Jan 27 (The following statement was released by the rating agency)
Fitch Ratings says that ratings on outstanding Italian CMBS will not be affected by recent legislative changes, which included further termination rights for certain public entity tenants.
In an attempt to cut rental costs and optimise occupied space related to administrative functions, Law decree No. 151 of 30 December 2013 (Decree 151) introduced further changes to legislation previously approved by the Italian Parliament. Public administration entities, regions, local entities and constitutional bodies will be granted a one-off additional termination right, to be exercised by 31 December 2014, with notice to be communicated to the respective landlord by 30 June 2014. Furthermore, Decree 151 introduces a formal approval process for renewal of existing leases that reach expiry. Agenzia del Demanio (the Italian Public Land Office) will only grant its consent if government-owned space is not available and rental levels for the assets are in line with market conditions.
Fitch has identified three transactions with material exposure to Italian government leases:
FIP Funding Srl (100% of rental income)
Patrimonio Uno CMBS Srl (81% of rental income)
Windermere XIV CMBS Ltd (39% of rental income)
For the first two deals, the new lease renewal approval process is not applicable, since an exemption applies if the respective assets are owned by investment funds purposely set up by the Italian Ministry of Finance. The provisions of the one-off additional break clause may be applicable, subject to further changes in the conversion of Decree 151 into law. However, the lease agreement between the government tenant (Agenzia del Demanio) and the real estate investment funds is subject to specific clauses that, subject to minimum flexibility, only allow vacation for the entire portfolio. These provisions were expressly regulated by law decrees published at the transactions'€™ closing.
Whilst FIP Funding and Patrimonio Uno may now be exposed to additional lease break risk, from March 2014 (when Decree 151 will have been converted into law) to end of June 2014 (end of the notice period), Fitch considers that the majority of assets are instrumental to state activity given their type (police training grounds, departments of local justice, local headquarters of inland revenue) and large surface area. We believe the portfolios cannot easily be vacated without disrupting the normal functions of the public entities currently in occupation. Also the tenant has not served notice at the end of the initial nine-year lease term for either transaction. Given these considerations and the short risk horizon, Fitch does not expect the new break optionality to be exercised. Moreover, the specific exclusion of FIP and Patrimonio from the lease renewal approval process suggests that transactions with government investment funds could also be excluded from the additional break option clause, once Decree 151 is converted into law.
For Windermere XIVâ€™s Fortezza 2 loan, the residual term of the current leases is not long enough to materially alter the rating analysis at loan exit. Fitch expects a protracted loan work-out after maturity and the collateral value is largely estimated on the basis of stabilised stressed rental values, regardless of the leases in place. Furthermore, the longest lease in Fortezza 2 is secured against the Rome headquarters of a state-owned company responsible for the Italian Ministry of Financeâ€™s IT services. There is a high chance that the tenant will remain in occupation, although it could successfully negotiate rent reductions following the new provisions of Decree 151.