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July 3 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Moda 2014 S.r.l expected ratings as follows:
EUR145.1m Class A due August 2026 (ISIN: TBC): ‘A+(EXP)sf’; Outlook Stable
EUR14.6m Class B due August 2026 (ISIN: TBC): ‘A(EXP)sf’; Outlook Stable
EUR17.7m Class C due August 2026 (ISIN: TBC): ‘BBB-(EXP)sf’; Outlook Stable
EUR3.8m Class D due August 2026 (ISIN: TBC): ‘BB+(EXP)sf’; Outlook Stable
EUR17.0m Class E due August 2026 (ISIN: TBC): ‘B(EXP)sf’; Outlook Stable
The final ratings are contingent upon the receipt of final documents and legal opinions conforming to the information already received.
The transaction is a securitisation of two commercial mortgage loans totalling EUR198.2m. The loans were granted by Goldman Sachs International Bank (GS, or the originator) to six Italian limited liability companies to finance the acquisition of/refinance certain Italian retail assets: a fashion outlet village (Franc loan); another fashion outlet village; a shopping centre; and two retail galleries (Vanguard loan). All the real estate is located in Italy and owned by borrowers sponsored by Blackstone.
The expected ratings are based on Fitch’s assessment of the underlying collateral, available credit enhancement and the transaction’s legal structure. Both loans benefit from scheduled amortisation of 1% per annum, meaning that (holding market values constant) the exit LTV for Franciacorta is 56% and for Vanguard 61%. Both loans also benefit from robust interest coverage ratio (ICR) tests: a cash-trap trigger at 2.0x and a default covenant at 1.4x, which - together with a highly granular income base, with no tenant accounting for more than 3.2% of passing rent - mitigate the generally short weighted average lease length (WALL).
Fitch views the Franciacorta asset as the best property in the portfolio, since it benefits from stable occupancy ratios and it is considered the destination outlet centre for a catchment area of approximately 3.7m people in a prosperous region. The Vanguard loan is instead backed by properties of mixed quality. Fitch believes the Valdichiana outlet centre to be a good prospect, whilst considers La Scaglia property to be the most challenging.
One component of the Vanguard loan was advanced in part to the property company holding the asset and in part to its parent/acquirer, reflecting a limitation on the propco’s debt capacity (to comply with “financial assistance” rules for company acquisitions under Italian law). Fitch understands that a merger of these vehicles is proposed to relieve this limitation and allow for the Vanguard parent loan to be absorbed into the conventional mortgage loan secured over the shopping centre. However, pending completion, EUR17.0m is not secured by the mortgage and is treated by Fitch as unsecured.
Fitch notes that the Italian retail sector has been suffering from a protracted recession. Whilst the agency’s real estate analysis incorporates significant further deterioration due to the Italian retail outlook, the ratings may be affected by macroeconomic shocks.
The structure allows some non-senior notes to share in amortisation arising from prepayments. Fitch has modelled a prepayment of the stronger Franciacorta loan to test the effect on senior notes of a greater exposure to weaker property from the Vanguard portfolio.
While the borrower-level interest rate caps expire at the loan’s scheduled maturities, Euribor on the notes thereafter will be capped at 7%, partially mitigating interest rate risk during the tail period. Property disposals are allowed to a premium above their respective allocated loan amounts.
Any excess spread (being the difference between interest available funds received under the loan and the sum of ordinary issuer expenses and notes interest payments) would be allocated to the holder of the unrated classes X1 and X2 notes. These instruments rank pari-passu with class A interest until the earlier of loan default or maturity, when they would become subordinated to all rated notes’ payments.
The transaction features a seven-year tail period between loan scheduled maturity (2019) and legal final maturity of the notes (2026). This length of time reduces the risk of an uncompleted workout by bond maturity, particularly given the uncertainty over mortgage enforcement timing in Italy. While share pledges over the holding companies located in Luxembourg may shorten the recovery process and decrease costs, Fitch has nevertheless assumed a conventional collateral enforcement in Italy mainly due to a lack of precedents.
‘Bsf’ weighted average LTV (by loan amount): 76.9%
‘Bsf’ weighted average capitalisation rate (by net rent): 7.2%
‘Bsf’ weighted average structural vacancy (by net rent): 13.0%
‘Bsf’ weighted average rental value decline (by net rent): 2.0%
Fitch tested the rating sensitivity of the class A to E notes to various scenarios, including steeper rental value declines, increasing capitalisation rates and rising structural vacancy. The expected impact on the notes’ ratings is as follows:
Current Rating: ‘A+(EXPsf)'/‘A(EXPsf)/‘BBB-(EXP)sf’/‘BB+(EXP)sf’/‘B(EXP)sf’ Deterioration in all factors by 1.1x:
Deterioration in all factors by 1.2x: ‘BBB(EXPsf)'/‘BBB
Link to Fitch Ratings’ Report: Moda 2014 S.r.l.