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Announcement:

Moody's affirms the ratings of all CMBS Notes issued by Longstone Finance plc

13 May 2010

GBP 868 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 Longstone Finance plc (amounts reflect initial outstandings):

- GBP542.5 million Class A Commercial Mortgage Backed Floating Rate Notes due 2036: Affirmed at Aaa, previously on 24 March 2006 assigned Aaa

- GBP46.5 million Class B Commercial Mortgage Backed Floating Rate Notes due 2036: Affirmed at Aa2, previously on 24 March 2006 assigned Aa2

- GBP279 million Class C Commercial Mortgage Backed Floating Rate Notes due 2036: Affirmed at A2, previously on 24 March 2006 assigned A2

1) Transaction Overview

The transaction represents a true sale securitisation of an initially GBP868 million commercial mortgage loan (the "Loan") secured by a portfolio of currently 53 food retail supermarkets (the "Portfolio") located across the UK. All properties securing the Loan are let to Sainsbury's Supermarkets Ltd ("SSL"). The term of the leases was 30 years from the closing date (March 2006) with yearly rental uplifts based on the LPI Index, capped at 5.0% and floored at 0.0% per annum. The tenant's obligations under the leases are guaranteed by J Sainsbury plc (rating not disclosed). J Sainsbury plc ("Sainsbury's") is a leading UK food retailer with revenues of GBP20.0 billion in the year to March 2009/10. Sainsbury's revenues increased by 24.2% since closing in the year to March 2005/06.

The Loan had an initial term of 25 years and is subject to scheduled partial amortisation. The interest rate payable on the Loan is adjusted annually based on the LPI Index, with adjustments capped at 5.0% and floored at 0.0% per annum. The Issuer has entered into two LPI swaps with Morgan Stanley & Co. International (A2, P-1) and UBS AG, London Branch (Aa3, P-1), and has to pay an LPI Index linked annuity to the hedge counterparties. In return, the Issuer receives all amounts needed to pay interest and principal due on the Notes, including final termination payments for Class B and Class C Notes at their expected maturity date. Upon unscheduled termination of the LPI swaps, termination payments may be due from the Issuer to the hedge counterparties. Such payments rank pro rata and pari passu to the Class A Notes and senior to the Class B and the Class C Notes. To date, the Loan's outstanding balance has decreased to GBP 815 million as a result of scheduled amortisation.

The key strengths of the transaction are (i) the long-term leases that are guaranteed by J Sainsbury plc and subject to inflation-linked uplifts; (ii) the Portfolio diversity in terms of geographical location; (iii) the relatively low leverage with an initial underwriter loan-to value (U/W LTV) of 60%; and (iv) the sequential repayment of the Notes. These features are viewed as key mitigants against the main weaknesses of the transaction, e.g. tenant and property type concentration, and the potential unwinding cost of the LPI swaps in case of unscheduled termination.

2) Rating Rationale

The transaction closed 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 all classes of CMBS Notes issued by Longstone Finance plc. The affirmation of the ratings of all Classes of Notes in the transaction follows a re-assessment of the value of the Portfolio, of the credit risk of the Loan and of the risk relating to the mark-to-market value of the LPI hedge. Today's rating affirmation is mainly driven by:

(i) Stable cash flows generated by the Portfolio. All properties securing the Loan are let on a long-term basis to Sainsbury's. The credit strength of Sainsbury's continues to be within Moody's expectations at closing.

(ii) Moderate refinancing risk of the Loan. Taking into account scheduled amortisation and cash sweep potentially starting from the Step-Up Date, Moody's expects a Moody's loan to market value of approximately 18% at the Loan's maturity date in 2031. The unexpired lease term at loan maturity will be 5 years.

(iii) Moody's loss given default and recovery assumptions are commensurate with the current rating levels for the individual Classes of Notes. Based on Moody's assessment of vacant possession values ("Moody's VPV"), the Moody's Note-to-value is

45% for the Class A Notes

49% for the Class B Notes

74% for the Class C Notes.

The Note-to-value levels increase by about 13%-points when including the potential swap termination costs at their current marked-to-market levels.

