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Announcement:

Moody's affirms ratings of CMBS Notes issued by Dragon Finance B.V.

13 May 2010

GBP 132.45 million of CMBS affirmed

London, 13 May 2010 -- Moody's Investors Service has today affirmed the ratings of the following Classes of CMBS Notes issued by Dragon Finance B.V. (amounts reflect initial outstandings):

- GBP102.45 million Class A Secured Floating Rate Notes due 2023: Affirmed at Baa3, previously on 27 March 2006 confirmed Baa3

- GBP30 million Class B Secured Floating Rate Notes due 2023: Affirmed at Baa2, previously on 21 June 2006 confirmed Baa2

Moody's does not rate the GBP100 million Class C Secured Floating Rate Notes due 2023 issued by Dragon Finance B.V.

1) Transaction Overview

Dragon Finance B.V. ("Issuer") closed in August 2000 and represents an initially 23-year sale and leaseback transaction of 10 supermarket sites sponsored by J Sainsbury plc ("Sainsbury's"). The Issuer used the proceeds from the GBP232.45 million Secured Bonds due 2023 ("Bonds", amount reflects initial outstandings) to subscribe for bonds issued by Hobart Property ("HP Bonds") and Hobart Leasing ("HL Bonds").

With the proceeds, Hobart Leasing refinanced the purchase of the head leases of the properties and sub-leased the properties to Sainsbury's Supermarkets Ltd ("SSL"), while Hobart Property refinanced the purchase of a beneficial interest in the properties. The rents paid by SSL under the initially 30-year lease have fixed annual uplifts of 1% and are guaranteed by Sainsbury's (the "Guarantor", rating not disclosed). Hobart Leasing uses the rental proceeds to subscribe for zero-coupon bonds issued by Hobart Property as well as to make payments of interest and principal to the Issuer under the HL Bonds.

The Issuer in turn uses those payments to amortise the Bonds down to GBP130 million in 2023. The residual value of the properties at maturity will enable Hobart Property to redeem the zero-coupon bonds and pay the principal due under the HP Bonds. With the redemption proceeds of the zero-coupon bonds, Hobart Leasing will make final payments under the HL Bonds, and the Issuer will redeem the then outstanding principal of the Bonds. In addition, Sainsbury's guarantees this residual value up to GBP38.6 million for the benefit of the Class A and Class B Noteholders.

With a restructuring of the transaction in 2006, a Jersey limited liability company ("Bond Guarantor") was incorporated into the structure, which now guarantees in favour of the Issuer all interest and principal payments due from time to time on the HL Bonds and on the HP Bonds. The Bond Guarantor benefits from a committed limited recourse loan agreement with a subsidiary of Sainsbury's (Sainsbury Propco D Limited, "Propco D"). The loan agreement is secured amongst other by first ranking mortgages on two properties let to SSL. For more details, please refer to the New Issue report and other associated research on www.moodys.com.

2) Rating Rationale

As outlined above, the transaction was restructured in March 2006. At that time, Sainsbury's had a Corporate Family rating of Baa3 but Moody's had assumed in its analysis Sainsbury's to be unrated.

Today, Moody's affirmed the Corporate Family rating of Sainsbury's and subsequently withdrew the public rating.

Today, Moody's affirmed the ratings on the Class A and Class B Notes issued by Dragon Finance B.V. The affirmation of the ratings of all Classes of Notes in the transaction follows a re-assessment of the value of the property portfolio and the credit risk of the HP Bonds, HL Bonds and ultimately the Bonds. Today's rating affirmation is mainly driven by:

(i) Stable cash flows generated by the property portfolio. All properties securing the HL Bonds and HP Bonds are let on a long-term basis to SSL. The credit strength of Sainsbury's continues to be within Moody's expectations at restructuring.

(ii) Moderate refinancing risk of the HP Bonds in 2023, which is in relation to the Bonds further mitigated by Sainsbury's guaranteeing the residual value up to GBP38.6 million for the benefit of the Class A and Class B Noteholders.

(iii) The liquidity facility available to Hobart Leasing providing liquidity of currently up to GBP32 million in case of a tenant (and Guarantor) default.

At current Moody's property value levels, the ratings of the Notes are sensitive to the credit strength of the Guarantor, J Sainsbury plc (rating not disclosed). Therefore, if the credit strength of the Guarantor was to deteriorate, all other things being equal, i.e assuming a constant value of the portfolio, the ratings of the Notes would be expected to come under pressure. However, the security derived from the property vacant possession value still acts as a cushion against a deterioration of the credit quality of the Guarantor. Moody' considers the extent of the cushion as low for the Class A and the Class B Notes.

3) Transaction Performance History

Excluding the additional properties owned by Propco D, the rental cash flow increased from GBP17.7 million at closing to approximately GBP 19.2 million in July 2009. Due to amortisation of the Class A Notes since closing, the outstanding balance of the Bonds reduced to GBP220 million.

4) Moody's Portfolio Analysis

Property value. Moody's formed its own opinion of market value ("Moody's MV") and vacant possession value ("Moody's VPV"). Including the Propco D properties, Moody's MV is GBP333 million and Moody's VPV is GBP227 million. Moody's VPV is relevant to determine the recoverable property value in a scenario where Sainsbury's would default. It is Moody's opinion that in a scenario where Sainsbury's would default, the recoverable property value is best reflected in Moody's VPV of GBP227 million given the significant number of properties that need to be re-let and/or ultimately liquidated and the likely stressed situation of the retail market in such a scenario. Based on Moody's VPV, the current LTVPV is 97%.

Default Risk and Expected Loss. Moody's assesses a relatively low default risk of the HL Bonds and HP Bonds. Moody's has determined that the main reason for a default of the HL Bonds and HP Bonds would be a default of Sainsbury's and to account for the single tenant exposure in this transaction, Moody's VPV is applied to calculate the severity of loss in case of default. The expected loss of the Bonds is still low, and the variability around the expected loss has remained stable, resulting in today's affirmation.

5) Rating Methodology

The principal methodologies used in rating and monitoring the transaction are "Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA" June 2005 and "Moody's Updates on its Surveillance Approach for EMEA CMBS" March 2009, which are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website. The last Performance Overview for this transaction was published on 20 August 2009.

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.

For updated monitoring information, please contact monitor.cmbs@moodys.com. To obtain a copy of Moody's New Issue Report on this transaction, please visit Moody's website at www.moodys.com or contact our Client Service Desk in London (+44-20-7772 5454).

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

London
Christian Aufsatz
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms ratings of CMBS Notes issued by Dragon Finance B.V.
No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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