DBRS Confirms Ratings of DECO 2012-MHILL Limited

DBRS Ratings Limited (DBRS) has today confirmed the ratings of the Commercial Real Estate Loan Backed Floating Rate Notes due 2021 issued by DECO 2012-MHILL Limited as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)

The trends are Stable.

The rating confirmations reflect the performance of the transaction. The collateral for the transaction consists of a GBP 210 million interest-only loan that is secured by the 50% of the beneficial interest in the Merry Hill mixed-use property portfolio located near Brierley Hill town centre in the West Midlands/ U.K. The Merry Hill portfolio is dominated by the Merry Hill Shopping Centre, with approximately 1.3 million square feet (sf) of retail space. Additionally, the portfolio includes a number of ancillary properties, including a retail park, a business park, a leisure complex, a free-standing supermarket, an industrial estate, a trade counter park, a petrol station and approximately 47 acres of development ground.

At issuance, the collateral was owned by a joint venture between The QIC Fund (QIC) and The Westfield Group (Westfield). In May 2014, Intu Properties purchased Westfield’s 50% interest in the properties for GBP 407.7 million and installed its management team as the new property management. QIC retained its 50% interest in the collateral. The securitized loan is secured by QIC’s ownership interest only.

The Merry Hill Shopping Centre is a prime retail asset and is one of the most attractive and best-performing shopping centres in the United Kingdom, averaging over 20 million visitors annually. The mall continues to be well occupied, at 91.8% as of the January 2016 rent roll; however, this is a decrease from the January 2015 occupancy rate of 94.8%. Moreover, one of the top ten tenants – British Home Stores filed a Company Voluntary Arrangement in March 2016 which could potentially decrease the occupancy rate by 2.3%. As a result of a slight decrease in occupancy, the projected 2016 net operating income is GBP 17.9 million, down from GBP 19.0 million in 2015. The reported interest coverage ratio (ICR) is 1.9x as per April 2016, down from 2.4x at transaction closing in February 2012.

The reported valuation of the 50% interest in the property portfolio is GBP422.6 million (as per June 2011), slightly above the GBP407.7 million price Intu Properties paid for Westfield’s stake in May 2014 (see above). Based on the reported valuation the loan-to-value (LTV) of the securitised loan is 49.7%, unchanged from closing of the CMBS.

The loan mature date is 20 July 2016 and the borrower has indicated that the loan will be repaid on or before the maturity. The final legal maturity of the Notes is in July 2021, five years beyond the maturity of the loan. Considering the relatively stable performance of the property portfolio, the relatively high ICR, the low LTV and the borrower’s indication of loan repayment, DBRS confirms the ratings of all classes of notes issued by DECO 2012-MHILL Limited.

Notes:
All figures are in British pounds sterling unless otherwise noted.

The principal methodology applicable is: European CMBS Surveillance.

The applicable methodologies are: European CMBS Surveillance, European CMBS Rating Methodology, Legal Criteria for European Structured Finance Transactions, Derivative Criteria for European Structured Finance Transactions and Unified Interest Rate Model for European Securitisations, which can be found on www.dbrs.com under Methodologies.

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

DBRS 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 documents have remained unchanged since the most recent rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to the DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries.

The sources of information used for this rating include Deutsche Bank AG, Situs Asset Management Limited, Cushman & Wakefield LLP and Intu Properties Plc. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on June 12, 2015.

The lead responsibilities for this transaction have been transferred to Rick Shi.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

A decrease of 10% and 20% in the DBRS net cash flow (NCF), derived by looking at comparable properties, market rents and market occupancies, in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to the following ratings in the transaction, as noted below for each class respectively:

Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A at AAA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A at AAA (sf)

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

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

For further information on DBRS 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.

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

This credit rating has been issued inside of the European Union (EU) and is endorsed by DBRS Ratings Limited. It may be used for regulatory purposed by financial institutions in the EU.

Initial Lead Analyst: Scott Goedken, Senior Vice President
Initial Rating Date: 1 February 2012
Initial Rating Committee Chair: Mary Jane Potthoff, Managing Director

Lead Surveillance Analyst: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Mary Jane Potthoff, Managing Director

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY
United Kingdom

The rating methodologies used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies:
-- European CMBS Rating Methodology
-- European CMBS Surveillance
-- Legal Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at http://www.dbrs.com/research/278375.