GBP608 million of EMEA CMBS affected
London, 18 October 2010 -- Moody's Investors Service has today affirmed the following classes
of Notes issued by Deco 8 -- UK Conduit 2 plc (amounts reflect initial
- GBP200M Class A-1, Affirmed at Aaa (sf); previously
on Jun 26, 2009 Confirmed Aaa (sf)
- GBP256.6M Class A-2, Affirmed at Aa3 (sf);
previously on Jun 26, 2009 Downgraded to Aa3 (sf)
- GBP32.4M Class B, Affirmed at Baa2 (sf); previously
on Jun 26, 2009 Downgraded to Baa2 (sf)
- GBP34M Class C, Affirmed at Ba1 (sf); previously on
Jun 26, 2009 Downgraded to Ba1 (sf)
- GBP23.5M Class D, Affirmed at B2 (sf); previously
on Jun 26, 2009 Downgraded to B2 (sf)
- GBP61.1M Class E, Affirmed at Caa2 (sf); previously
on Jun 26, 2009 Downgraded to Caa2 (sf)
1) Rating Rationale
Today Moody's affirmed the ratings of the classes of Notes A,
B, C, D, and E. Following a detailed re-assessment
of the pool's credit risk, which examined both negative and
positive credit events on the loan and/or property level, it was
concluded that the outstanding ratings were commensurate with the credit
risk of the pool. During 2010, Moody's received special
notices affecting three of the four largest loans in the transaction.
The notices included:
1. The restructuring of the Lea Valley loan (extension to April
2016 from April 2012);
2. Lease renewal of the largest tenant of the Mapely II loan;
3. Updated valuation of the Le Meridien loan following a recent
sale of the hotel property.
As such, the primary focus of the review was these three loans which
account for 79% of the current pool and secondarily, the
performance of the Fairhold Portfolio loan and the remaining 13 smaller
loans in the pool.
This rating action concludes Moody's annual review for this transaction.
2) Moody's Portfolio Analysis
Lea Valley loan. On 28 May 2010, the servicer (Deutsche Bank
AG, London) announced that following prior negotiations, parties
have agreed to certain loan modifications of the Lea Valley loan.
These include amongst others: (i) an extension of the maturity date
to April 2016 from April 2012; (ii) a reduced fixed rate for the
extended period (with the loan margin unchanged); (iii) a new target
debt level covenant subject to a potential six months tolerance granted
by the servicer; (iv) excess cash flow swept into deposit account;
and (v) removal of the loan-to-value ("LTV")
ratio covenant. In order to meet the debt targets the borrower
has the intention to sell (an unidentified) part of the existing 28 properties
securing the loan, all of which are located throughout the UK.
No updated valuation has been reported to date. Hence with no amortisation
since closing, the underwriter's ("UW") LTV ratio
remained at 84% on a whole loan basis and 77% on an A-Loan
basis. Furthermore, the loan benefits from a current debt
service coverage ratio (DSCR) of 1.1x on a whole loan basis (1.2x
on A-Loan basis). The weighted-average ("WA")
remaining lease term to expiry/ break is currently 3.3 years.
Since April 2009, the vacancy level increased to 31% in July
2010 from 21%. Based on its rating review, Moody's
views the above modifications to the Lea Valley loan overall as mildly
positive for the lenders as a whole.
As a result of the analysis of the loan modifications, property
market developments, rental cash flows and the value of the properties
securing the loan, Moody's revised its current value to GBP183 million
from GBP174 million. Going forward, the current value is
expected to remain relatively flat and affected by (i) the current high
vacancy level (31% by area) and (ii) the existing relative short
WA lease to expiry/ break. As a result, Moody's expected
exit LTV ratio is approximately 128% on a whole loan basis.
Therefore, Moody's still expects a high likelihood of default of
the Lea Valley loan at the extended loan maturity date in April 2016 despite
a possible recovery during the 4-year extension. Although
the refinancing risk remains high, it has marginally decreased compared
to pre-restructuring of the loan. Hence benefitting from
a possible market recovery.
Mapely II loan. The Mapely II loan is secured by 16 office properties
all located in the UK. The loan is interest only and matures in
April 2016. At the July 2010 IPD, the largest tenant,
Microsoft (rated Aaa), exercised their December 2010 lease break
option. Microsoft occupies three of the properties securing the
loan (the Microsoft Campus) in Reading, totalling approximately
246,000 square feet. However, as announced on 28 September
2010, the completion of recent negotiations resulted in three new
RPI linked leases for the entire campus. The leases have no break
option and each have a 15-year term providing a total rental income
of GBP5.65 million. The rental income (excluding rent free)
is approximately 23% below the closing date rental level.
The borrower agreed to a rent free period of 14 months which will be spread
equally over the next six years. As a result, the WA remaining
lease term to expiry/ break increased to approximately 8.7 years
from 3.1 years as reported at the last IPD. To date,
no updated valuation has been reported. Hence, the UW LTV
ratio remained at 82%. As a result of the recent rent reduction,
the interest coverage ratio (ICR) of 1.56x as reported at the last
IPD (1.18x excluding Microsoft) is expected to decrease at the
next IPD. However, Moody's does not expect the ICR
covenant of 1.25x to be breached.
