DBRS Ratings Limited (Morningstar DBRS) confirmed its credit ratings on the following classes of commercial mortgage-backed floating-rate notes due to August 2030 issued by Deco 2019-RAM DAC (the Issuer).
Class A at AAA (sf)
Class B at AA (high) (sf)
All trends are Stable.
The rating confirmation reflects the collateral's stable performance over the last 12 months and the transaction's favourable credit metrics.
CREDIT RATING RATIONALE
The transaction is a 95% securitisation of an originally GBP 150.0 million floating-rate senior commercial real estate loan with a loan-to-value (LTV) ratio of 42.7% that Deutsche Bank AG, London Branch (Deutsche Bank; the loan seller and arranger) advanced to The Wilmslow (No. 3) Limited Partnership (the borrower). At loan origination, the borrower was 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 923.5 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 in this transaction, becoming the sole owner of the borrower.
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. At origination, Jones Lang LaSalle Incorporated (JLL or the appraiser) valued the shopping centre at GBP 351.0 million. The appraiser undertook a new valuation in October 2020 and revalued the shopping centre at GBP 203.5 million, which represents a 42.0% decline from the valuation at issuance. Following this and the deterioration in the transaction's performance amid the Coronavirus Disease (COVID-19) pandemic, Morningstar DBRS downgraded its credit ratings on all classes of notes with Negative trends on 23 December 2020. JLL's most recent valuation of the collateral was GBP 213.4 million in March 2023, which represents a 1.2% decline in market value from JLL's previous valuation of GBP 216.0 million in April 2022.
The borrower made a GBP 71.00 million partial prepayment by way of equity contribution and made an additional voluntary prepayment of GBP 6.75 million, funded with amounts standing to the credit of the cash trap account and the debt service account, on the loan payment date in April 2023. Following these prepayments, the outstanding loan balance declined to GBP 51.5 million from GBP 129.2 million. The Issuer's significant deleveraging of the transaction led Morningstar DBRS to upgrade its credit ratings on both the Class A and Class B notes in May 2023. The borrower has paid down the loan with an additional GBP 3.4 million via voluntary prepayments since then and the loan amount stood at GBP 48.1 million as of the February 2024 interest payment date (IPD).
The loan represented a LTV of 22.6% as of the February 2024 IPD based on the most recent valuation of GBP 213.4 million, which indicates modest leverage and shows improvement over the May 2023 LTV of 23.9%. Even though the collateral's market value declined by 1.2%, the deleveraging of the loan by GBP 3.4 million offset the decline in market value and led to a decrease in the loan's LTV. The interest coverage ratio showed a positive trend as well, increasing to 5.43 times (x) as of the February 2024 IPD from 3.55x as of the May 2023 IPD, driven by an increase in net income as well as the partial paydown of the loan. Net income for the collateral increased by 5.6% to GBP 9.4 million as of the February 2024 IPD from GBP 8.9 million as of the May 2023 IPD and vacancy at the collateral declined to 10.4% from 11.5% over the same period.
Morningstar DBRS adjusted its net cash flow (NCF) assumption downward to GBP 15.8 million from GBP 19.1 million as part of its annual surveillance in December 2022 and did not make further adjustments in this round of surveillance. Morningstar DBRS maintained its cap rate assumption of 10%, which changed most recently in December 2020 from 7.4% at issuance. Based on this NCF and cap rate, the Morningstar DBRS value is approximately GBP 158.4 million, which represents a 25.7% haircut to the most recent valuation of GBP 213.4 million.
The transaction benefits from a liquidity facility of GBP 1.4 million (compared with 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 Class B interest, and property protection loans. According to Morningstar DBRS' analysis, the commitment amount could provide interest payments on the covered notes of up to 12 months based on a strike rate of 1%.
The initial loan maturity is July 2024 with a one-year extension option subject to certain conditions, which brings the fully extended maturity of the loan to July 2025. The legal final maturity of the notes is in August 2030, five years after the fully extended loan maturity date. Morningstar DBRS 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.
Morningstar DBRS' credit ratings on the notes issued by Deco 2019-RAM DAC addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are principal amounts and interest amounts.
Morningstar DBRS' credit ratings does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Sonia Excess Amounts, Default Interest Amounts and Prepayment Fees.
Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://dbrs.morningstar.com/research/427030.
Notes:
All figures are in British pound sterling unless otherwise noted.
The principal methodology applicable to the credit ratings is the European CMBS Rating and Surveillance Methodology (17 January 2024), https://dbrs.morningstar.com/research/426818.
Other methodologies referenced in this transaction are listed at the end of this press release.
Morningstar 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 credit rating action.
For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to 'Appendix C: The Impact of Sovereign Ratings on Other Morningstar DBRS Credit Ratings' of the 'Global Methodology for Rating Sovereign Governments' at: https://dbrs.morningstar.com/research/421590.
The sources of data and information used for these credit ratings include servicer reports provided by Situs Asset Management and cash management reports provided by Deutsche Bank.
Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial credit ratings, Morningstar DBRS was not supplied with third-party assessments. However, this did not affect the credit rating analysis.
Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.
Morningstar DBRS does not audit or independently verify the data or information it receives in connection with the credit rating process.
The last credit rating action on this transaction took place on 15 May 2023, when Morningstar DBRS upgraded its credit ratings on the Class A and Class B notes and changed its trend on the notes to Stable from Negative.
The lead analyst responsibilities for this transaction have been transferred to Deniz Gokce.
Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com.
Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):
Class A Risk Sensitivity:
10% decline in Morningstar DBRS NCF, no change to sizing output of Class A notes at AAA (sf)
20% decline in Morningstar DBRS NCF, no change to sizing output of Class A notes at AAA (sf)
Class B Risk Sensitivity:
10% decline in Morningstar DBRS NCF, expected rating of Class B notes at AA (high) (sf)
20% decline in Morningstar DBRS NCF, expected rating of Class B notes at AA (high) (sf)
For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Deniz Gokce, Senior Analyst
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 13 September 2019
DBRS Ratings Limited
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030
A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.
For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
JONES LANG LASALLE INCORPORATED 
