Morningstar DBRS Confirms the Credit Ratings on Deco 2019 - Vivaldi S.r.l., Changes Trend to Stable from Negative

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings on the bonds issued by Deco 2019 - Vivaldi S.r.l. (the Issuer) as follows:

-- Class A confirmed at A (high) (sf)
-- Class B confirmed at BBB (sf)
-- Class C confirmed at BB (high) (sf)
-- Class D confirmed at B (high) (sf)

At the same time, Morningstar DBRS changed the trends on all credit ratings to Stable from Negative, in line with its credit outlook for the retail sector.

CREDIT RATING RATIONALE
The credit rating actions reflect the stable performance of the underlying portfolios following the partial prepayment of the loans in August 2024 as part of the restructuring agreed by the noteholders in June 2024.

Deco 2019 Vivaldi S.r.l. is a securitisation of approximately 95% interest of two refinancing facilities, the Franciacorta loan and the Palmanova loan, backed by two retail outlet villages in Northern Italy. The borrowers are ultimately owned by the funds controlled by Blackstone LLP (the Sponsor) and are managed by Kryalos SGR S.p.a. The loans are interest-only prior to permitted change of control (COC). Following the partial prepayment that occurred in August 2024, their aggregate outstanding balance decreased to EUR 210.5 million from EUR 233.9 million at closing.

Both loans pay the three-month Euribor interest rate (floored at zero) plus a margin, which is function of the weighted average (WA) of margins payable on the notes, capped at 4.04% for both loans. Accordingly, the Class D notes are subject to an available funds cap if the shortfall is attributable to an increase in the WA margin of the notes. Consequently, there is no excess spread in the structure with the issuer's ongoing costs and expenses being covered by the borrowers.

There are no default covenants prior to the permitted COC. Following the amendment agreement dated 19 June 2024 and from its effective date of 15 August 2024, a cash trap event is continuing until the repayment date. Please see the press release "Morningstar DBRS Comments on Deco 2019 - Vivaldi S.r.l. Loans Restructuring" published 25 June 2024
for more details regarding the amendment.

Originally, the loans had a two-year term with three one-year extension options, subject to hedging being extended. The third extension option was exercised, providing the loans with a maturity at the August 2024 interest payment date (IPD). From the loan amendment effective date, the maturity of the loans has been extended to August 2027. A 4.0% strike rate hedging provided by HSBC plc is in place until the August 2026 IPD.

As of the November 2024 IPD, the Franciacorta loan balance stands at EUR 151.4 million, representing 72% of the loan pool. Based on the last available valuation report undertaken in December 2023 by Cushman & Wakefield (C&W), the collateral portfolio's 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 the initial valuation of EUR 257.3 million at issuance. As of the November 2024 IPD, the loan-to-value ratio (LTV) was 71.5%, down from last year's LTV of 77.2%. As per the amendment loan agreement, all excess cash flow is trapped in the cash trap account until the final repayment date. As of the November 2024 IPD, the amount held in the cash trap is EUR 4.8 million.

The Franciacorta debt yield (DY) increased to 10.8% at the November 2024 IPD from 9.4% in November 2023, mainly driven by an improved net rental income (NRI) and lower vacancy rate. The portfolio's NRI increased to EUR 15.9 million as of the November 2024 IPD from EUR 15.6 million the year before, while the vacancy rate decreased to 9.0% from 12.6% a year ago.

For the Franciacorta loan, Morningstar DBRS maintained its net cash flow (NCF) assumption at EUR 11.7 million, representing a haircut of 28.0% to the issuer's NRI. Morningstar DBRS maintained its cap rate assumption at 7.1%. This resulted in a Morningstar DBRS value of EUR 165.8 million, which represents a 19.1% haircut to the most recent C&W valuation.