At current Moody's property value levels, the ratings of the Notes are sensitive to the credit strength of the Guarantor, J Sainsbury plc. 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.

Within the transaction, the extent of this cushion for each Class of Notes depends on its position in the capital structure. Moody's considers the extent of the cushion as moderate for the Class A Notes and low for the Class B and Class C Notes, meaning that a deterioration of the credit quality of Sainsbury's would impact the rating of Class B and Class C Notes at current Moody's VPV levels.

3) Transaction Performance History

Due to rent increases, the reported DSCR has improved over the past four years from 1.5x in March 2006 to 1.6x in January 2010. The rental cash flow increased from GBP 79 million at closing to approximately GBP87 million.

Under the terms of the transaction the Sponsor (Sainsbury's) procures independent investment values for half the portfolio on an annual basis. This value is based on the properties tenanted by SSL under the terms of the existing leases and takes no account of extensions or developments since closing which have been funded independently by SSL. In March 2010 Sainsbury's obtained an investment valuation from BNP Paribas Real Estate ("BNP") on the whole Portfolio ("BNP IV"). In addition Sainsbury's also procured a valuation from BNP based on vacant possession value ("BNP VPV") of the whole Portfolio which takes into account the underlying stores trading potential and the store extensions and developments undertaken by the tenant since closing.

Per March 2010, BNP determined an investment value ("BNP IV") of GBP1,724 million, an increase of 11% compared to closing in 2006. This BNP IV increase is derived from a compression of implied yields. Based on the updated BNP IV and scheduled amortisation since closing, the LTV has decreased to 47% compared to 56% at closing.

Per March 2010, BNP determined a vacant possession value ("BNP VPV") of GBP2,017 million, an increase of 26% compared to closing in 2006. This BNP VPV increase is derived from (i) an increase by 5% of the retail floor area in existing properties (ii) the overall improvement of trading in the Portfolio (iii) the continuing demand from a highly competitive grocery sector for more retail space at a time when restrictions continue to limit new development. Based on the updated BNP VPV and scheduled amortisation since closing, the LTV has decreased to 40% compared to 54% at closing.

As outlined in more detail in the Analysis section below, Moody's formed its own opinion of market value ("Moody's MV") and vacant possession value ("Moody's VPV"). Moody's MV of GBP1,497 million is lower than the BNP IV (difference: 13%). Due to different underlying assumptions, Moody's VPV, at GBP1,097 million, is significantly lower than the BNP VPV (difference: 46%). 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 GBP1,097 million given the significant number of properties that need to be liquidated and the likely stressed situation of the retail market in such a scenario.

4) Moody's Portfolio Analysis

Property value. After having increased in 2006 and 2007, commercial property values across the UK have fallen significantly in 2008 and H1 2009. Moody's MV has increased by GBP 21 million (1.4%) compared to closing, which is mainly driven by Sainsbury's sponsored development of additional retail floor area in existing properties, with an increase of the gross internal floor area by 5%, to which BNP allocates a value increase of GBP59 million.

Since closing, Moody's VPV has decreased by GBP272 million (20%), which reflects Moody's observation of the continued tiering between properties with strong long-term leases in place versus vacant properties. Moody's has therefore accounted for yield widening in its Moody's VPV assessment and has also allocated a lower value increase for the additional floor area. Moody's VPV reflects a value of GBP277 per sq ft gross internal floor area, compared to GBP509 per sq ft for the BNP VPV.

Default Risk and Expected Loss. Moody's assesses a relatively low default risk of the Loan. Moody's has determined that the main reason for a default of the Loan 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 Loan default. Consistent with its analysis at closing, Moody's also considered in its loss given default assessment the potential termination costs in case of an unscheduled termination of the LPI swaps. At about GBP145 million, Moody's notes that the indicated swap termination costs are currently significantly higher than at closing when they amounted to GBP 44 million. The expected loss of the Loan 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 2 February 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.

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
Alexander Zeidler
Asst Vice President - 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 the ratings of all CMBS Notes issued by Longstone Finance plc
No Related Data.
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