Following the analysis of recent property market developments, current
rental cash flows and the value of the properties securing the loan,
Moody's revised its current value to GBP221 million from GBP240 million
as per last review in June 2009. Going forward, the value
is expected to increase moderately benefitting from a good tenant base,
low vacancy rate and moderate lease rollover. As a result,
Moody's expected exit LTV ratio is approximately 90%. In
June 2009, Moody's assessment resulted in a slightly lower
exit LTV ratio (approximately 83%). Therefore, Moody's
still expects a moderate likelihood of default of the Mapely II loan at
the loan maturity date in 2016.
Le Meridien loan. On 23 July 2010, the servicer reported
that the asset securing the Le Meridien loan, a 266-room,
5-star hotel in London West End, was sold to the American
hotel group Host Hotels and Resorts ("HHR") (rated Ba1).
The request by HHR for a change of control instead of a loan prepayment
was permitted by the servicer subject to two conditions; (i) an updated
valuation; and (ii) the removal of the junior lender control rights
in the intercreditor agreement. The subsequent updated value increased
to GBP67.1 million from GBP52.5 million at closing.
This resulted in a UW whole loan LTV ratio of 64% and an LTV ratio
of 50% on an A-Loan basis compared to 85% on a whole
loan basis at closing. Following its analysis, Moody's
current assessment of the property value is GBP40 million (GBP150,000
per room) resulting in LTV ratio of 106% on a whole loan basis
which is expected to remain flat until the (extended) loan maturity in
The Fairhold Portfolio loan. Since October 2009, the Fairhold
Portfolio loan (11.8% of the current portfolio) which is
secured by a large portfolio of ground leases breached its DSCR covenant.
As a result, the loan which matures in January 2013 was added to
the servicer's watch list. To date, the borrower continues
to make all loan interest payments. The ICR/ DSCR as per last IPD
were 1.26x/ 1.07x on a whole loan basis and 1.81x/
1.51x on a A-Loan basis. Compared to its last review
in 2009, Moody's did not change its main assumptions for this
loan. Therefore, the current Moody's LTV ratio is 96%
on a whole loan basis and 73% on A-Loan basis. Moody's
LTV ratio at loan maturity is 90%, which is lower compared
to today as result of scheduled amortisation. The UW LTV ratio
is 72% on whole loan basis and 55% on A-loan basis.
No updated valuation has been reported since closing.
Loan payment status of the 13 smallest loans. As of the last interest
payment date, all but four of the remaining 13 loans in the portfolio
were current. Three loans which receive only partial interest payments
and no amortisation include (i) the KS Focus Derby loan (0.7%
of the current pool); (ii) the Challenge and Wrencote loan (0.5%
of the current pool); and (iii) the Swiftgold Limited loan (0.2%
of the current pool). In addition to the Fairhold Portfolio loan,
the MPH (UK) loan (0.7% of the current pool) breached its
DSCR covenant while it continued to receive full interest payments.
However, only partial amortisation was paid by the borrower at the
The MPH (UK) loan breached its DSCR covenant in January 2010 due to the
insolvency of the single tenant. Currently, the loan is expected
to be restructured while a new 5-year lease has been agreed to
with the administrator of the tenant. The servicer received an
updated valuation indicating an increase in UW market LTV ratio to 186%
from 51% at closing.
At the upcoming (October) IPD, it is expected that also the Rowan
UK loan (2.6% of the current portfolio) will be transferred
to special servicing due to an ICR covenant breach at the previous IPD
coupled with the upcoming loan maturity.
Refinancing risk in the pool. The transaction's exposure to loans
maturing in the short-term (2010 and 2011) is moderate.
While 3.4% of loans mature in 2010, 6.4%
of the current pool matures in 2011 (including the fourth largest loan
(Le Meridien loan, 5.8% of the current pool),
and 1.7% of the loans mature in 2012 (reduced from 39.4%
as result of the Lea Valley loan extension). The Le Meridien loan
benefits from two remaining one-year extension options.
Since Moody's expects property values in the UK to only slowly recover
from 2011 onwards, all loans will remain highly leveraged at their
respective maturity dates, especially when taking into account the
additional debt in the form of B-loans for four of the loans.
Consequently, in Moody's view, for almost all of the loans,
the default risk at maturity remains high compared to the closing analysis.
The principal methodologies used in rating Deco 8 -- UK Conduit 2
plc were "Update on Moody's Real Estate Analysis for CMBS Transaction
in EMEA" published in June 2005 and "Moody's Updates on its Surveillance
Approach for EMEA CMBS" published in March 2009. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found on Moody's website.
The last Performance Overview for this transaction was published on 28
September 2010. Further information on Moody's analysis of this
transaction is available on www.moodys.com. 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
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instruments
related to the monitoring of this transaction in the past 6 months.
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Andrea M. Daniels
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's Investors Service Ltd.
Moody's affirms five classes of Notes issued by Deco 8 -- UK Conduit 2 plc
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