Approximately GBP 443.5 Million of CMBS Affected
London, 21 July 2015 -- Moody's Investors Service has downgraded the ratings of four classes of
Notes issued by Fairhold Securitisation Limited.
Moody's rating action is as follows:
....GBP329M A Notes, Downgraded to Ca
(sf); previously on May 4, 2015 B2 (sf) Placed Under Review
for Possible Downgrade
....GBP84.7M A(N) Notes, Downgraded
to Ca (sf); previously on May 4, 2015 B2 (sf) Placed Under
Review for Possible Downgrade
....GBP24M B Notes, Downgraded to C
(sf); previously on May 4, 2015 Caa3 (sf) Placed Under Review
for Possible Downgrade
....GBP5.8M B(N) Notes, Downgraded
to C (sf); previously on May 4, 2015 Caa3 (sf) Placed Under
Review for Possible Downgrade
RATINGS RATIONALE
Today's downgrade action reflects Moody's increased concerns
regarding the refinancing of the loan due in October 2015. In terms
of asset performance the transaction has been stable and Moody's
continues to recognize the very good quality and predictability of the
cash flows derived from ground rents. However, as expected
in the May 2015 review when the Notes were put on review for downgrade,
the continued low interest rate and inflation environment has resulted
in an increase in the net swap mark to market (MtM) valuation amount by
GBP 236 million to GBP 507 million as per the May 2015 servicer update
and this amount ranks mostly senior to the Notes. The updated value
of the assets as of April 2015 shows a significant increase of 27.5%
in value, but this is not sufficient to improve the Note to Value
ratios on the rated classes when the swap mark to market (MtM) is included.
Based on the external valuation, the Note to Value ratios on classes
A and B are 90.1% and 93.0% respectively,
compared to 85.4% and 89.1% previously.
Based on Moody's current value assessment, the Note to Value ratios
on classes A and B are 167.4% and 172.9% respectively.
As noted in the previous downgrade action in July 2014, there could
be an incremental risk of swap breakage costs becoming due and payable
prior to the note final maturity as the transfer fee reserve is being
depleted at a faster rate than initially anticipated. Considering
the current level of income, the transfer fee reserve will not be
able to cover debt service payments in the future and a draw on the liquidity
facility is expected.
Moody's downgrade reflects a base expected loss in the range of 60%-70%
of the current balance, compared with 40%-50%
at the last review. Moody's derives this loss expectation from
the analysis of the default probability of the securitised loan (both
during the term and at maturity) and its value assessment of the collateral.
Methodology Underlying the Rating Action:
The principal methodology used in this rating was Moody's Approach to
Rating EMEA CMBS Transactions published in May 2015. Please see
the Credit Policy page on www.moodys.com for a copy of this
methodology.
Other factors used in this rating are described in European CMBS:
2014-16 Central Scenarios published in March 2014.
Factors that would lead to an upgrade or downgrade of the rating:
Main factors that could lead to an upgrade or downgrade of the ratings
are (i) the swap MtM valuation and (ii) the valuation of the underlying
assets. Both factors are subject to change; primary sources
of assumption uncertainty are (i) sensitivity of the swap MtM amounts
to future changes in interest and inflation rates and (ii) sensitivity
of asset valuation to real interest rate expectations. The value
volatility of the assets is substantial due to limited evidence of large
transactions in the investment market for ground rent portfolios.
MOODY'S PORTFOLIO ANALYSIS
Fairhold Securitisation Limited closed in March 2006 and was subsequently
tapped in 2007. It represents the securitization of a loan granted
by the Issuer to Fairhold Finance Limited (the "Borrower").
The loan's repayment relies on the receipt of ground rent payments,
warden's apartments rents and transfer fees arising from freehold
and long leasehold reversionary interests in 406 sheltered housing developments
(the "Portfolio") owned by thirteen property owning subsidiaries
of the Borrower. The portfolio's cash flows relate to 18,678
sheltered housing apartments and 310 warden's apartments located
in town centers throughout the United Kingdom.
The transaction has been performing well with no issues to date.
Therefore, the very high default probability of the loan is principally
due to the refinancing risk when the loan reaches maturity in October
2015 and as such the default risk of the notes is concentrated in the
period between the loan maturity date and note maturity date in 2017.
Moody's is aware that ground rent portfolios are potentially attractive
to certain type of investors, in particular those looking for exposure
to long-dated, inflation-linked cash flows.
Despite this, Moody's believes that ground rent portfolios
are still a relatively niche asset class, and as such the market
is still neither particularly deep nor are ground rent portfolios apparently
liquid. This, combined with the challenging hedging structure
caused Moody's to further revise its refinancing outlook for the
underlying loan to incorporate a very high probability of default at the
loan's maturity date.
The other driver of the ratings is Moody's valuation. The
portfolio valuation supplied in the investor reporting follows an actuarial
approach. There is doubt in Moody's view whether a buyer
of the portfolio would purchase solely based on an actuarial valuation,
given the uncertainty around projecting very long-dated cash flows.
Market comparables to date have indicated that a yield-based approach
would be used to value similar portfolios.
In the analysis, Moody's took a blended approach, giving
part value to an actuarial method and part value to a yield-based
method, to derive Moody's sustainable portfolio valuation
of GBP 550 million, which is unchanged compared to last review.
The main characteristics of the ground rents have been considered in the
yield-based approach, in particular: (i) the length
of the leases and the remaining years until lease extension, (ii)
the frequency of the rent reviews and the inflation-linked nature
of the rent reviews, (iii) the timing of the rent reviews,
and (iv) the average ground rents per unit and the costs associated with
collecting the income. We did not consider potential lease enfranchisements
and we gave no benefit for potential ancillary income. This results
in a Moody's loan-to-value ratio of 80.6%
prior to the swap MtM and 172.9% including the whole net
MtM as per the May 2015 servicer update, significantly higher than
129.9% at previous review.
In the event of a portfolio sale and under current interest rate conditions,
it is highly likely that the hedging structure would need to be dismantled
and a termination payment would become payable by the Issuer and Borrowers.
The requirement to pay swap termination payments will further constrain
the availability of financing at the refinancing date. Moody's,
in its credit assessment of the Notes, has assumed a base case termination
payment of GBP 507 million based on the May 2015 servicer update.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity
analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions of the disclosure form.
The analysis relies on a Monte Carlo simulation that generates a large
number of collateral loss or cash flow scenarios, which on average
meet key metrics Moody's determines based on its assessment of the
collateral characteristics. Moody's then evaluates each simulated
scenario using model that replicates the relevant structural features
and payment allocation rules of the transaction, to derive losses
or payments for each rated instrument. The average loss a rated
instrument incurs in all of the simulated collateral loss or cash flow
scenarios, which Moody's weights based on its assumptions
about the likelihood of events in such scenarios actually occurring,
results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios
that stress factors contributing to sensitivity of ratings and take into
account the likelihood of severe collateral losses or impaired cash flows.
Moody's weights the impact on the rated instruments based on its
assumptions of the likelihood of the events in such scenarios occurring
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Sarwesh Paradkar
Associate Analyst 1
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Andrea M. Daniels
Associate Managing Director
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Downgrades UK ground rent backed Fairhold Securitisation Limited
