DBRS Confirms Rating of Notes Issued by Debussy DTC plc

DBRS has today confirmed the rating on the following class of Commercial Real Estate Loan Backed Fixed-Rates Notes due in July 2025 issued by Debussy DTC plc:

-- Class A at BBB (low) (sf) with Stable trend

The rating confirmations reflect the overall stable performance of the transaction since issuance. The GBP 263.2 million fixed-rate loan is secured by a portfolio of 30 Toys “R” Us retail stores and one Toys “R” Us warehouse and distribution centre. There is one retail store each in Northern Ireland, Scotland and Wales, with the remaining retail stores and distribution centre located throughout England. The collateralized properties operate under individual triple-net leases, with leases expiring in February 2036 or February 2037. The leases provide for annual rental rate increases based on the Retail Price Index subject to a 1.0% floor and a 2.5% cap. In Q1 2014, rental rates across the portfolio increased by 2.5%. The loan is interest only for its entire seven-year term, and according to the July 2014 Investor Report, the interest coverage ratio was 1.31 times (x), an increase from 1.28x at issuance.

Like many traditional, big-box retailers, Toys “R” Us faces increased competition from other brick and mortar stores as well as online retailers, which offer similar products. As a result of the increase in online shopping, the need for retailers to occupy large spaces has diminished as they no longer require large traditional storefronts. These retailers have been forced to compete directly with competitors, most notably online retailers, in terms of price and delivery expectations, which often times results in downsizing. Despite these downward pressures, the performance of Toys “R” Us in the United Kingdom has remained stable, with the company opening three new retail stores since July 2013. According to Q1 2014 reporting, T12 net sales increased by 1.6% to GBP 68.6 million for the 83 retail locations compared with Q1 2013 reporting; however, EBITDA decreased over the same time period by 5.8% to GBP 4.0 million. While traditional retail properties will likely remain challenging in certain markets, the collateralized properties were reappraised in April 2014 at a total combined value of GBP 335.5 million, an increase of GBP 20.5 million since issuance.

Notes:
All figures are in pounds sterling unless otherwise noted.

The applicable methodologies are European CMBS Rating Methodology, European CMBS Surveillance and Legal Criteria for European Structured Finance Transactions, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The sources of information used for this rating include Debussy DTC PLC and Situs Asset Management Limited. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.