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Rating Action:

Moody's Affirmed the Rating of EUR 1,251 million of Commercial Real Estate Loans Advanced to Tree Inversiones Inmobiliarias, S.A.

Global Credit Research - 29 Jul 2010

EUR 1,251 million of Commercial Real Estate Loans affected

London, 29 July 2010 -- Moody's Investors Service has today affirmed the ratings of two commercial real estate loans advanced to Tree Inversiones Inmobiliarias, S.A. (the "Borrower") of:

....EUR1,139.0 million Senior Loan maturing in September 2017, Affirmed at A3; previously on September 24, 2009 Assigned A3

....EUR112.2 million Mezzanine Loan maturing in May 2017, Affirmed at Baa2; previously on September 24, 2009 Assigned Baa2

The affirmation of the ratings of the two commercial real estate loans (the "Loans") maturing in 2017 relates to the debt financing of a sale-and-lease back transaction comprising initially 944 bank branches and three office buildings located throughout Spain (the " Initial Properties"). Today's affirmation follows the analysis of the initial transaction including the intended acquisition by the Borrower of a further 153 bank branches and two office buildings (the "Additional Properties", together the "Properties"). The acquisition of the Additional Properties will be financed by an increase of the existing Senior Loan to EUR1,139.0 million from EUR917.5 million, a EUR20.7 million increase to EUR112.2 million of the existing Mezzanine Loan and additional sponsors' equity. The Properties are currently all occupied by Banco Bilbao Vizcaya Argentaria, S.A. ("BBVA" or "Tenant"), (Aa2, negative outlook). Following the intended acquisition, the transaction will be similar to the transaction at the initial closing date (September 2009) and based on the same transaction structure, sponsors' disposal plan, similar LTVs and strengths and weaknesses (as described below).

The affirmation of the ratings of the Loans are based upon (i) Moody's assessment of the real estate quality and characteristics of the underlying Properties; (ii) the loan-to-value ratio over the term of the Loans and at the loan maturity date taking into account the sponsor's disposal plan; (iii) the debt service coverage over the term of the Loans; (iv) an analysis of the loan, intercreditor and security agreements backing the Loans; (v) the paydown structure between Senior Loan and Mezzanine Loan, which are cross defaulted and cross collateralised; (vi) an analysis of the Borrower structure, including its flexibility to substitute properties over time; (vii) Borrower-level inflation rate and interest rate hedging provided by the initial hedging banks (Deutsche Bank AG, London Branch (Aa3, P-1), ING Belgium SA/NV (Aa3, P-1), Barclays Bank PLC (Aa3, P-1) and Caja de Ahorros y Pensiones de Barcelona ("La Caixa") (Aa2, P-1)) and additional hedging banks (Natixis (Aa3, P-1) and Societe Generale (Aa2, P-1)); (viii) the other legal and structural features of the Loans; and (ix) the performance of the transaction since initial closing date.

The Loans will also be secured by way of first and second ranking legal mortgages. The filing of the additional mortgages will happen within 60 days from the financing date and the registrations are expected within the following 12 months. In addition, a share pledge and lease assignment form part of the security package. The triple net leases with BBVA as initial tenant have a 30 year term for the bank branches and a 20 year term for the office buildings and in both cases are starting from the financing date. Furthermore, BBVA is providing a backstop guarantee of the Tenant's obligations, in particular in case of lease assignment.

The rental payments due from the Tenant will be adjusted annually based on the European inflation index ("HICP") and a multiplier of 1.85x (until 2017), subject to a floor of 2.5% in the first three years from the financing date. In order to convert these variable cashflows received from the Tenant into fixed-uplift cashflows, the Borrower has entered into an inflation swap with the respective hedging banks in respect of the Initial Properties. For the Additional Properties, the Borrower does not enter into an inflation swap. Instead, excess rental cash flows will be partially trapped to build up a reserve that can be used to cover cash flow shortfalls to pay debt service payments. Taking into account this reserve amount, the debt service coverage ratios will be equal to, or higher than, those for the financing of the Initial Properties.

Before the maturity date, the balances of the Loans will reduce by way of scheduled amortisation. The Mezzanine Loan is expected to amortise in full by May 2017, whereas the Senior Loan will amortise more slowly, having a larger balloon payment at the maturity date (September 2017), and it is expected to pay down mainly through prepayments and disposals. Disposal proceeds will be subject to a release premium of 122.5% to be used in amortising the Senior Loan, and disposals are not subject to any limitations.

