DBRS Places Three Classes Under Review with Negative Implications and Confirms Class A Ratings of Taurus 2015-1 IT S.r.l.

DBRS Ratings Limited (DBRS) has today confirmed the rating of, and changed the trend to Negative from Stable on, the Class A Commercial Mortgage-Backed Floating-Rate Notes Due February 2027 issued by Taurus 2015-1 IT S.r.l.:

-- Class A at A (high) (sf)

Additionally, DBRS has placed Classes B, C and D Under Review with Negative Implications as follows:

-- Class B at A (sf), Under Review with Negative Implications
-- Class C at BBB (low) (sf), Under Review with Negative Implications
-- Class D at BB (low) (sf), Under Review with Negative Implications

The Under Review with Negative Implications designations and the trend changes are a result of the potential significant decline in net operating income (NOI) for the Globe and the Calvino loans, which are discussed in greater detail below. DBRS is awaiting further information from the servicer to fully assess the impact on the transaction.

Taurus 2015-1 IT is a securitisation of three floating-rate commercial real estate loans granted by Bank of America, N.A. Milan Branch to the borrowers. The three loans -- Calvino loan, Globe loan and Fashion District loan -- had an aggregate balance of EUR 301.5 million at issuance and are hedged with borrower-level interest rate caps. As of the latest investor report from November 2016, the current outstanding whole loan balance is EUR 275.5 million, and the securitised balance is EUR 261.7 million, which represents a collateral reduction of 8.6% since issuance. This collateral reduction is due to the disposal of two properties associated with the Calvino loan, which were sold in Q1 2015 and Q3 2016. The proceeds from these sales were used to pay down the outstanding debt.

At origination, the three loans were secured by 14 properties located in Italy that were occupied by 442 tenants, with the top ten tenant exposures across all properties accounting for 37.1% of the portfolio’s in-place base rental income. Approximately 38.1% of the allocated loan amount is secured by shopping centres anchored by hypermarkets, 28.2% is secured by retail centres, 25.1% is secured by office properties and 8.6% is secured by telephone exchange facilities.

The largest loan by market value, the Globe Loan, is secured by three shopping centres anchored by the regional hypermarket Unicomm SRL. The loan is sponsored by Orion Capital Managers. As of the investor report from November 2016, the portfolio’s most recent physical vacancy rate is 8.8%, which represents an increase from 2.3% at the last review (Nov 2015 IPD) and 1.7% at issuance. The increase in vacancy has primarily been driven by development works that have been carried out at the largest property, Vizencia-Palladio, which led to the temporary closure of some retail units. Additionally, the anchor tenant Unicomm SRL reduced its space. The loan benefits from a five-year rental vendor guarantee with Unicomm S.R.L, an un-rated entity. The guarantee states that if the annual NOI is lower than EUR 13.7 million, the vendor will pay the difference directly to the Borrower. DBRS did not give credit to this vendor guarantee in its analysis. Excluding the vendor guarantee payments, the most recent trailing-12-month (T-12) NOI as of November 2016 was EUR 11.5 million. This differs from the servicer’s projected NOI for the next 12 months of EUR 8.7 million. If such deterioration of the cash flows arises and is continuing, the performance of the Globe Loan and the transaction may be affected. In December 2015, Jones Lang LaSalle revalued the Globe Loan’s portfolio and estimated a market value of EUR 213.4 million, a 7.4% increase since issuance. The November 2016 interest coverage ratio (ICR) and loan-to-value (LTV) were 5.04 times (x) and 53.9%, respectively. The maturity date of the loan is in February 2020.

