DBRS Morningstar Confirms Rating on Debussy DTC Plc Class A Notes; Removes from Under Review with Negative Implications

DBRS Ratings Limited (DBRS Morningstar) confirmed its B (sf) rating on the Class A Commercial Real Estate Loan Backed Fixed-Rate Notes issued by Debussy DTC plc (the issuer) and assigned a Negative trend to the rating.

With this, the rating has been removed from the Under Review with Negative Implications (UR-Neg.) status, where it was placed on 27 July 2020 after DBRS Morningstar’s analysis of the overall risk exposure of the CMBS sector to the Coronavirus Disease (COVID-19) and the resulting conclusion that certain asset classes were more at risk and likely to be affected by the fallout of the pandemic on the economy.

Debussy DTC PLC is a securitisation of one fixed-rate loan split into three tranches with a combined balance of GBP 178.1 million (GBP 263.1 million at inception). Since the insolvency of the sole tenant previously occupying the properties, Toys R Us (TRU), the loan defaulted and the special servicer, CBRE, set out a business plan to sell the properties, whilst it lets out vacant space and carrys out capital expenditures in the interim. Following the completion of three asset sales in Q2 2020, there are currently 11 properties left in the portfolio, which brings the total number of disposals to 21 properties and the total principal repayment amount of Tranche A to GBP 85 million.

The market value of the 11 remaining assets is GBP 130.4 million based on a revaluation carried out by Colliers in June 2018, which implies a loan-to-value (LTV) of 136.5%. DBRS Morningstar would expect a full repayment of the GBP 99.2 million Class A principal amount upon the successful execution of the business plan by the special servicer and based on DBRS Morningstar’s stressed value of the portfolio of GBP 98.8 million (or 24% haircut to the latest available valuation) plus the presence of GBP 17.2 million of cash currently held on different accounts under the control of the special servicer. Such funds are expected to be used for a variety of purposes, including capital and operational expenses and future quarterly payments to noteholders and issuer costs.

According to the July 2020 special servicer report, whilst no sales have been lost so far due to coronavirus, some lease negotiations have been affected. One prospective tenant has demanded a longer rent-free period, and the proposed letting of the final unit at Nottingham to a gym operator has been aborted. Tenants are also requesting pandemic clauses in new leases to provide for future lockdown scenarios. Due to the level of uncertainty caused by coronavirus, DBRS Morningstar will continue to assess the execution of the business plan whilst maintaining the Negative trend on the rating. In particular, a delay of planned sales or sales below DBRS Morningstar’s stressed portfolio value could affect the rating negatively.

COVID-19 CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many tenants and borrowers. DBRS Morningstar anticipates that vacancy rate increases and cash flow reductions may arise for many CMBS borrowers, some meaningfully. In addition, commercial real estate values will be negatively affected, at least in the short-term, impacting refinancing prospects for maturing loans and expected recoveries for defaulted loans. The ratings are based on additional analysis as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.
On 16 June 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated CMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/362693/european-cmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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” (13 December 2019).

DBRS Morningstar 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 at: https://www.dbrsmorningstar.com/about/methodologies.

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/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include various reports provided by the special servicer CBRE Loan Services Limited.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS Morningstar was 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 this rating 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 27 July 2020 when DBRS Morningstar placed its rating on the Class A notes UR-Neg.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

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 Notes Risk Sensitivity:
-- 10% decline in DBRS Morningstar net cash flow (NCF), expected rating of Class A at below B (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A at below B (low) (sf)

Generally, 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.

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

Lead Analyst: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 July 2013

DBRS Ratings Limited
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Registered and incorporated under the laws of England and Wales: Company No. 7139960

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 (13 December 2019), https://www.dbrsmorningstar.com/research/354637/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.

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.