DBRS Upgrades and Confirms Ratings of Deco 2014 – Gondola S.R.L.

DBRS Ratings Limited (DBRS) has today upgraded the ratings of the Commercial Real Estate Loan Backed Floating Rate Notes (the Notes) due February 2026 issued by Deco 2014 – Gondola S.R.L. as follows:

-- EUR 53.7 million Class A Notes upgraded to AA (high) (sf) from AA (sf);
-- EUR 65 million Class B Notes upgraded to AA (sf) from AA (low) (sf).

The trends are Stable.

DBRS has confirmed the ratings of classes C, D and E with a trend change on Class C as follows:
-- EUR 30.5 million Class C Notes rated A (sf) with the trend changed to Stable from Negative;
-- EUR 52.0 million Class D Notes rated BBB (low) (sf) with a Negative trend;
-- EUR 21.9 million Class E Notes rated BB (high) (sf) with a Negative trend.

The rating upgrades of classes A and B reflect reduced leverage following the sequential allocation of the Gateway loan prepayment proceeds. In addition, the Delphine loan was partially prepaid after the sale of the NHOW Hotel (likewise allocated sequentially to the CMBS notes). The total outstanding securitised loan balance decreased from EUR 333.8 million as of the February 2016 interest payment date (IPD) to EUR 223.2 million as of the May 2016 IPD which in turn has reduced Class A’s balance to EUR 53.7 million. The aggregate outstanding balance of classes A and B is now EUR 118.7 million and Class B benefits from 46.8% subordination, similar to the 47.7% subordination for Class A at issuance. There is no outstanding liquidity facility (LF) draw as of May 2016 and the remaining LF commitment (EUR 15.1 million) is sufficient to cover interest payments for two years based on DBRS’s stressed rate.

Following the prepayments, the Class C notes also benefit from an improved 33.1% subordination level compared with 20.8% at issuance. Therefore, DBRS has changed its trend to Stable.

The Delphine loan borrower is still working on re-letting Block 2 of the Milan office complex securing the loan. Block 2 is the biggest block of the three-block office complex that was entirely leased to RCS at issuance. These office buildings are located in central Milan, just outside of the Milan CBD area, and are in good condition. The property manager has launched refurbishment works for Block 2 to attract tenants following the departure of RCS in December 2015, and is currently in discussion with potential tenants. DBRS has updated its net cash-flow (NCF) assumption giving some value to re-letting of Block 2. DBRS also assumes that the office area will be let at market rent, which was provided by the surveyor in its May 2016 valuation report. The updated DBRS NCF is EUR 11.5 million 4.7% lower than the current gross rental income (GRI) reported by the servicer, which does not include any rent from Block 2.

In light of the property quality and DBRS’s expectation that Block 2 can be re-let in the near- to medium-term, the rating agency confirmed the ratings for classes D and E. DBRS recognises, however, that the premises are still vacant and that it is a common practice in Europe to give a long rent-free period to new tenants. Therefore, DBRS’s maintains the Negative trends for these two classes.

The partial loan prepayment following the sale of the NHOW hotel was subject to a 30% release premium above the (dynamic) allocated loan amount (EUR 22.8 million). As a result, the loan’s leverage reduced following the property sale.

The other remaining loan – the Mazer loan – has lost EUR 0.61 million of GRI despite of the successful leasings of two of its underlying units. This is mainly due to the departure of Acerse from the Suzzara site, which was significantly over-rented under Acerse’s lease. The new tenant is paying market rent. This change of tenancy resulted in a loss of circa EUR 1 million in GRI which has been partially offset by positive rent development in other properties securing the loan. The servicer has also reported that a new tenant will occupy all of the vacant space in Oleggio site from 1 May 2016.

DBRS continues to monitor this transaction on a quarterly basis.

Notes:

All figures are in Euro unless otherwise noted.

The principal methodology applicable is: European CMBS Surveillance.

The applicable methodologies are: European CMBS Surveillance, European CMBS Rating Methodology, Legal Criteria for European Structured Finance Transactions, Derivative Criteria for European Structured Finance Transactions and Unified Interest Rate Model for European Securitisations, which can be found on www.dbrs.com under Methodologies.

Other methodologies referenced in this transaction are listed at the end of this press release.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to the DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries.

The sources of information used for this rating include Situs Asset Management Ltd., Savills Italy S.r.l. and Securitisation Services. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

The last rating action on this transaction took place on 17 August 2015 when DBRS has confirmed all ratings but changed the trends of classes C, D and E to Negative.

The lead responsibilities for this transaction have been transferred to Rick Shi.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

A decrease of 10% and 20% in the DBRS net cash flow (NCF), derived by looking at comparable properties, market rents and market occupancies, in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to the following ratings in the transaction, as noted below for each class respectively:

Class A Note Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A to AA(high) (sf);
-- 20% decline in DBRS NCF, expected rating of Class A to AA(high) (sf).

Class B Note Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B to AA (sf);
-- 20% decline in DBRS NCF, expected rating of Class B to AA (sf).

Class C Note Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C to A (sf);
-- 20% decline in DBRS NCF, expected rating of Class C to BBB (high) (sf).

Class D Note Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D to BB (high) (sf);
-- 20% decline in DBRS NCF, expected rating of Class D to B (high) (sf).

Class E Note Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class E to CCC (sf);
-- 20% decline in DBRS NCF, expected rating of Class E to CCC (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS’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 regulations only.

Initial Lead Analyst: Chase Purdom, Vice President
Initial Rating Date: 15 July 2014
Initial Rating Committee Chair: Erin Stafford, Managing Director

Lead Surveillance Analyst: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Erin Stafford, Managing Director

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY
United Kingdom

The rating methodologies used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies:
-- European CMBS Rating Methodology
-- European CMBS Surveillance
-- Legal Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations

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.