DBRS Confirms Ratings on Debussy DTC Plc

DBRS Ratings Limited (DBRS) has today confirmed the rating on the Class A of the Commercial Real Estate Loan Backed Fixed-Rate Notes due July 2025 (the Class A Notes) issued by Debussy DTC plc at BBB (low) with a Negative trend.

The rating confirmation with a Negative trend underlines the potential difficulty in refinancing the loan despite the currently steady performance.

Debussy DTC Plc is the securitisation of 30 mega retail stores and one distribution centre operated by Toys “R” Us (TRU). The properties are primarily located in secondary and tertiary markets in the United Kingdom. All properties are registered under Toys “R” Us Properties (UK) Limited and are operated under individual triple-net leases to Toys “R” Us Ltd., with leases expiring in February 2036 or February 2037. TRU is currently paying above-market rent with an annual rental rate increase based on the retail price index and subject to a 1.0% floor and a 2.5% cap.

In lieu of a third-party liquidity facility, the borrower has established the Borrower Security Reserve Account and funded it with GBP 19,300,000 to provide liquidity support to the Class A and Class C Note Senior Additional Payments (0.5% per annum on Class C outstanding balance and ranks senior to Class A note interest and principal). Together with the Reserve Account, which is currently funded to its maximum at GBP 3 million , the reserves could cover up to two-year interest payments on the Class A interest and Class C Senior Additional Payment.

The securitised loan is interest only and the borrower will have to repay GBP 263 million at maturity in July 2020. There is no extension option but the loan maturity date could be potentially extended to July 2023 at the latest, two years before note maturity.

Due to the indexation, the reported rent has steadily increased to GBP 24.9 million from GBP 23 million at inception, in contrast to the GBP 0.3 million market rent decrease since issuance, to GBP 19.6 million at last valuation. As a result, DBRS has adjusted its net cash flow (NCF) assumption to GBP 21.5 million, which is reflective of the updated market rent and includes a rental markdown per the DBRS “European CMBS Rating and Surveillance Methodology.”

As the loan approaches its maturity date, DBRS notes that the commercial retail property market has been adversely impacted by the increasing competition from online retailers and intensified investment volatility resulting from the United Kingdom’s referendum in June 2016 to leave the European Union. As such, DBRS thinks that the refinancing of the TRU loan in 2020 could be challenging.

In DBRS’s view the recent debt restructuring of the TRU Group in the United States is expected to improve the group’s short-term financial soundness, which DBRS estimates to be below investment grade, and may provide some extra time for the company to adjust its business model. To reflect the various uncertainties, which are on balance negative, DBRS has maintained a Negative trend on the Notes.

DBRS continues to monitor this transaction on a quarterly basis.

Notes:
All figures are in British pounds sterling 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 surveillance section of 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 this rating include Situs Asset Management Limited, U.S. Bank Global Trust Services and CBRE 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 July 22, 2016, when DBRS confirmed the rating on the Notes and changed the trend to Negative from 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 Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A Notes to BB (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class A Notes to CCC (sf)

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.

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: 19 July 2013

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
-- 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