Fitch Assigns Gallerie 2013 S.r.l. Expected Ratings

Nov 20 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Gallerie 2013 S.r.l. expected ratings.

The transaction is a securitisation of a EUR363m commercial mortgage loan previously granted by Goldman Sachs International Bank (GS (KSE: 078935.KS - news) ) to an Italian closed-ended real estate fund (Krypton) to enable it to acquire 13 shopping centres and one retail park located across Italy.

EUR271m class A due November 2025 (ISIN TBC): 'A(EXP)sf'; Outlook Stable

EUR50m class B due November 2025 (ISIN TBC): 'A-(EXP)sf'; Outlook Stable

EUR42m class C due November 2025 (ISIN TBC): 'BBB-(EXP)sf'; Outlook Stable

The final ratings are contingent upon the receipt of final documents and legal opinions conforming to the information already received, and selection of issuer account bank and other transaction parties.

KEY RATING DRIVERS

The expected ratings are based on Fitch's assessment of the underlying collateral, available credit enhancement and the transaction's sound legal structure.

The property portfolio comprises 624 retail units and therefore benefits from a granular and diverse income profile, with the top 10 tenants providing around a quarter of total passing rent. While the weighted average lease length to first break for the portfolio is short at 3.2 years, the occupancy ratio of 94% indicates the portfolio's appeal to retailers. All the shopping centres benefit from an adjoining hypermarket area owned and operated by Auchan, a fully-owned Italian subsidiary of the French conglomerate Auchan SA. While these grocery areas are not part of the collateral securing the loan, they nevertheless anchor footfall.

GCI is an investor in Krypton (along with Morgan Stanley Real Estate Fund VII) and provides integrated property management services for the combined estate. Along with a 10-year Auchan-underwritten rental guarantee provided to Krypton to mitigate occupational market risks, and the co-dependence between the grocery and non-grocery components, the arrangement provides for an alignment of interests between Auchan and Krypton which is relevant to an analysis of the property risks.

Fitch has analysed the last seven years of operating performance at the relevant Auchan's hypermarkets, which reported a decline in sales that was reflective of wider stress in the Italian retail sector. Nevertheless, the hypermarkets still report strong turnover per unit and sound profitability levels.

Despite an alignment of interests, there is no guarantee that Auchan will continue to operate out of each of the stores. However, should Auchan dispose any of the stores there would be a step-up in the payment liability it has assumed for the related collateral under the rental guarantee.

The portfolio purchase was financed by a five-year senior securitised loan, a EUR107m unsecured subordinated junior loan and by an equity investment made by the fund's unit holders (aprox. EUR98m contributed by Morgan Stanley Real Estate Fund VII and aprox. EUR92m by GCI). The closing reported loan-to-value ratio (LTV) is 58%, which is scheduled to reduce by loan maturity to 55% following annual amortisation of 1% of the starting loan balance. Semi-annual re-valuations and strong interest coverage ratio (ICR) and LTV trap covenants (at 1.6x and 65%, respectively) should enable performance deterioration to be detected well before loan default.

The transaction features a seven-year tail period between loan scheduled maturity (2018) and legal final maturity of the notes (2025). This length of time reduces the risk of an uncompleted workout by bond maturity, particularly given the uncertainty over liquidation timing for a distressed real estate fund.

While the structure envisages a "mandate to sell" upon loan default (whereby a sales agent is responsible for out-of-court liquidation within certain covenants), residual risk over its enforceability in case of fund insolvency has not been eliminated to Fitch's satisfaction. Therefore, Fitch has assumed a forced liquidation of the fund, which typically entails additional work-out costs and a prolonged resolution.

While the borrower-level interest rate cap expires at the loan's scheduled maturity in 2018, Euribor on the notes thereafter will be capped at 7%, partially mitigating interest rate risk during the tail. Sales of property by the borrower presuppose repayment of the allocated loan amount and 15% release premium. Since the latter flows to noteholders sequentially, it mitigates the exposure of senior bondholders to potentially adversely selected assets, while excess spread is sufficient to absorb attendant increases in the average weighted margin on the notes.

Any excess spread (being the difference between interest available funds received under the loan and the sum of ordinary issuer expenses including notes interest payments) is enjoyed by the holder of the unrated class X notes. This instrument ranks pari-passu with class A interest until the earlier of loan default or maturity, when it would become subordinated to all rated notes' payments. Another material feature in the structure is that the issuer waterfall changes after loan maturity, so that issuer available funds will be allocated on an interest principal-interest principal basis, ensuring that the class A notes would have to be redeemed before the class B notes receive further distributions, and the same is true for class B and C notes. This reduces the "leakage" of cash flow to junior stakeholders of the issuer, including the class X note holder.

The transaction documents include counterparty triggers supporting up to 'Asf' ratings for the notes. Together with the design of the liquidity facility, this is unlikely to allow for upgrades of the notes above this level regardless of leverage and asset performance.

KEY PROPERTY ASSUMPTIONS

'Bsf' LTV: 75%

'Bsf' weighted average capitalisation rate: 8%

'Bsf' weighted average structural vacancy: 18%

'Bsf' weighted average rental value decline: 4%

RATING SENSITIVITIES

Fitch tested the rating sensitivity of the class A to C notes to various scenarios, including an increase in rental value declines, capitalisation rates and structural vacancy. The expected impact on the notes' ratings is as follows (class A/class B/class C):

Current Rating: 'Asf'/'A-sf'/'BBB-sf'

Deterioration in all factors by 1.1x: 'Asf'/'BBBsf'/'B+sf'

Deterioration in all factors by 1.2x: 'BBB+sf'/BBsf/'CCCsf'

A presale report, including further information on transaction related stress and sensitivity analysis, and material sources of information that were used to prepare the credit rating, is available at www.fitchratings.com.

Link to Fitch Ratings' Report: Gallerie 2013 S.r.l.