DBRS Morningstar Upgrades Credit Ratings on ERNA S.r.l. With Stable Trends, Removes From Under Review With Positive Implications

DBRS Ratings GmbH (DBRS Morningstar) upgraded the following classes of commercial mortgage-backed security (CMBS) notes issued by ERNA S.r.l. (the Issuer):

-- Class A notes to AA (low) (sf) from A (high) (sf)
-- Class B notes to BBB (high) (sf) from BBB (sf)
-- Class C notes to BBB (low) (sf) from BB (high) (sf)

DBRS Morningstar also removed the notes from Under Review with Positive Implications (UR-Pos.), where they were placed on 13 October 2023. The trends on all classes of notes are Stable.

CREDIT RATING RATIONALE
The transaction is the securitisation of four Italian senior commercial real estate loans: the Aries loan, the Ermete loan, the Raissa loan, and the Excelsia Nove (Nucleus) loan. The loans are secured predominantly by telephone exchange properties, but the Nucleus loan portfolio also includes some office, warehouse, garage, and residential spaces. The loans were granted as refinancing facilities to four borrowers, all ultimately owned and controlled by TPG Sixth Street Partners (the Sponsor).

The removal of the UR-Pos. status on the notes results from the discontinuation of a stress scenario regime for sovereigns rated in the “A” category or below. DBRS Morningstar has determined that macroeconomic risk for securitised assets in lower-rated countries is in most cases reflected in historical data that is used in the structured finance rating analysis. For further information, please refer to the following press release: https://www.dbrsmorningstar.com/research/421863/dbrs-morningstar-places-credit-ratings-on-14-european-structured-finance-transactions-under-review-with-positive-implications-following-release-of-updated-sovereign-methodology.

The credit rating impact of these changes is positive, with the upgrade also supported by the improved key performance metrics of the underlying pool as at the October 2023 interest payment date (IPD). In particular, the latest servicer report for the October 2023 IPD showed improved cash-flow metrics, with a weighted-average (WA) debt yield (DY) of 18.2%, up from 16.4% at the last DBRS Morningstar review and 13.0% at issuance.

The whole transaction’s outstanding balance decreased to EUR 159.3 million at the October 2023 IPD, which reflects an 11.4% decline from EUR 179.8 million as at DBRS Morningstar’s last review conducted in May 2023 and a more pronounced 49.6% decline from EUR 315.8 million since cutoff in June 2019.

Colliers Valuation Italy Srl (Colliers) and CBRE Valuation & Advisory Services (CBRE) revalued the portfolios securing four loans as of 31 December 2022 and appraised the aggregate market value of the 366 properties in the transaction at EUR 511.1 million. As a result, as at the October 2023 IPD, the WA loan-to-value (LTV) ratio stood at 33.2%, down from 35.5% as at DBRS Morningstar’s last review and 42.6% at issuance.

Vacancy has remained stable when compared to DBRS Morningstar’s last review, with a rate lower than 1% for the Aries, Ermete, and Raissa portfolios, where Telecom Italia is the sole tenant, and a slightly improved 26.4% for the Nucleus portfolio as of the October 2023 IPD compared to 28.6% at the last review. The WA unexpired lease term remains long, ranging between 13 years and 16 years for all loans, with the majority of rent expiring after the notes’ maturity.

The final maturity for the four loans is scheduled in July 2024, while the final maturity of the notes is in July 2031. All four loans are 90% hedged via cap agreements with Merrill Lynch International as counterparty, with a strike rate of 2.0% and a termination date that coincides with the final loan maturity date.

DBRS Morningstar’s credit ratings on the notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Interest Payment Amounts and the related Class Outstanding Balances.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the credit ratings on the notes do not address Euribor Excess Amounts, Pro Rata Default Interest Amounts, and Note Exit Fees.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar 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, 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is: “European CMBS Rating and Surveillance Methodology” (19 October 2023; https://www.dbrsmorningstar.com/research/422173/european-cmbs-rating-and-surveillance-methodology).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating actions.

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 DBRS Morningstar Credit Ratings of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/421590/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 credit ratings include the quarterly investor reports provided by Securitisation Services S.p.A as at the October 2023 IPD.

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

At the time of the initial credit ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating actions on these transactions took place on 13 October 2023, when DBRS Morningstar placed its credit ratings on the notes UR-Pos.

Information regarding DBRS Morningstar credit 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 rating of Class A Notes of AA (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class A Notes of A (high) (sf)

Class B Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class B Notes of BBB (high) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class B Notes of BBB (sf)

Class C Risk Sensitivity:
-- 10% decline in DBRS Morningstar NCF, expected rating of Class C Notes of BBB (low) (sf)
-- 20% decline in DBRS Morningstar NCF, expected rating of Class C Notes of BB (high) (sf)

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

Lead Analyst: Violetta Volovich, Senior Analyst
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 10 May 2019

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The credit 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” (19 October 2023;
https://www.dbrsmorningstar.com/research/422173/european-cmbs-rating-and-surveillance-methodology)
-- “Legal Criteria for European Structured Finance Transactions” (30 June 2023;
https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions)
-- “Interest Rate Stresses for European Structured Finance Transactions” (15 September 2023; https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions)
-- “Derivative Criteria for European Structured Finance Transactions” (18 September 2023;
https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions)
-- “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (4 July 2023;
https://www.dbrsmorningstar.com/research/416784/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.