DBRS Ratings Limited (DBRS Morningstar) confirmed its B (sf) rating on the Class A Notes of the Commercial Real Estate Loan Backed Fixed-Rate Notes due July 2025 issued by Debussy DTC plc and maintained its Negative trend on the rating.
The rating confirmation reflects the continued uncertainty of the loan after the single tenant, Toys R Us (TRU), vacated all the properties, not just in the portfolio but across the UK, following its administration. The vacating of the tenant led to a subsequent decrease in value as of the latest valuation conducted by Colliers International (Colliers) in June 2018 to GBP 248.5 million compared with the previous GBP 359.4 million as at the April 2017 valuation, before TRU vacated. Following six asset disposals in 2018, a further 10 assets were disposed in 2019, resulting in sale proceeds of GBP 86.0 million and an appraised value for the remaining 15 assets in the portfolio of GBP 177,475,000. The sales proceeds achieved for the 10 disposals was approximately 13% lower than the Colliers valuation for the respective properties.
In August 2018, the special servicer, Solutus, was replaced by CBRE Loan Services Limited (CBRE) ,which terminated the former receiver and appointed a new receiver. In September 2018, CBRE submitted a claim to the High Court of England disputing the validity of the previous standstill agreement, the purchase option, and the continuing appointment of the original receiver made by the previous special servicer. In November and subsequent December 2018 court hearings, the court was held to determine the application for interim relief and give directions for the determination of the administration application. However, the court did not provide further direction of the administration application and instead ruled that the application should be managed with the main claim at the case management conference in February 2019.
According to the special servicer, the court proceedings were settled by all parties on 12 April 2019. The settlement deed required the borrower to achieve certain sales and lettings targets by a specific date; however, as of the July 2019 interest payment date, the borrower failed to meet its targets, leading to the special servicer taking full control of the portfolio.
The 10 assets that were disposed of by the special servicer in the last 12 months had a total gross proceeds of GBP 86.0 million. The proceeds were used to pay down GBP 51.3 million of principal on Tranche A to GBP 129.2 million and top up the reserve funds. As there is currently no cash being generated from the underlying properties, the reserve balances had been actually decreasing in order to pay issuer senior costs, interest on the Class A and Class C Note senior additional payment. As of the January 2020 interest payment date, the reserves totalled GBP 26.0 million, of which GBP 11.9 million are expected to fund interest payments on both the Class A and the Class C Note senior additional payment (which ranks senior to principal of both the Class A and B notes) for approximately 18 months. Additionally, the remaining funds in the reserve are split between a GBP 13.6 million disposal reserve and a GBP 0.53 million cost reserve to cover any possible capital expenditures required to maintain the properties in order for eventual sale.
DBRS Morningstar believes repayment of Class A principal will occur in full upon the successful execution of the business plan, which is to sell the remaining assets, whilst letting vacant space and spending a further GBP 9 million of capex in the interim. In its calculations, DBRS Morningstar applied a haircut to market value of 13% as seen across the 10 sold properties and concluded that over an 18-month period after senior-ranking costs, the gross sale proceeds would just cover the full repayment of the Class A principal. If the sale of the remaining portfolio were to complete before 18 months, funds held in reserve could also be used towards principal repayment.
All figures are in British pound sterling unless otherwise noted.
The principal methodology applicable to the rating is: “European CMBS Rating and Surveillance Methodology.”
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for this rating include CBRE Loan Services Limited and Situs Asset Management Ltd.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 8 March 2019, when DBRS Morningstar maintained its rating on the Class A note as B (sf) and maintained its negative trend.
The lead analyst responsibilities for this transaction have been transferred to Dinesh Thapar.
Information regarding DBRS Morningstar 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 Morningstar 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 Morningstar net cash flow (NCF), expected rating of Class A at below B (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A at below B (low) (sf)
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
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
Initial Rating Date: 29 July 2013
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- European CMBS Rating and Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
A description of how DBRS Morningstar 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 firstname.lastname@example.org.