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Announcement:

Moody's affirms the ratings of all classes of UK CMBS Notes issued by Canary Wharf Finance II plc following property substitution

17 Nov 2010

GBP 2.462 billion of CMBS securities affected

London, 17 November 2010 -- Moody's Investors Service has today affirmed the ratings of the below referenced classes of Notes issued by Canary Wharf Finance II plc (amounts reflect initial outstandings), as a result of the announced property substitution by the Issuer:

GBP 1215 million Class A1 Notes, Affirmed at Aaa (sf); previously on 22 Jan 2004 Confirmed at Aaa (sf)

GBP 400 million Class A3 Notes, Affirmed at Aaa (sf); previously on 22 Jan 2004 Confirmed at Aaa (sf)

GBP 222 million Class A7 Notes, Affirmed at Aaa (sf); previously on 24 Apr 2007 Definitive Rating Assigned Aaa (sf)

GBP 235 million Class B Notes, Affirmed at A1 (sf); previously on 14 Apr 2009 Downgraded to A1 (sf)

GBP 104 million Class B3 Notes, Affirmed at A1 (sf); previously on 14 Apr 2009 Downgraded to A1 (sf)

GBP 275 million Class C2 Notes, Affirmed at Baa1 (sf); previously on 14 Apr 2009 Downgraded to Baa1 (sf)

GBP 125 million Class D2 Notes, Affirmed at Ba1 (sf); previously on 14 Apr 2009 Downgraded to Ba1 (sf)

1) Transaction Overview

Canary Wharf Finance II plc (the "Issuer") represents a true-sale securitisation of a large loan secured by first-ranking mortgages over a portfolio of prime office properties located in the London Docklands Canary Wharf district.

This transaction originally closed in June 2000 and the Issuer has issued Notes on six occasions, with the most recent issuance closing in April 2007. The total current balance of the Notes is approximately GBP 2,462 million as of the October 2010 interest payment date. The legal final maturity of the Notes is in October 2037 with an expected maturity in January 2035. The Notes are partially amortising with a balloon repayment in January 2035 of approximately GBP 757 million. The transaction benefits from a coverage reserve account that can be used to cover intercompany loan-level interest and amortisation shortfalls. In addition, there is a GBP 300 million liquidity facility. At the October 2010 interest payment date, GBP 0.3 million was standing to the credit of the coverage reserve account.

In April 2009, Moody's downgraded the classes B, B3, C2 and D2 following negative developments including: (i) the impact of the insolvency of Lehman Brothers Limited, the main tenant of the largest property in the pool, 25/30 Bank Street ("HQ2"); (ii) the weakening credit strength of a number of larger tenants occupying the other six properties in the transaction; and (iii) Moody's expectation of further property value declines in the future. In April 2010, Moody's affirmed the then ratings as the transaction was performing in line with expectations.

2) Rating Rationale

Moody's has today affirmed the ratings of all classes of Notes following the announcement of a property substitution that the HQ2 and 50 Bank Street ("HQ4") properties have been removed and replaced by 10 Cabot Square ("FC2") and 20 Cabot Square ("FC4"). In addition, the announcement states that Canary Wharf Group will increase the cash reserve account by GBP 65.7 million in order to fund the cash flow shortfall caused by the substitution. Indeed, after considering the benefit of the HQ2 facility, the portfolio generates GBP 30 million less annual rental cash flow post-substitution than pre-substitution, causing a debt service shortfall until mid-2016 in Moody's estimation.

This decrease in rental income is the main negative credit consequence of the substitution. However, Moody's believes this is largely offset by the following positive aspects:

1- The substitution of the HQ2 building removes a large part of the uncertainty surrounding future rental cashflows of the mortgaged properties;

2- Other characteristics of the property portfolio have improved following the substitution: (i) the property portfolio now benefits from a longer lease profile, (ii) the average tenant quality has improved as a result of Barclays Bank Plc ("Barclays") (Aa3/P-1) representing 20% of the current net rental income and (iii) the total underwritten value of the new estate has also increased with the substitution;

3- Injection of GBP 65.7 million cash by Canary Wharf Limited into the reserve account. This will offset the above referenced shortfall for approximately four years, allowing the transaction to maintain a 1.00x DSCR during that period.

