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
- 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
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
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
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%
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
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).
Asst Vice President - Analyst
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
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454