DBRS Ratings Limited (DBRS) assigned the following provisional ratings to the notes to be issued by Deco 2019-RAM DAC (the Issuer):
--Class A rated AAA (sf)
--Class B rated AA (sf)
All trends are Stable.
Deco 2019-RAM DAC (the issuer) is the securitisation of [76.0%] of a commercial real estate (CRE) loan backed by Intu Derby, a regional shopping centre in Derby, England. The GBP 150.0 million senior loan was advanced by Deutsche Bank A.G., London Branch (Deutsche Bank, the loan seller and arranger) to The Wilmslow (No.3) L.P. (the borrower), which is ultimately owned by a newly formed joint venture (JV) between the Intu Group and Cale Street Investments LP (Cale Street, together with Intu Group, the sponsors). The Intu Group will continue to assume its property manager role at Intu Derby after the JV is finalised.
Intu Derby is a 1.3 million square foot (sf) shopping mall located southeast of the Derby city centre. The main shopping centre has registered a total 20.1 million footfall (22.3 million including Eagle Market) in 2018, a 4.4% decrease from 2017. Intu Derby features a food court, Eagle Market (a covered retail market that opened in H2 2017) and a 12-screen cinema and has four car parks servicing the site. Jones Lang LaSalle (JLL or the appraiser) valued the shopping centre at GBP 351.0 million on 4 June 2019 based on a gross rental income of GBP 27.6 million and a net rent of GBP 24.2 million. Based on the financial statements provided to DBRS, at YE2018, Intu Derby generated a total net rental income (NRI) of GBP 25.2 million and was 95.2% occupied.
DBRS analysed the transaction based on the rent roll as at the 11 April 2019 cut-off date and concluded a DBRS net cash flow (NCF) of GBP 21.3 million, which represents a 12.8% haircut to the reported net rent. DBRS underwrote a higher vacancy of 20.0% to reflect vacancy risks associated with seven tenants that are under corporate voluntary agreements (CVAs). DBRS then applied a capitalisation rate of 7.4% to the underwritten NCF and arrived at a DBRS-stressed value of GBP 289.9 million, which represents a 17.4% haircut to the market value (MV) provided by the appraiser.
The loan features a loan extension option, cash trap and default covenants and the concept of a major tenant event. The loan has a five-year term with a one-year extension option exercisable if certain conditions are met. Cash trap covenants are set at 3.1 times (x) of projected interest coverage ratio (ICR) and/or 52.7% loan-to-value (LTV) while the default covenants are set at 2.5x of projected ICR and/or 58.5% LTV. A major tenant event will occur if a major tenant, classified as Debenhams or one of its affiliates/successor, reduces its space to below 100,000 sf, misses rental payments or becomes insolvent. In this case, a further 0.2% of the initial loan amount will be trapped per quarter. DBRS notes the LTV and/or projected ICR breach-related cash trap proceeds will be used to pay down the loan after continuing for four interest payment dates (IPDs). Conversely, in the event a major tenant vacates the property, cash trapped proceeds related to a major tenant event will be used to pay down the loan on the fourth IPD until the cash trap has been cured or the major tenant is replaced based on the conditions laid out in the loan agreement.
To hedge against increases in the interest payable under the loans resulting from fluctuations in the three-month LIBOR, the borrower has purchased an interest cap agreement from Merrill Lynch International with a cap strike rate of 1.0% for the full outstanding loan amount.
Deutsche Bank will provide a liquidity facility of GBP 4.0 million to the issuer in order to cover any potential shortfalls on the issuer’s senior expenses, Class A and B interest and property protection loans. According to DBRS’s analysis, the commitment amount, as at closing, will be equivalent to approximately 12 months of coverage based on the hedging term. At issuance, it is expected that the liquidity reserve facility will be fully drawn and deposited in an account under the issuer’s control.
The final legal maturity of the notes is in August 2030, five years after the fully extended loan maturity date. If necessary, DBRS believes that this provides sufficient time, given the security structure and jurisdiction of the underlying loan, to enforce on the loan collateral and repay the bondholders.
Initially, the loan seller will be selling [76.0%] of the loan to the issuer; however, there is no undertaking from the loan seller to retain the remaining [24.0%] balance during the life of the transaction. Notwithstanding, Deutsche Bank will retain an ongoing material interest of no less than 5.0% in order to comply with EU risk retention regulation.
The ratings will be finalised upon receipt of execution version of the governing transaction documents. To the extent that the documents and information provided to DBRS as of this date differ from the executed version of the governing transaction documents, DBRS may assign a different final rating to the rated notes.
All figures are in British pound sterling unless otherwise noted.
The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology”
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: https://www.dbrs.com/research/333487/rating-sovereign-governments.
The sources of data and information used for the ratings include Deutsche Bank AG, London branch and its delegates, JLL, and Paul Hastings LLP.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
These ratings concern a newly issued financial instrument. These are the first DBRS ratings on this financial instrument.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A at AA (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class A at A (high) (sf)
Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B at A (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class B at A (low) (sf)
For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.
Lead Analyst: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 13 September 2019
DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology
A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at email@example.com.
The press release was amended on 20 September 2019 to add the brackets on the securitisation and loan seller retain percentages in paragraphs 1 and 8.