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Announcement:

Moody's: No adverse rating impact on notes issued by Telereal Securitisation PLC following proposal to increase the note balance on the Class A6 and Class B2 Notes

22 Feb 2021

London, 22 February 2021 -- Moody's Investors Service ("Moody's") announced today that the proposed increase in Class A6 Notes to GBP 325 million, and Class B2 Notes to GBP 250 million, whilst simultaneously fully retiring the Class B3 Notes, would not, in and of itself and as of this point in time, result in a reduction, placement on review for possible downgrade or withdrawal of Moody's current ratings of any rated notes issued by Telereal Securitisation PLC.

The proposal includes the following features:

- to increase the outstanding note balance on the Class A6 Notes to GBP 325.0 million, which will fully amortise by December 2031, and that will bear interest based on a fixed rate coupon, to be agreed that will ensure that based on provided rental income and cost assumptions, all financial covenants will be met over the transaction term;

- to increase the outstanding note balance on the Class B2 Notes to GBP 250.0 million, which will fully amortise by December 2031, and that will bear interest based on a fixed rate coupon, to be agreed until 10th March 2026, and thereafter a floating interest rate to be calculated with reference to daily compounded SONIA, plus a credit adjustment spread to be agreed, plus a margin of 4.32% per annum; the issuer will enter into an interest rate swap agreement that will ensure that based on provided rental income and cost assumptions, all financial covenants will be met over the transaction term;

- to fully retire the Class B3 Notes and make related amendments to the Class B2 and Class B3 interest rate swap agreements to facilitate the retirement of the Class B3 Notes.

Based on the analysis of the provided information on the proposal, including to be determined interest rates that ensure that all financial covenants are met, the default risk of the transaction would not change if the proposal is implemented.

Telereal Securitisation PLC is a secured notes issuance backed by a fixed rate loan secured by a portfolio of 5,340 fixed-line telephone exchanges and other specialised properties located throughout the UK and let to British Telecommunications Plc (BT) (Baa2 negative).

The key credit strengths and credit challenges of the transaction would remain unchanged:

Credit Strengths

Rental income from investment grade tenant to fully amortise rated notes: BT have entered into a full repairing and insuring lease (FRI lease) with rental uplifts of 3% per annum until at least December 2031. The BT net rent is sufficient to fully amortise the principal amounts on Class A, Class B and Class C Notes by December 2031.

Importance of BT to the United Kingdom's telecommunication infrastructure: Given the public service nature of BT's operations and the importance of its fixed-line network, in a distress scenario, it is likely that BT's creditors would want to protect the value in BT and opt to maintain the business (reorganisation as opposed to liquidation). In this scenario, the rent will continue to be paid as long as the company generates sufficient cash.

Importance of underlying property portfolio: On the assumption that the properties in the portfolio are necessary in order to operate BT's business, leading counsel considers that the rent payable under the lease would be viewed by the court as an operating expense of the administration. As a result, as long as the telephone exchanges remain an essential asset for the company, BT (or its administrator) would be likely to use any available cash in priority to pay the rent. This raises the question of how long will the properties be needed as telephone exchanges to operate BT's fixed-line network business. In the short to medium term, Moody's believes there are strong arguments in favour of maintenance of a large portion of the properties as telephone exchanges.

Credit Challenges

Low debt service coverage ratio (DSCR) throughout the life of the transaction: The increase in debt amounts will reduce the DSCR for the remaining term of the transaction. The DSCR, including the Class C Notes debt service, will average 1.02x throughout the life of the transaction, reducing even closer to 1.0x during the latter years. Thus the transaction's performance is more sensitive to unexpected increases in expenses. Mitigant: An additional GBP 4 million per annum of third-party rent, which has not been included in calculating the DSCR, is available to meet any unexpected increases in expenses and for scheduled amortisation.

Property obsolescence: The pace of technological changes in the telecom industry makes it difficult to assess the future configuration, use and value of BT's fixed-line network and telephone exchanges in the long term. Mitigant: The scheduled amortisation is reducing the loan balance as the risk of property obsolescence increases.

Esoteric nature of properties: The properties are all telephone exchanges spread throughout the UK. Given the esoteric nature of some of the properties a secondary value is difficult to ascertain. The valuer has valued the properties on a vacant possession value (VPV), assuming significant costs in converting the properties to an alternative usage. The alternative usage of the properties are mostly residential and office. Thus any prospective buyer will be required to inject significant amounts to convert the properties. Mitigant: The scheduled amortisation is reducing the exposure with the increasing risk of the properties no longer being needed as telephone exchanges.

Specified vacation allowance: BT has specified allowances, which it can use to vacate any properties within the portfolio without having to pay compensation. BT can vacate up to 10.44% of the portfolio by rent, as from the 2001 Closing Date - usable over 30 years and indexed on an annual basis taking into account the fixed 3% annual rental uplifts. As of today, the total specified allowance available equates to an annual rent of GBP 7.3 million, which Moody's assumes will be utilised over the transaction term. Mitigant: The net rent is sufficient to pay all interest and scheduled principal on all the notes, despite assuming full utilisation of the allowance.

Unspecified vacation allowances: BT may also, at any time, vacate any of the properties within the portfolio. Mitigant: BT will be required to pay compensation, which will de-leverage the transaction. The compensation is equal to the higher of (i) the net present value (NPV) of future rents on the vacated property, plus any breakage costs, and (ii) 125% of the Allocated Debt Amount (provided that proceeds from the sale are higher than NPV).

For further details on the transaction refer to the previously published new issue reports, which are available at https://www.moodys.com.

The principal methodology used in reaching this conclusion and in monitoring the ratings of the notes issued by Telereal Securitisation PLC is "Moody's Approach to Rating EMEA CMBS Transactions", published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1243194. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's opinion addresses only the credit impact associated with the proposed amendment, and Moody's is not expressing any opinion as to whether the proposed amendment has, or could have, other non-credit related effects that may have a detrimental impact on the interests of holders of rated obligations and/or counterparties.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Thomas Rahman
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
Client Service: 44 20 7772 5454

Oliver Moldenhauer
VP - Sr Credit Officer/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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