DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the commercial mortgage-backed floating rate notes issued by Deco 2019-RAM DAC (the Issuer) as follows.
Class A downgraded to BBB (high) (sf) from A (low) (sf)
Class B confirmed at BBB (low) (sf)
The trends on all ratings remain Negative.
The downgrade on the Class A notes reflects the collateral's relatively weak performance since issuance. Following the deterioration of the asset's performance after the onset of the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar updated its net cash flow (NCF) and cap rate assumptions in 2020. Given the most recently reported net income levels, which appear to still significantly underperform issuance income levels and DBRS Morningstar's previous income assumptions, DBRS Morningstar again adjusted its NCF downward, which resulted in the downgrade of the Class A Notes.
The transaction is a 95% securitisation of an originally GBP 150.0 million (42.7% loan-to-value (LTV) ratio) floating-rate senior commercial real estate loan that Deutsche Bank AG, London Branch (Deutsche Bank; the loan seller and arranger) advanced to The Wilmslow (No. 3) Limited Partnership (the borrower), which was at that time ultimately owned by a joint venture between Intu Properties plc (Intu) and Cale Street Investments LP (Cale Street). Cale Street is backed by the Kuwait Investment Authority, which was formed in 1953 and has approximately USD 750.0 billion in assets according to data from the Sovereign Wealth Fund Institute. Following Intu's collapse into administration in June 2020, Cale Street purchased Intu's interest, becoming the sole owner of the borrower in this transaction.
The loan is backed by Derbion (formerly Intu Derby), a 1.3 million-square foot shopping mall southeast of the city centre in Derby, England. Jones Lang LaSalle Incorporated (JLL or the appraiser) valued the shopping centre at GBP 351.0 million at origination. The appraiser undertook a new valuation in October 2020 and revalued the shopping centre at GBP 203.5 million, representing a 42.0% decline from the issuance value. Following this and deterioration in the transaction's performance amid the pandemic, DBRS Morningstar downgraded its ratings on all classes of notes with Negative trends on 23 December 2020.
Despite the deterioration in the asset's performance since issuance, financial metrics show improvement over the last 12 months (LTM) ended November 2022 during which the loan has deleveraged significantly. The aggregate loan prepayment over the LTM totaled GBP 12.6 million as of the November 2022 interest payment date (IPD) (GBP 12.0 million at securitisation level), which reduced the loan's balance to GBP 130.8 million (GBP 124.2 million securitised). The loan will continue to deleverage as part of the 2022 amendment, consent, and waiver letter.
According to the 2022 amendment, consent, and waiver letter that the borrower facility agent and the borrower entered into in May 2022, any breach of the LTV and interest coverage ratio (ICR) covenants prior to a loan payment date falling before (or in) July 2023 shall not give rise to a loan default.
As part of the amendments included in the letter, the borrower shall make partial prepayments of the loan in amounts laid out in the letter. The first prepayment took place in July 2022 and the last prepayment will take place in July 2023. The prepayment schedule laid out in the amendment total GBP 7.5 million over five installments.
The obligors shall also ensure the balance of the debt service account, on any day prior to the loan payment date falling in July 2023, is at least equal to the debt service amounts (excluding the partial prepayment amounts referenced above), in each case on the next two loan payment dates immediately succeeding that day but not including any loan payment date falling after July 2023. The current reserve account balance equaled GBP 2.7 million as of the November 2022 IPD, which is sufficient to cover the next two quarters' interest payments.
Compared with DBRS Morningstar's last annual review in December 2021, the collateral exhibits improving financial performance. Contracted rent increased by GBP 1.0 million to GBP 19.8 million as of November 2022 from GBP 18.8 million as of November 2021, driven by fluctuations in income from car parks, which increased by GBP 1.6 million between November 2021 and November 2022.
Over the same period, vacancy declined to 9.1% from 11.0% and the number of leases increased to 336 from 314. There has also been substantial improvement in arrears levels, which declined to GBP 0.8 million in November 2022 from GBP 5.3 million in November 2021. As a result of the improvements in the gross income and collections, net income improved by GBP 1.4 million.
JLL undertook a new valuation in April 2022, which indicates a modest increase to GBP 216.0 million from the previous valuation of GBP 203.5 million.
Given the increased income levels, modest increase in valuation, and deleveraging of the loan between the November 2021 IPD and the November 2022 IPD, the LTV and ICR both show improvement since DBRS Morningstar's last review in December 2021. The whole-loan LTV declined to 60.5% from 70.5% while the ICR moved to 2.13 times (x) from 1.78x since DBRS Morningstar's last review. Despite these positive dynamics, the loan is in breach with respect to both financial covenants for LTV and ICR at 58.5% and 2.5x, respectively.
Considering the continuous underperformance DBRS Morningstar adjusted its NCF assumption downward to GBP 15.8 million from GBP 19.1 million. DBRS Morningstar maintained its cap rate assumption of 10%, which was most recently changed in December 2020 from 7.4% at issuance. Based on this NCF and cap rate and giving credit to the debt reserve account (GBP 2.7 million), the DBRS Morningstar value is GBP 161.1 million, which represents a 25.4% haircut to the most recent valuation of GBP 216.0 million.
The transaction benefits from a liquidity facility of GBP 4.4 million (GBP 5.0 million at issuance), which equals 3.5% of the total outstanding balance of the covered notes. The liquidity facility is provided by Deutsche Bank and can be used to cover any potential shortfalls on the Issuer's senior expenses, Class A and B interest, and property protection loans. According to DBRS Morningstar's analysis, the commitment amount could provide interest payments on the covered notes of up to 12 months based on the hedging term.
The initial loan maturity of the loan is August 2024 with a one-year extension option subject to certain conditions, which brings the fully extended maturity of the loan to August 2025. The final legal maturity of the notes is in August 2030, five years after the fully extended loan maturity date. DBRS Morningstar believes that this provides sufficient time, given the security structure and jurisdiction of the underlying loan, to enforce on the loan collateral and repay bondholders.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings>. (17 May 2022)
Notes:
All figures are in British pound sterling unless otherwise noted.
The principal methodology applicable to the ratings is: European CMBS Rating and Surveillance Methodology (17 December 2021).
Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies>.
DBRS Morningstar 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.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to 'Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings' of the 'Global Methodology for Rating Sovereign Governments' at: https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments>.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings>.
The sources of data and information used for these ratings include servicer reports provided by Situs Asset Management.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS Morningstar 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 20 December 2021, when DBRS Morningstar confirmed its ratings on the notes with Negative trends.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.
Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):
Class A Risk Sensitivity:
10% decline in DBRS Morningstar NCF, expected downgrade of Class A Notes to BBB (low) (sf)
20% decline in DBRS Morningstar NCF, expected downgrade of Class A Notes to BB (low) (sf)
Class B Risk Sensitivity:
10% decline in DBRS Morningstar NCF, expected downgrade of Class B Notes to BB (low) (sf)
20% decline in DBRS Morningstar NCF, expected downgrade of Class B Notes to CCC (sf)
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are monitored.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml>. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies>.
These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Dinesh Thapar, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 September 2019
DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies>.
European CMBS Rating and Surveillance Methodology (17 December 2021), https://www.dbrsmorningstar.com/research/389947/european-cmbs-rating-and-surveillance-methodology>.
Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions>.
Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions>.
Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions>.
DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings>.
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375>.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com' >info@dbrsmorningstar.com.
JONES LANG LASALLE INCORPORATED 
