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Announcement:

Moody's affirms five classes of Notes issued by Deco 8 -- UK Conduit 2 plc

18 Oct 2010

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 outstandings):

- 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 January 2013.

Remaining pool:

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 last IPD.

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.

3) Methodology

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.

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

New York
Andrea M. Daniels
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom

Moody's affirms five classes of Notes issued by Deco 8 -- UK Conduit 2 plc
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