4- Void costs for the HQ2 building will not be borne out of securitisation cashflows anymore. In the HQ2 property, void costs were forecast to increase due to high vacancy (90%) following Nomura's lease expiry;

5- The cost of the HQ2 facility will no longer have to be borne by the securitisation.

Overall, the ratings continue to be within acceptable parameters. However, their sensitivity to adverse events has increased compared with the situation pre-substitution, owing to the lower coverage because of the reduction in current annual rents, especially for the Class D2 Notes. Hence, today's affirmation relies on the ability of the borrower to support the transaction both through active property management and cash injections when necessary. Moody's will continue to closely monitor the transaction going forwards.

3) The Substitution

Prior to the property substitution, the seven buildings backing the intercompany loans were 33 Canada Square ("DS6"), One Canada Square ("DS7"), 20 Bank Street ("HQ1"), 40 Bank Street ("HQ3"), 10 Upper Bank Street ("HQ5"), 50 Bank Street ("HQ4") and 25-30 Bank Street ("HQ2").

The buildings involved in the substitution are described below:

HQ2 Property: Lehman Brothers Limited ("LBL"), who entered into administration in the UK in September 2008, is the tenant of record of that building. Theoretically, the administrator of LBL currently leases 1.023m sq ft on a tenancy agreement due to expire in July 2033 at a rent of GBP54.59 psf. Of that 1.023m sq ft, approximately 354,000 sq ft was sublet to Nomura International. It exercised its break option in September 2010 and has now vacated the building. 100,000 sq ft is sublet until 2013. LBL's administrators vacated the building in April 2010 and ceased paying rent. Prior to the substitution, the securitisation had the benefit of a loan facility agreement with AIG, which would fund shortfalls between the contracted rent and the received rent for the HQ2 property. The facility would have been available for 4 years starting from the first drawdown. As of June 2010, the underwriter's ("UW") value of the HQ2 property was GBP 351 million.

HQ4 Property: This building is mainly let to Northern Trust Company (Aa3/P-1) under several leases expiring in March 2022. Other tenants include Goldenberg Hehmeyer Trading Company Limited. As of June 2010, the UW value of the HQ4 building was GBP 142 million.

FC2 Property: Located on 10 Cabot Square / 5 North Colonnade, this property is almost fully let to Barclays until June 2032 at a rent of GBP29 psf. The lease is indexed to the UK retail price index ("RPI") floored at 0% and capped at 5% annually. However, the first review will only fall in January 2015 where the rent will be reset based on the previous 5 years RPI compounded. WPP Group plc currently occupies 103,854 sq ft at a higher rate (GBP38.44 psf) until August 2016. From that point on, the rent on this space will become payable by Barclays at a rent equivalent to the rent payable in the reminder of the building.

FC4 Property: Located on 20 Cabot Square / 10 South Colonnade, it is also let to Barclays until June 2032 at a rent of GBP27.50 psf. There are no other tenants. As before, the lease is indexed to RPI with a floor of 0% and a cap of 5% annually. However, the first review will only fall in January 2015 whereupon the rent will be reset based on the previous 5 years RPI compounded.

Today, the Issuer has agreed to the following changes:

- Release of the HQ2 and HQ4 buildings together worth a total of GBP 493 million as of June 2010 and termination of the HQ2 facility;

- In return, addition of FC2 and FC4 buildings together worth GBP 615 million as of June 2010. A cash injection by Canary Wharf Limited into the reserve account of GBP 65.7 million brings the total on the reserve account to GBP 66 million.

The removed properties currently represent an area of 1.233 million sq ft and generate total annual rental income of approximately GBP 14 million. With the benefit of the HQ2 facility, that rental income would potentially have been GBP 64 million. HQ2 and HQ4 have a weighted average remaining lease term of 2.7 and 11.3 years remaining respectively. The buildings substituted into the transaction generate currently approximately GBP 34 million of annual rental income and represent 1.2 million sq ft of lettable space.

4) 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 can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. The last Performance Overview for this transaction was published on 2 July 2010.

Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Rating Methodologies sub-directory on Moody's website. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at moodys.com/SFQuickCheck.

London
Lisa Macedo
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Marie-Jeanne Kerschkamp
MD - EMEA Structured Fin
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's affirms the ratings of all classes of UK CMBS Notes issued by Canary Wharf Finance II plc following property substitution
No Related Data.
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