The Palmanova loan balance stands at EUR 59.1 million as of November 2024 IPD, representing 28% of the loan pool. Based on December 2023 C&W valuation, the collateral portfolio value stood at EUR 80.0 million, which shows a further 8.2% decline from the previous valuation of EUR 87.1 million in December 2022 and a 22.0% decline from the initial valuation of EUR 102.6 million at issuance. As of the November 2024 IPD, the LTV was 70.3%, down from last year's LTV of 74.4%. As per amendment loan agreement, all excess cash flow is trapped in the cash trap account, until the final repayment date. As of the November 2024 IPD, the amount held in the cash trap is EUR 2.8 million.

The Palmanova DY increased to 11.8% at the November 2024 IPD from 9.9% a year earlier. The portfolio's NRI increased to EUR 6.6 million from EUR 6.4 million, while the vacancy rate decreased to 5.9% as of the November 2024 IPD from the vacancy rate of 13.9% a year ago. 

Morningstar DBRS' NCF assumption for the Palmanova loan stood at EUR 4.7 million as of its last annual review in January 2024, reflecting a haircut of 28.3% compared with the issuer's most recent NRI. Morningstar DBRS' cap rate of 7.5% provides a Morningstar DBRS value of EUR 63.3 million, equivalent to a haircut of 20.9% to the most recent C&W valuation.

The transaction benefits from a liquidity reserve facility provided by Deutsche Bank AG, London Branch that can be used to cover interest shortfalls on the Class A and Class B Notes. The size of the reserve stands at EUR 9.5 million as of the November 2024 IPD, decreased from EUR 10.5 million at closing following the partial prepayment that occurred on the August 2024 note payment date.

According to Morningstar DBRS, the outstanding balance of the liquidity reserve facility as of November 2024 would be sufficient to cover 12 months of interest payments on the Class A and Class B notes, given the current hedging in place and the margins on the notes but excluding the revenue excess amounts, and 10 months based on the Euribor capped at 5.0% payable on the notes after their maturity.

The Morningstar DBRS credit rating on the Class A notes is four notches lower than the credit rating implied by the direct sizing hurdle. The difference is warranted given that the level of liquidity reserve support available to the Class A notes is below the level Morningstar DBRS typically expects in order to mitigate payment disruption risk. At the time of issuance, based on Morningstar DBRS' calculation, the liquidity reserve facility was sufficient to provide 23 months of coverage on the covered notes given the lower hedging requirement compared with the current 12 months coverage based on a WA strike rate of 4.0% in compliance with the hedging conditions laid out in the amendment dated June 2024. 

The notes' final legal maturity date is scheduled in August 2031, four years after the loan maturity date. The tail period is shorter than the seven-year period Morningstar DBRS would expect in similar Morningstar DBRS-rated transactions. In Morningstar DBRS' view, the reduction of the tail period to four years increases the uncertainty about 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.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August, 2024) at https://dbrs.morningstar.com/research/437781.

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.

Morningstar DBRS has conducted a review of the transaction's legal documents provided in the context of the amendment agreement. A review of any other transaction legal documents was not conducted as the 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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include servicer reports and updated valuation reports provided by CBRE Loan Services as well as investor and payment reports provided by Zenith Service S.p.A.

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

At the time of the initial credit rating , 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 action on this issuer took place on 26 January 2024 when Morningstar DBRS confirmed its credit ratings with Negative trends and removed the notes from Under Review with Positive Implications status.

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 A (low) (sf)

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

Class D Notes Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on Class D Notes at B (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on Class D 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: Patrizia Catanese, Assistant Vice President,
Rating Committee Chair: David Lautier, Senior Vice President,
Initial Rating Date: 30 April 2019

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
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://dbrs.morningstar.com/about/methodologies.

European CMBS Rating and Surveillance Methodology (17 January 2024),
https://dbrs.morningstar.com/research/426818.

Interest Rate Stresses for European Structured Finance Transactions (24 September 2024) https://dbrs.morningstar.com/research/439913.

Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024) https://dbrs.morningstar.com/research/443196.

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August, 2024), https://dbrs.morningstar.com/research/437781.

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/439604.

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