The Calvino Loan has a current outstanding securitised loan balance of EUR 71.7 million following the sale and release of two office properties. The loan is sponsored by Cerberus and Cordea Savills. Following the release, the loan collateral consists of a portfolio containing four office buildings and three telecom switching stations located in Northern Italy and Rome. Prysmian S.p.A. (Milano) and Wolters Kluwer Italia S.r.l (Assago), which are two of the largest tenants and represent EUR 3.8 million of annual contracted rent, have both confirmed they will be vacating the properties upon their respective lease expiry dates in April 2017 and July 2017. Together, these tenants comprise 36.6% of the in-place rent. As mentioned in DBRS’s rating confirmation published in January 2016, Prysmian S.p.A., the single-tenant occupying the property in Viale Sacra (Milan), communicated its intention to leave the property in Q4 2015. According to the most recent investor report, the borrower is actively marketing the vacant and soon-to-be vacant units, and DBRS will monitor any updates. Further information from the servicer is still pending to assess the sponsor’s plan following the lease expiries. In DBRS’s view, the departure of these tenants represents a significant risk; if such space is not effectively leased or the income loss partially mitigated, the loan carries an increased risk of a covenant and/or payment default, also considering current rent-free periods of other tenants, irrecoverable expense and capex requirements for vacant units. Colliers valued the portfolio at EUR 117.3 million in Q3 2016, which is in line with the issuance value, excluding the disposed assets. The ICR and LTV as of the November 2016 IPD, were 1.83x and 64.1%, respectively. The original loan term was five years with a maturity date of August 2018; however, the Borrower has the option, providing certain conditions are met, to extend the loan’s maturity by one year to August 2019.

The Fashion District Loan was originated in November 2014 to provided financing for the acquisition of two fashion outlet villages to the Blackstone Group through a real estate fund, MOMA. The two fashion-outlet villages include Mantova, which is located in Northern Italy, and Molfetta, which is located in South-Eastern Italy. Since issuance, the portfolio’s vacancy rate has increased to 21.6% from 17.9%. While the vacancy rate at the Mantova property has remained stable since issuance, the vacancy rate at the Molfetta property has risen from 26.0% at the first IPD to 31.5% as of the latest investor report in November 2016. This can primarily be attributed to capital expenditure projects. The sponsor concentrated all vacancies in a specific area, which was closed to the public for refurbishment works and was expected to be completed in December 2016. DBRS expects the Molfetta vacancy rate to stabilise after refurbishments works are finished. Mantova generates approximately 57.0% of total annual rent, while Molfetta accounts for 43.0% of the total annual rent. According to the latest investor report from November 2016, the most recent T-12 NOI was EUR 8.1 million, which represents a decrease since issuance caused by the higher vacancy at Molfetta, but is still in line with the DBRS stabilized cash flow of EUR 8.7 million at issuance. At issuance, the estimated market value of the portfolio was EUR 130.9 million, as reported by Cushman & Wakefield (C&W), who valued the properties in September 2014. During Q4 2016, Savills revalued the portfolio and estimated a market value of EUR 144.4 million, which represents an increase of 9.4% over the initial C&W valuation. The ICR and LTV as of November 2016 were 3.8x and 58.9%, respectively.

The final legal maturity of the Notes is in February 2027, seven years beyond the latest date of the loans maturing, including loan extensions. If necessary, this is believed to be sufficient time, given the security structure and jurisdiction of the underlying loans, to enforce on the loan collateral and to repay bondholders.

At issuance, DBRS took the sovereign stress into consideration by adjusting the sizing hurdles used in its ratings. Recently, on 13 January 2017, DBRS downgraded the Republic of Italy to BBB (high), and consequently, an additional stress was applied to the sizing hurdles in this transaction. For a more detailed discussion of the Italy rating downgrade, please refer to http://dbrs.com/research/304610.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating 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.

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

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 DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of data and information used for this rating include the Servicer, Mount Street Mortgage Servicing Limited.

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

At the time of the initial rating 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 this rating to be of satisfactory quality.

DBRS 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 17 February 2016 when DBRS confirmed the ratings on this transaction.

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):

A decrease of 10% and 20% in the DBRS net cash flow (NCF), derived by looking at comparable properties, market rents, 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 Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A to BBB (sf)
-- 20% decline in DBRS NCF, expected rating of Class A to BB (high) (sf)

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B to BBB (sf)
-- 20% decline in DBRS NCF, expected rating of Class B to BB (high) (sf)

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C to CCC (sf)
-- 20% decline in DBRS NCF, expected rating of Class C to CCC (sf)

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS’s outlooks and ratings are monitored.

This rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Jorge Lopez Herguido, Financial Analyst, EU CMBS
Rating Committee Chair: Christian Aufsatz, Managing Director, Global Structured Finance
Initial Rating Date: 22 January 2015

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
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisation

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.

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