DBRS Confirms Ratings of Moda 2014 S.r.l.

DBRS Ratings Limited (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes Due August 2026 issued by Moda 2014 S.r.l.:

• Class A at A (high) (sf)
• Class B at A (sf)
• Class C at BBB (sf)
• Class D at BBB (sf)
• Class E at BB (sf)

The Class X1 and Class X2 Notes are not rated by DBRS. All trends are Stable.

The rating confirmation reflects the stable performance of the sole remaining loan in the transaction, the Vanguard Loan. Moda 2014 S.r.l. was initially a securitisation of two floating-rate loans: the Franciacorta and the Vanguard Loan. At issuance, the two loans had an aggregated balance of EUR 198.2 million. As of the most recent investor report of May 2017, the outstanding transaction balance was EUR 116.8 million, representing a 41.1% collateral reduction since issuance. The reduction is due to the prepayment of the Franciacorta Loan (39.3% of the initial securitised balance) in May 2016 and the Vanguard Loan’s 2.7% scheduled amortisation (1.0% per annum) since issuance. The prepayment proceeds of the Franciacorta loan were allocated modified pro rata to the CMBS notes.

The purpose of the Vanguard Loan was to provide financing for the acquisition of one outlet village and to refinance the existing debt of the borrowers. The sponsor of the loan are funds managed by Blackstone Real Estate Partners. The collateral consists of one outlet village and three shopping centres located across Italy. While the Vanguard Loan does have exposure to economically weaker Southern Italy, which has a lower gross domestic product per capita and higher unemployment rates than Italy as a whole, approximately 87.1% of the total gross income of the loan lies in the economically stronger regions of Northern and Central Italy.

Since issuance, the Vanguard Loan has been characterised by a mixed performance with increasing vacancy rates, increasing expenses and lower net operating income across the three largest properties. Despite that weaker performance, the Vanguard Loan performance has been in line with DBRS’s expectations and stabilised metrics. However, during the last 12 months, the Vanguard Loan has experienced a recovery based on a broadly improved performance with lower irrecoverable costs and higher net operating cash flows since the last review in June 2016. The latest Investor Report of May 2017 shows a total loan physical vacancy rate of 7.8%, lower than the 13.4% reported in May 2016. The total loan vacancy is mainly driven by the largest property, the Valdichiana Outlet Village; the three other properties are close to fully let. The current aggregated net operating income (NOI) of all four properties securing the Vanguard Loan is EUR 14.6 million, which represents a 9.5% increase from the EUR 13.4 million reported in the first Investor Report of February 2015. The main driver of the increase in NOI has been the reduction of irrecoverable expenses during the last year, followed by a lower vacancy rate. According to the Investor Report of May 2017, weighted-average lease length ranges between 3.1 to 7.2 years across the four properties with a loan remaining term of 2.3 years. Based on the rent roll provided by the servicer, 25.7% of total gross income has lease expiry or break options within the next 12 months. At issuance, DBRS estimated a stabilised net cash flow (NCF) of EUR 12.3 million, which represents a 16.6% haircut to the most recent NOI. Per the Investor Report of May 2017, the most recent reported interest coverage ratio (ICR) and debt service coverage ratio (DSCR) are 3.1x and 2.9x respectively. In June 2016, Cushman & Wakefield (C&W) revalued the portfolio and estimated a portfolio valuation of EUR 210.1 million, which represents a 12.4% increase from the original EUR 186.9 million in March 2014. DBRS’s stabilised value of EUR 149.3 million currently presents a 19.3% haircut to the most recent C&W valuation. As of the May 2017 Investor Report, the loan-to-value ratio is 55.6% compared to 64.3% at issuance.

The largest of the four properties securing the Vanguard Loan, the Valdichiana Outlet Village, accounts for 57.3% of the total gross revenue of the loan. As of the May 2017 Investor Report, the physical vacancy of this property marginally increased to 7.1% from the 7.0% reported in May 2016. The most recent reported net operating income (NOI) is EUR 8.7 million, which shows an 8.0% uplift from the EUR 8.0 million a year ago but still 4.2% below the initial NOI of EUR 9.1 million. Higher vacancy rates and expense amounts have mainly driven the NOI at this property. Per the rent roll provided by the servicer, 12.3% of the entire gross revenue at the property (6.9% of the entire loan) has lease expirations within the next 12 months); tenants contributing 4.8% to the rental income have already given notice of their intention to leave and eight units are under negotiations with new tenants. According to the servicer’s investor report commentary, the last 12 months’ sales increased by 4.1% compared with the previous year.

