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Global Credit Research - 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
- 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
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
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 email@example.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).
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.
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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