franciacorta loan and the Palmanova loan, each backed by a retail outlet village located in Northern Italy. The borrowers are ultimately owned by the funds controlled by Blackstone LLP (the Sponsor) and are managed by Land of Fashion Outlet Management S.r.l. The loans are interest only prior to a permitted change of control.

As of the May 2024 interest payment date (IPD), the Franciacorta loan balance stands at EUR 167.2 million, representing 71% of the loans’ pool. Based on the last available valuation report undertaken in December 2023 by Cushman & Wakefield (C&W), the collateral portfolio value stood at EUR 205.0 million, which represents a further 4.8% decline from the previous valuation of EUR 215.4 million in December 2022 and a 20.3% decline from initial valuation at issuance (EUR 257.3 million). As of May 2024 IPD, the LTV ratio resulted in 80.6%, up from last year LTV of 77.5%. The loan remains in breach of the LTV cash trap covenant set at 75%.
The Franciacorta debt yield (DY) increased to 9.8% in May 2024 IPD, from 8.7% in May 2023, mainly driven by improved net rental income (NRI) and lower vacancy rate. The portfolio’s NRI increased to EUR 16.3 million as of May 2024 IPD from EUR 14.5 million, while the vacancy rate decreased to 12.2% from 12.6% a year ago.

Morningstar DBRS’ net cash flow (NCF) assumption for the Franciacorta loan stood at EUR 11.7 million as of Morningstar DBRS’ last annual review in January 2024, reflecting a haircut of 29.7% compared with the most recent issuer NRI. Morningstar DBRS’ cap rate at 7.5% provides a Morningstar DBRS value of EUR 165.8 million, equivalent to a haircut of 19.1% to C&W’s valuation.

The Palmanova loan balance stands at EUR 66.7 million as of May 2024 IPD, representing 29% of the loans’ pool. Based on December 2023 C&W valuation, the collateral portfolio value stood at EUR 80.0 million, which represents a further 8.2% decline from the previous valuation of EUR 87.1 million in December 2022 and a 22.0% decline from initial valuation at issuance (EUR 102.6 million). As of May 2024 IPD, the LTV ratio resulted in 81.0%, up from last year LTV of 74.4%, breaching the LTV cash trap covenant of 75%. The Palmanova DY increased to 10.4% in May 2024 IPD from 8.7% in May 2023. The portfolio’s NRI increased to EUR 6.8 million from EUR 5.7 million, while the vacancy rate decreased to 10.3% as of May 2024 IPD from the previous year vacancy rate of 14.2%.
Morningstar DBRS’ NCF assumption for the Palmanova loan stood at EUR 4.7 million as of our last annual review in January 2024, reflecting a haircut of 27.6% compared with the most recent issuer NRI. Morningstar DBRS’ cap rate at 7.1% provides a Morningstar DBRS value of EUR 63.3 million, equivalent to a haircut of 20.0% to C&W’s valuation.

In Morningstar DBRS’ view, the absence of the extension of the original notes’ maturity and consequently the reduction of the tail period to four 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 Franciacorta and Palmanova 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.

The parties agreed to a requirement to enter into an interest rate cap agreement with a WA strike rate of no more than 4.0% 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 2.90% from 1.90%, Class B Notes to 3.90% from 2.90%, Class C Notes to 5.00% from 4.00%, and Class D 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 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 for both Franciacorta loan and Palmanova loan at 4.04%.

The amendments also include a voluntary equity paydown from the borrowers to significantly deleverage each loan balance as follows: EUR 15.8 million for the Franciacorta loan to reduce the loan to EUR 151.4 million from EUR 167.2 million, and EUR 7.6 million for the Palmanova loan to reduce the loan to EUR 59.1 million from EUR 66.7 million. 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 after the paydown both loan LTVs will decrease to 73.9%, down from 80.6% for the Franciacorta loan and 81% for the Palmanova loan. The Franciacorta DY would increase to 10.7% based on May 2024 NRI, from current 9.8%, and the Palmanova DY would increase to 11.4% based on May 2024 NRI, from current 10.4%. The overall transaction WA LTV ratio after paydown will decrease to 73.9%, down from current WA LTV of 82.1%. The transaction’s WA DY would improve to 10.9% (based on issuer NRI as of May 2024) enhancing the issuer’s ability to meet debt service obligations.

Furthermore, the borrowers agreed to advance an equity contribution of EUR 1.21 million into the Palmanova loans’ cash trap account as follows: the 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 capital expenditure (capex). All surplus net rental income is paid into the cash trap account for each loan. Corporate expenses and management fees are capped per annum as follows: EUR 2.5 million for the Franciacorta loan and EUR 1.25 million for the Palmanova 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.

On a full repayment of each loan following the sale of the property secured under the same 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.

Morningstar DBRS did not take any credit rating actions as a result of these amendments. The trend on all classes remains Negative, reflecting the prolonged uncertainty of the Italian property market as reported in the last credit rating action on 26 January 2024, when Morningstar DBRS confirmed its credit ratings on the Class A to Class D Notes (see https://dbrs.morningstar.com/issuers/23880).

The transaction benefits from a liquidity reserve facility that totals EUR 10.5 million and is provided by Deutsche Bank AG, London Branch. The liquidity reserve facility can be used to cover interest shortfalls on the Class A and Class B Notes. Morningstar DBRS estimates that, following the restructuring, the liquidity facility support would be equivalent to approximately 12 months of coverage based on the hedging terms mentioned above and approximately 10 months of coverage based on the Euribor capped at 5.0% payable on the notes after their notes’ maturity.

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 (23 January 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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