Le Colonne Shopping Gallery, accounting for 17.3% of the total gross revenue of the loan, is the second-largest property. The property is located in Brindisi, in the province of Apulia (Puglia) and is the only property located in Southern Italy. As of the latest investor report of May 2017, the property is now fully let compared with the 1.0% vacancy rate at issuance. The most recent reported NOI of EUR 2.4 million is higher than the EUR 2.0 million at last review in June 2016; however, it is still lower than EUR 2.8 million at issuance. Per the rent roll provided by the servicer, there is an elevated lease rollover exposure, with 40.7% of the total annual rent at the property (7.0% of the entire loan revenue) having break options or lease maturities within the next 12 months. According to the servicer, footfall and sales increased by 4.7% and 7.3%, respectively, in the last 12 months. Additionally, 13 tenants paid a turnover rent in 2016 for an amount corresponding to about 13.4% of the total gross rent.

The remaining two shopping centres, Il Borgogioioso and La Scaglia, account for 12.9% and 11.9% of the total loan revenue, respectively, based on the Investor Report of May 2017. The first, Il Borgogioioso, reported an NOI of EUR 1.7 million, which is higher than the EUR 1.3 million at last review but lower than the EUR 2.2 million at issuance. Both properties have reduced their vacancies to near 0-1.0% from rates of 7.8% in Il Borgogioioso and 9.3% in La Scaglia since issuance. As of the Investor Report of May 2017, La Scaglia’s NOI increased to EUR 1.7 million or 24.6% up from issuance. A lower irrecoverable expenses figure during the last 12 months has been the main driver of the increase in NOI.

Per the loan documents, every quarter the Vanguard Loan is subject to covenant tests. These covenants require to maintain a minimum ICR of 1.40x and a 2.00x ICR Cash Trap. Additionally, the loan has a loan-to-value covenant test of a maximum of 82.5% loan-to-value (LTV) and a 77.5% LTV Cash Trap trigger. As of this review, all the ratios were within the expected range at issuance and DBRS estimates a currently low risk of the covenant’s triggers being breached during the remaining loan term.

At issuance, there was a 364-day revolving liquidity facility of EUR 16.5 million provided by Goldman Sachs International Bank. Per the latest Investor Report of May 2017, the closing liquidity balance available is EUR 8.9 million, which represents a decrease of 45.9% from the initial balance and is in accordance with the proportional cancellations following the prepayment of the Franciacorta Loan and the loan’s 1.0% amortisation per annum. In May 2017, a notice to Noteholders was reviewed indicating the extension of the Liquidity Facility for a further period until July 2018.

The final legal maturity date of the transaction is in August 2026, seven years beyond the maturity of the sole remaining loan in August 2019. In DBRS’s view, this would allow for sufficient time to enforce and repay bondholders, if needed.

At issuance, DBRS took the sovereign stress into consideration by adjusting the sizing parameters used in its ratings. On 13 January 2017, DBRS downgraded the Republic of Italy to BBB (high), and consequently, an additional stress was applied to the sizing parameters used 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.

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 these ratings include the Servicer, Securitisation Services S.p.a.

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.

The last rating action on this transaction took place on 13 June 2016, when DBRS confirmed the ratings for Moda 2014 S.r.l.

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 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 downgrade of Class A to BBB (high) (sf)
-- 20% decline in DBRS NCF, expected downgrade of Class A to BB (high) (sf)

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

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected downgrade of Class C to BB (low) (sf)
-- 20% decline in DBRS NCF, expected downgrade of Class C to B (sf)

Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected downgrade of Class D to BB (low) (sf)
-- 20% decline in DBRS NCF, expected downgrade of Class D to B (sf)

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

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

Lead Analyst: Jorge Lopez Herguido, Financial Analyst, European CMBS
Rating Committee Chair: Christian Aufsatz, Managing Director, European CMBS
Initial Rating Date: 3 July 2014

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

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