DBRS Confirms Ratings of Deco 2014 - Gondola S.R.L.

DBRS Ratings Limited (DBRS) has today confirmed the ratings of the Commercial Mortgage-Backed Floating-Rate Notes Due February 2026 (the Notes) issued by Deco 2014 - Gondola S.R.L. as follows:

-- EUR 48.4 million Class A Notes rated AA (high) (sf) with a Stable trend,
-- EUR 65 million Class B Notes rated AA (sf) with a Stable trend,
-- EUR 30.5 million Class C Notes rated A (sf) with a Stable trend,
-- EUR 52.0 million Class D Notes rated BBB (low) (sf) with a Negative trend and
-- EUR 21.9 million Class E Notes rated BB (high) (sf) with a Negative trend.

The rating confirmations reflect the overall performances of the loans. Tenancy risks related to the Delphine Loan warrants the Negative trends on the most junior tranches.

Deco 2014 - Gondola S.R.L. is a securitisation of originally three commercial real estate loans originated in Italy. Following the prepayment of the Gateway Loan in 2016, two loans (the Delphine Loan and the Mazer Loan) are still in the pool. As of the May 2017 Interest Payment Date (IPD) the total outstanding note balance has decreased to EUR 217.8 million from EUR 354.9 million at inception and most notably the Class A note balance has reduced down to EUR 48.4 million from EUR 185.5 million at issuance thanks to the sequential-payment structure. There is currently no liquidity facility (LF) drawing outstanding and the remaining LF commitment (EUR 14.7 million) is sufficient to cover interest payments for almost two years based on DBRS’s stressed rate.

The trends on the most junior tranches remain Negative due to the tenancy risk arising from the potential departure of Telecom Italia from the Parco di Medici (PdM) property in the Delphine Loan, the second-largest tenant with EUR 7.7 million gross rent (approximately 22% of the total rental income). The tenant served noticed in Q4 2016, indicating the intention to vacate the premises at lease expiration, on 20 July 2018. The Fund Manager is discussing with Telecom Italia the renewal of the lease and according to the Servicer it is unlikely that Telecom Italia would find accommodations elsewhere, given the scarce availability of “Grade A” office spaces in Rome and the halt to the development of their new headquarters in Rome. In parallel, the sponsor is also contemplating leasing the asset to multiple tenants should Telecom Italia eventually leave the property.

The Delphine Loan borrower has successfully leased up the entire Block 2 of the Milan office complex to primarily two financial-sector tenants. Block 2 is the biggest block of the three-block office complex, which is located in central Milan, just outside of Milan’s central business district.

Despite of the full lease up of the Milan property and the potential re-letting of the PdM asset after 2018, the projected gross rental income (GRI) is still expected to decline due to the higher rent currently paid by Telecom Italia, estimated to be above the market rent. DBRS also notes that Telecom Italia departing shortly before the Delphine Loan’s maturity date on 15 February 2019 would increase the refinancing risk of the loan.

DBRS has kept its net cash flow (NCF) assumption at EUR 11.5 million, 26% lower than the latest reported GRI or 21% lower than the net operating income (calculated as GRI minus operating expenses). DBRS has also tested a scenario where the sponsor, Blackstone, has to sell the portfolio to repay the loan after Telecom Italia vacates and concluded that (1) the current income of RCS buildings, approximately EUR 8 million, would be sufficient to meet the debt service due on the loan; (2) the expected value decline of the whole portfolio following the departure of the tenant would not materially impact the loss expectations on the Notes (current loan-to-value is 54%); and (3) no loan covenant would be breached. DBRS recognises, however, the refinancing risk for the loan is elevated, therefore maintains the Negative trends for the two most junior classes.

The other remaining loan – the Mazer Loan – maintains its GRI at approximately EUR 19 million despite Arcese having vacated the Orbassano property on 31 December 2016. This is mainly due to the lease up of the Oleggio and Tortona properties. The current occupancy of the Mazer portfolio is at 95.6%. DBRS has updated its NCF assumption to EUR 14.6 million to account for the non-recoverable expenses.

DBRS continues to monitor this transaction on a quarterly basis.

The rating assigned to Class E differs from the lower rating implied by the direct sizing parameters that are a substantial component of the DBRS “European CMBS Rating and Surveillance” methodology. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by a substantial component of a rating methodology. In this case, the assigned rating reflects that positive lease events in one loan could affect net cash flow in coming quarters.

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 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 surveillance section of 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.

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 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 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 19 July 2016 when DBRS has upgraded the Class A and B notes and confirmed the ratings of the Class C, Class D and Class E notes with a trend change on Class C to Stable.

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 with 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 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 (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class C to BBB (low) (sf)

Class D Note Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class D to BB (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class D to B (low) (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 and US regulations only.

Lead Analyst: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 July 2014

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 and Surveillance Methodology
-- 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.