Morningstar DBRS Upgrades and Confirms Credit Ratings on Pietra Nera Uno S.R.L. With Stable Trends

DBRS Ratings GmbH (Morningstar DBRS) took the following credit rating actions on the bonds issued by Pietra Nera Uno S.R.L. (the Issuer):

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

The trend on all ratings remains Stable.

CREDIT RATING RATIONALE
The credit rating upgrades and confirmations follow the repayment of the Palermo loan in full and the deleveraging of the two remaining loans, Fashion District and Valdichiana, because of the restructuring that took place in April 2024 as well as the loans' scheduled amortisation.

At issuance, the transaction was an agency securitisation of three senior commercial real estate 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., the originator, advanced the loans to four Italian borrowers ultimately owned by the Blackstone Group LP (Blackstone or the Sponsor), and the loans are backed by four retail properties located across Italy. Deutsche Bank AG, London Branch (Deutsche Bank) acted as sole arranger for the transaction.

The Palermo loan was repaid in full in November 2024, leaving behind The Fashion District loan and Valdichiana loan as collateral. 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. 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.

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. The Sponsor's proposal entailed the loan extension of three years to May 2027 against a partial repayment of the three loans via equity injection, an increased margin on the notes and a funded cash reserve at loan level to be used to fund any shortfalls of debt service amounts and certain costs amongst other conditions. Please see the following press release from Morningstar DBRS for more details regarding the amendment: "Morningstar DBRS Comments on Pietra Nera Uno S.R.L. Loans Restructuring".

In June 2024, the noteholders voted on and passed a further resolution, which included the following amendments, amongst others: (1) the final maturity of the notes was extended to May 2034; (2) Revenue Excess Amounts now rank senior to interest due and payable on the Class Z Notes, Note Premium Amounts, and Liquidity Reserve Subordinated Amounts (previously Revenue Excess Amounts ranked junior to the three items listed above); and (3) the primary servicer shall not be capable of granting any extension to the repayment date of any loan without noteholder consent.

The balance of the Fashion District loan declined to EUR 106.6 million from EUR 122.8 million over the quarter ended May 2024 because of scheduled amortisation and a repayment of EUR 16.2 million via an equity injection as stipulated by the amendment dated April 2024. Similarly, the balance of the Valdichiana loan declined to EUR 88.9 million from EUR 94.1 million over the same quarter because of scheduled amortisation and a repayment of EUR 5.2 million via an equity injection from the borrower. Both loans continue to amortise by 1.0% per annum. The outstanding balances of the Fashion District and Valdichiana loans stand at EUR 106.0 million and EUR 88.4 million as of November 2024, respectively.

Primarily driven by the reduction in loan balances, both loans' debt yields (DYs) improved over the past four quarters. The Fashion District loan's DY rose to 16.1% as of November 2024 from 10.47% as of November 2023. Meanwhile the Valdichiana loan's DY went up to 13.2% from 11.4% over the same period. The contracted rent for the Fashion District portfolio increased to EUR 15.1 million from EUR 14.0 million between November 2023 and November 2024. Similarly, contracted rent for the Valdichiana asset increased to EUR 11.7 million from EUR 11.3 million. All surplus net rental income is paid into the cash trap account for each loan following the amendment dated 30 April 2024. As of November 2024, the cash trap balance of the Fashion District and Valdichiana loans is EUR 5.3 million and EUR 6.5 million, respectively.

Based on the latest available valuation report dated 29 February 2024 prepared by Cushman & Wakefield (C&W), the appraised value of Valdichiana is EUR 128.9 million, which shows a decline of 2.0% over the previous valuation (EUR 131.5 million), and the collective value of the two assets securing the Fashion District loan, Mantova and Puglia, is EUR 143.5 million, which shows a 4.2% decline over the previous valuation (EUR 149.8 million). C&W also conducted the previous valuation dated 31 March 2023. In spite of a modest decline in market value for all the assets comprising the collateral, the LTV metrics as of November 2024 show improvement compared with November 2023 because of the deleveraging of the loans. Fashion District's LTV declined to 70.5% as of November 2024 from 82.4% as of November 2023. Valdichiana's LTV declined to 66.4% from 71.7% over the same period.

Morningstar DBRS maintained its net cash flow (NCF) and capitalisation rate (cap rate) assumptions for Fashion District at EUR 9.5 million and 8.25%, respectively. This results in a Morningstar DBRS value of EUR 114.6 million, which represents a 20% haircut over the most recent appraised value of EUR 143.5 million. Similarly, Morningstar DBRS maintained its NCF and cap rate assumptions for Valdichiana at EUR 8.1 million and 7.5%, respectively. This results in a Morningstar DBRS value of EUR 108.5 million, which represents a 16% haircut over the most recent appraised value of EUR 128.9 million.

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 2026, with strike rates of 3.90% for the Fashion District loan and 3.92% for the Valdichiana loan. The hedging counterparty is HSBC Bank plc.

The transaction benefits from a liquidity reserve facility of EUR 7.2 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 November 2024 interest payment date (IPD). According to Morningstar DBRS, the outstanding balance of the liquidity reserve facility as at the November 2024 IPD would be sufficient to provide 12 months of coverage based on the WA cap rate strike across the two loans and 10 months based on the Euribor cap of 5.0% payable on the notes after their maturity date, not accounting for the Revenue Excess Amounts which are not rated by Morningstar DBRS.

The Morningstar DBRS credit rating on the Class A Notes is three notches lower than the credit rating implied by the Direct Sizing Hurdles. This difference is warranted given that the level of liquidity 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, the liquidity facility was sufficient to provide 23 months of coverage on the covered notes according to Morningstar DBRS' calculation. The coverage is now 12 months as stated above based on the WA cap rate strike across the two loans and not including Revenue Excess Amounts. The primary reason for the decline in liquidity facility coverage is that the WA cap rate strike across the loans securing the transaction was 2.0% at the time of issuance, and it is now 3.91%, which complies with the hedging conditions laid out in the amendment dated April 2024.

Following the amendments that passed in April and June 2024, the final legal maturity of the notes is now 22 May 2034, seven years after the loan maturity (15 May 2027). Given the security structure and jurisdiction of the underlying loan, Morningstar DBRS believes this provides sufficient time to enforce on the loan collateral, if necessary, and repay the bondholders.

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 factor(s) 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), 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 amendments. 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 23 January 2024 when Morningstar DBRS upgraded and confirmed credit ratings on Pietra Nera Uno S.R.L. with Stable trends and removed the credit ratings from Under Review with Positive Implications.

The lead analyst responsibilities for this transaction have been transferred to Patrizia Catanese.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on http://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 (high) (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 (high) (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on Class B Notes at BBB (low) (sf)

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

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

Class E Notes Risk Sensitivity:
-- 10% decline in Morningstar DBRS NCF, expected credit rating on Class E Notes at BB (sf)
-- 20% decline in Morningstar DBRS NCF, expected credit rating on Class E Notes at below B (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: Mark Wilder, Senior Vice President
Initial Rating Date: 2 February 2018

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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

-- 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.