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Rating Action:

Moody's Downgrades and Affirms EMEA CMBS Notes issued by European Property Capital 3 p.l.c.

04 Apr 2014

Approximately EUR343 Million of CMBS Affected

London, 04 April 2014 -- Moody's Investors Service (Moody's) has today downgraded two classes and affirmed further two classes of notes issued by European Property Capital 3 p.l.c.

Moody's rating action is as follows:

....EUR311.5M A Certificate, Downgraded to Baa1 (sf); previously on Jul 11, 2011 Downgraded to A2 (sf)

....EUR31.8M B Certificate, Downgraded to Ba3 (sf); previously on Jul 11, 2011 Downgraded to Ba1 (sf)

....EUR32.1M C Notes, Affirmed Caa3 (sf); previously on Jun 19, 2012 Downgraded to Caa3 (sf)

....EUR31.312M D Notes, Affirmed Ca (sf); previously on Jun 19, 2012 Downgraded to Ca (sf)

RATINGS RATIONALE

Today's rating action is driven by increased concerns about the timely repayment of principal by the note legal final maturity in May 2015 given the short period of time to note maturity and the slow liquidation of the properties securing the last remaining loan in the pool. In addition, the sales so far were mostly below the latest reported valuation. The loan is in default and in special servicing, with the special servicer currently marketing the remaining properties for sale.

For further details on Moody's approach to assess the rating of classes in the tail period, please refer to the report Rating Caps for CMBS in the Tail Period, published in October 2011.

The ratings on Classes C and D Notes reflect the expected losses of the pool and the risk that the recovery proceeds will not be paid by the note maturity to the noteholders and are therefore affirmed.

The special servicer has made some progress in the property disposal process. During 2013, the special servicer took actions to remove the influence of the mezzanine lender and appointed a new asset manager. Since then four properties have been sold, with the remaining assets currently being marketed for sale. However, with 13 properties remaining, the completion of the disposals by May 2015 appears increasingly challenging.

The credit enhancement levels for Classes A and B Notes have improved due to the sequential allocation of recovery proceeds and amortisation amounts from excess cash. The credit enhancement on Classes A and B Notes are currently 66% and 44%, respectively compared to 54% and 36% at the time of the last Moody's rating action in June 2012.

Based on Moody's reassessment of the underlying property values, the loan-to-value (LTV) ratio is 126% on the securitised loan and 150% on the whole loan. This compares to a Moody's LTV of 114% on the securitised loan and 131% on the whole loan in June 2012. Compared to the market valuation, the haircut applied to derive the Moody's value has increased since last review, due to the deterioration of the lease profile and the reduced time available to market the properties.

Moody's rating actions reflect a base expected loss in the range of 30%-40% of the current balance, increased since 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 recovery 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 December 2013. 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:

The main factors or circumstances that could lead to a downgrade of the ratings are (i) lower than expected proceeds from future property sales, leading to an increased loss expectation for the notes or (ii) slower than expected timing of property sales, leading to an increased likelihood of non- repayment of the notes in full by the note legal final maturity.

The main factors or circumstances that could lead to an upgrade of the ratings are (i) significantly higher than expected proceeds from property sales or (ii) faster than expected timing of sales. Any potential upgrades are subject to the rating caps due to the short legal final maturity.

MOODY'S PORTFOLIO ANALYSIS

European Property Capital 3 p.l.c. closed in December 2005 and represents the securitisation of initially five loans originated by JP Morgan Chase Bank, N.A. Four loans have repaid since securitisation, representing a 80% paydown including partial repayments on the remaining loan. The pool has not experienced any realised losses to date.

The last remaining loan, the Randstad Loan, is secured by 13 properties (originally 20) that are all located in the Netherlands. The property types are office (11 properties representing 82% by UW value) and industrial (2 properties representing 18% by UW value). The portfolio contains relatively old properties, with the majority built between 1980 - early 1990s. The current portfolio vacancy rate is 18%, relatively stable since last review. The tenancy base is still granular with currently 64 leases outstanding. However, the lease profile is deteriorating with two major tenants with lease expiries in less than one year. The weighted average time remaining to lease break is currently slightly above three years, compared to 3.7 years in June 2012. The Dutch office market continues to experience a challenging environment with some of the highest vacancy rates in Europe.

The outstanding balance is EUR 95.4 million, which is split between a securitised portion of EUR 80.2 million and a B-Note of EUR 15.2 million. The latest investor report (as of February 2014) exhibits a strong whole loan interest coverage ratio of 3.3x. The loan payments due to the B-lender and all surplus rent are swept to pay down the A-loan. The A-loan will continue to benefit as long as excess cash is not negatively impacted by rollover exposure on the portfolio.

The loan is in default because it did not repay at its scheduled maturity in August 2010 and was transferred to special servicing in October 2010. Between September 2011 and February 2012, the lenders and the borrower agreed to work together on a consensual sale process and sold three properties. The sale prices were substantially lower than the appraised values and reflected the progressively deteriorating conditions in the Dutch office market, particularly for secondary properties. From February 2012 to May 2013 no properties have been sold, mainly due to a lack of consent from the junior lender to agree on a consensual sale of the properties. Since May 2013, the junior lender's consent is no longer required and the special servicer has more control over the disposal process. Four properties have been sold and the remaining assets are being marketed.

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.

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

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.

As the section on loss and cash flow analysis describes, 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.

Emmanuel Savoye
Asst Vice President - Analyst
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

Oliver Moldenhauer
Vice President - Senior Analyst
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 and Affirms EMEA CMBS Notes issued by European Property Capital 3 p.l.c.
No Related Data.
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