Moody's current market value for the Properties is EUR1.5 billion resulting in a LTV of 75.4% based on the day-1 Senior Loan balance and 82.9% on the total balance of the two Loans. This compares to an underwriters ("U/W") market value of EUR1.9 billion resulting in a LTV of 59.6% based on the day-1 Senior Loan balance and 65.4% on the total balance of the Loans. The Moody's market value is driven by the lease profile with BBVA as strong covenant. On a VPV basis, Moody's value is EUR817 million compared to the U/W VPV of EUR992 million, resulting in a Moody's LTVPV of 153% and a underwritten LTVPV of 126% on total balance day-1. This compares to a Moody's LTVPV of 149% and 127% underwritten LTVPV at the initial closing date. As a result, the haircuts to the U/W market value and VPV are approximately 21% and 18%, respectively. This is mainly driven by an adjustment to the ERV's, void periods and cap rates used in the U/W valuation. The increase of Moody's LTVPV mainly results from an adjustment to the U/W ERV's and void periods of the Additional Properties. At loan maturity, Moody's assumes that the LTV will range between 55% to 65%, whereby the reduced LTV will be mainly the result of increased rental cashflows due to indexation, scheduled amortisation of the Loans and importantly by principal prepayments plus release premia stemming from property disposals.

The key strengths of the Loans include; (i) the long occupational triple net leases with BBVA subject to rental uplifts based on the European inflation index, with such obligations guaranteed by BBVA in case of lease assignments; (ii) the overall quality of the Properties; (iii) the experience of the sponsor RREEF (part of the Deutsche Bank Group) and its ability to execute the disposal plan; and (iv) the diversity in terms of number of properties and location (main locations are Madrid 18.6%, Barcelona 5.0%, Bilbao 9.1%; Sevilla 1.7% and Valencia 1.6%).

Moody's notes that the A3 and Baa2 ratings are well below the current Aa2 rating of the Tenant, which is mainly due to the following weaknesses of the Loans (i) the lack of a tail period beyond the maturity date of the Loans; (ii) a non-clean SPV Borrower structure; (iii) the more limited transaction governance compared to traditional CMBS transactions; (iv) the lack of a liquidity facility; (v) the refinancing risk of the Senior Loan at the maturity date; and (vi) the property type concentration.

Due to the lack of a tail period and the expected size of the Senior Loan at its maturity date, Moody's highlights the risk that the rating of the Senior Loan could migrate significantly downwards towards the maturity date if the real estate and lending markets in Spain would experience severe stress. Furthermore, the ratings of the Senior and Mezzanine Loans will be sensitive to (i) changes in the rating of BBVA; (ii) changes in the ratings of any of the swap counterparties since the swap agreements do not comply with Moody's de-linkage criteria; and (iii) execution risk of the disposal plan.

Since the initial closing, the transaction performed inline with Moody's expectations. As of the June 2010 IPD, the reported DSCR for the Senior and two Loans together (based on the initial transaction amounts) were 1.56x and 1.22x respectively. The U/W LTVPV based on the balance of the two Loans is 126.9% similar to initial closing date. Also, 95.2% of the mortgages have been registered with the local land registers.

Moody's analysed and will monitor this transaction using the rating methodology for EMEA CMBS transactions as described in the Rating Methodology report "Update on Moody's Real Estate Analysis for CMBS Transactions in EMEA," June 2005 and "Moody's Updates on its Surveillance Approach for EMEA CMBS," published in March 2009 and "Framework for De-Linking Hedge Counterparty Risks from Global Structured Finance Cashflow Transactions," May 2006. All can be found on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

More information can be found in Moody's New Issue Report and Performance Overviews for this transaction that are available on its website www.moodys.com -- alternatively, please contact the Moody's client service desk in London on 44(0) 20 7772 5454.

Frankfurt
Marie-Jeanne Kerschkamp
MD - EMEA Structured Fin
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Jeroen Heijdeman
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Affirmed the Rating of EUR 1,251 million of Commercial Real Estate Loans Advanced to Tree Inversiones Inmobiliarias, S.A.
No Related Data.
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