Credit rating agencies have expressed concerns about US manager Blackstone’s prospects of refinancing five securitised loans backed by Italian retail assets.
The agencies cited poor consumer spending and limited refinancing opportunities in the sector as potential problems.
In a 15 March note, Fitch explained weaker operating conditions for Italian retail had led it to downgrade its ratings on multiple tranches of the Pietra Nera Uno and Deco 2019-Vivaldi commercial mortgage-backed securities transactions.
Euan Gatfield, managing director in Fitch’s structured finance group, told Real Estate Capital Europe: “We have recently adjusted our ratings on the notes related to the loans behind both Vivaldi and Pietra Nera Una, which suggests we see real possibility of loans defaulting and having to be taken over by a special servicer.”
The two securitisations, which financed properties owned by funds managed by the private equity giant, are backed by five loans linked to six Italian retail properties. Neither CMBS is in default currently and all loans are performing. However, extension options on the underlying loans have been exercised in both cases.
There is not yet a consensus on downgrading the loans. Rating agency DBRS Morningstar, which also rates both CMBS transactions, left its ratings unchanged in January, owing to stable performance of the assets and improved debt yield metrics. However, it maintained its negative trends outlook across the notes due to the vulnerability of the retail sector to the high-inflationary environment.
Dinesh Thapar, structured finance specialist at DBRS Morningstar, explained to Real Estate Capital Europe: “Banks and investors are nervous about the future prospects of [the] Italian retail sector, limiting the refinancing options for the sponsor.
“The question is: is there a market for lenders to lend against Italian retail? The retail sector is generally under pressure, and we are seeing this on other retail-related European CMBS transactions today. Sponsors are facing the need to de-lever while loan-to-values have gone up as a result of value declines.”
Despite the concerns raised by the rating agencies, Blackstone argued it does not expect refinancing problems for the underlying loans. In a statement, the firm said: “The retail centres that collateralise these bonds continue to recover strongly from covid. We expect their debt will be fully repaid at or before the stated maturity.”
Indeed, performance of the retail centres has rebounded significantly since the covid-19 outbreak, with net rental income for 2022 more than double what it was during the pandemic – which the manager defines as between Q2 2020 and Q1 2021, according to figures derived from the CMBS servicers’ reports, which are publicly available.
Blackstone added: “These investments represent only 0.2 percent of the equity value of Blackstone Real Estate’s European portfolio and were made through funds that have already returned significant profits to our investors.”
Benjamin Bouchet, structured finance analyst at Berlin-based Scope Ratings, which does not rate the two deals but monitors all European CMBSs, believes that the main issue for the borrower will be lending conditions rather than any weakness in Italian consumer spending.
“A debt yield of 9 percent for Deco 2019-Vivaldi and 10 percent for Pietra Nera Uno is good and improving from a year ago,” Bouchet said. “While revenues have decreased on an absolute basis since issuance, they are better than, or close to, the same period pre-covid, which shows that the cost-of-living crisis hasn’t impacted these retail outlets as much.”
Florent Albert, senior director, structured finance analyst at Scope Ratings, added: “The loans are not in default, they are performing. However, between now and next year, it is difficult to see what will change in terms of asset performance, and lending conditions and appetite to lend on retail or buy retail assets.”
The Pietra Nera Uno CMBS, issued by Deutsche Bank in February 2018 in six tranches, was a €403 million securitisation of three loans totaling €411.7 million. It has a final legal maturity date of 2030, including the tail period typical in such structures.
Blackstone has previously exercised embedded extension options within the facility during the five-year term for hedging cost purposes. The servicer has now exercised the additional one year extension to May 2024.
In November 2022, delegate servicer CBRE informed noteholders that the loans had been amended to include an additional extension option, which extends the final repayment date by a year to May 2024, with no amortisation scheduled, or additional borrower covenants.
“Granting the additional extension options would, among other things, provide the borrowers with additional time to continue [to] implement strategic asset management initiatives,” CBRE told noteholders at the time, adding that these would “mitigate risk of a default at maturity in May 2023 resulting from a failure to refinance the loans”. One loan relates to two outlet centres – Mantova Village in northern Italy and Puglia Village in the south of the country. The second is backed by Valdichiana Outlet Village in Tuscany, and the third by Forum Palermo in Sicily. As of November 2022, the total loans’ outstanding balance was €387.7 million, according to Scope.
Deco 2019-Vivaldi is the €222.2 million securitisation – also arranged by Deutsche Bank – of two loans, each backed by a retail outlet village – Palmanova Outlet Village in Udine and Franciacorta Village near Brescia – managed by Dutch firm Multi Outlet Management. The final legal maturity of the notes is August 2031.
The earliest maturity of the Deco 2019-Vivaldi loans was August 2021, but the borrower has exercised several extension options, the latest of which – in August 2022 – extended the maturity to August 2023. CBRE Loan Services is the delegate servicer for the transaction.
“A further – but last – one-year extension option could be exercised at that time,” explained Fitch’s Gatfield, adding: “This final extension option looks likely to be exercised given the loans are hedged against rising interest rates until August 2024.”
In February, in response to the latest extension, Fitch downgraded the C-notes in the Vivaldi CMBS to CCCsf, explaining that elevated inflation, interest rates hikes and the prospect of recession would be “headwinds” for the performance of both loans.
In the same note, it said: “The retail sector is exposed to falling real wages, and we cannot rule out stagnation in income alongside rising refinancing costs, with ongoing negative implications for collateral values. With both loans maturing in August 2024, the risk of one or both defaulting is material, acting as a drag on ratings. This is reflected in the negative rating actions.”
Gatfield said of CMBS transactions backed by Italian retail: “Without improvement in market conditions, servicers will have to assume significantly more responsibility in the complex task of turning around performance and maximising proceeds.”
In a January research note, Scope warned European CMBS transactions were coming under pressure as refinancing risk intensified.
Scope had previously warned in January that one third of commercial real estate loans in European CMBSs now faced “significant” refinancing risk because their expected cash flows are too low to meet higher expected yield requirements from lenders.
DBRS’s Thapar added that while European CMBS transactions are better structured and generally less leveraged compared with CMBSs issued prior to the global financial crisis, the issue for borrowers is now refinancing. He said of the loans in Pietro Nera Uno and Deco-2019 Vivaldi: “Despite a recovery of cash flows of these loans since the pandemic, and subsequent debt yield improvement, the performance of the underlying real estate is still not back to issuance levels.”