DBRS Morningstar Confirms Ratings of ERNA S.r.l.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by ERNA S.r.l. (the Issuer):

-- Class A at A (high) (sf)
-- Class B at BBB (sf)
-- Class C at BB (high) (sf)

All trends are Stable.

The transaction has generally preserved its credit quality through the pandemic. A new valuation dated 31 December 2020 showed a slight value drop of EUR 11.9 million (including three disposals), but the overall market value (MV) drop since issuance is only EUR 10.9 million on a like-for-like basis. This represents a less than 2% MV decrease, which is still within current rating levels’ tolerance, hence the rating confirmations.

The Issuer is the securitisation of four Italian senior commercial real estate loans: the Ermete loan, the Raissa loan, the Excelsia Nove/Nucleus loan, and the Aries loan. The loans, advanced by ERNA S.r.l., were granted as refinancing facilities to four borrowers all ultimately owned and controlled by TPG Sixth Street Partners (the Sponsor).

The properties securing the four loans were revalued at EUR 691.2 million as of 31 December 2020. As the valuation was finalised only after the January 2021 interest payment date (IPD), the MV drop of EUR 11.9 million between January 2021 and April 2021 can be attributed largely to the value depreciation of the portfolios, although there were three asset disposals that occurred in between. Precisely, the Nucleus loan’s MV has decreased 2.9% (including two asset disposals), the highest among the four loans. The Raissa loan’s MV dropped about 2.1% (including one asset disposal), and the Ermete loan’s MV dropped only 1.1%. In contrast, the Aries loan’s MV increased slightly by 0.7% or 6.3% based on the issuance MV. Overall, the aggregated MV decline for the transaction was 1.7% between 2019 and 2020, or 1.6% since inception.

Although there have been 67 property disposals (of which four were partial disposals), each subject to a 15% release premium, the transaction did not deleverage significantly mainly due to the MV depreciation, which offsets the loan-to-value (LTV) decrease amid disposals, while Enel Italia S.P.A. vacating in 2019, and the subsequent difficulty to lease up the vacant space during the pandemic offsets the disposal driven debt yield (DY) increase. As such, the transaction’s LTV and DY remain around 42.5%-43.0% and 12.8%-12.9%, respectively.

DBRS Morningstar estimates that the overall impact of the Coronavirus Disease (COVID-19) pandemic on the transaction is limited because of the long lease terms of the main tenants and the limited impact on the main tenants’ day-to-day businesses. The servicer’s Q4 2020 investor report showed only limited rent reduction (<1% of gross rent) was agreed and all the tenants are paying rent in full as of the Q2 2021 IPD.

To reflect the property disposals, DBRS Morningstar updated its net cash flow (NCF) assumptions on the Aries, Ermete, Nucleus, and Raissa loans to EUR 7.0 million, EUR 3.2 million, EUR 10.7 million, and EUR 7.7 million, respectively. By applying the same capitalisation rates (8% for the Aries, Ermete, and Raissa loans and 8.5% for the Nucleus loan), the DBRS Morningstar values of the four properties are EUR 88.1 million, EUR 40.1 million, EUR 125.9 million, and EUR 96.0 million.

The Sponsor subscribed to the unrated and junior-ranking Class Z notes. This retention note is fully subordinated within the structure and will not receive any principal payments until the Class A, Class B, and Class C notes are repaid in full.

At inception, DBRS Morningstar noted that there were potential tax-related liabilities on the Ermete and Excelsia Nove loans. However, DBRS Morningstar considers the tax liability risk to be non-material to the credit quality of the bonds and largely covered by the cash surplus generated by the portfolio.

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 continue to arise for many commercial mortgage-backed security (CMBS) borrowers, some meaningfully. In addition, CRE values will be negatively affected, at least in the short term, affecting refinancing prospects for maturing loans and expected recoveries for defaulted loans.

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 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
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/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology” (26 February 2021).

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.

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 Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments

The sources of data and information used for these rating include April 2020 investor reports and disposed asset list from Securitisation Services S.p.A. and CBRE Loan Servicing Limited, and valuation reports from C&W (U.K.) LLP, CBRE Valuation S.p.A., and Colliers Real Estate Services Italia S.r.l.

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 5 June 2020, when DBRS Morningstar confirmed its ratings on all classes of notes.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case):

Class A Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at BBB (high) (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class A notes at BBB (low) (sf)

Class B Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at BB (high) (sf)
--A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class B notes at BB (low) (sf)

Class C Notes Risk Sensitivity:
-- A 10% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at BB (sf)
-- A 20% decline in DBRS Morningstar NCF would lead to an expected rating of the Class C notes at B (low) (sf)

For further information on DBRS Morningstar 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. 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 Limited for use in the United Kingdom.

Lead Analyst: Rick Shi, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 10 May 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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 (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021), https://www.dbrsmorningstar.com/research/376314/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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/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.