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I AGREE
09 Feb 2011
GBP685million of EMEA CMBS rated
London, 09 February 2011 -- Moody's Investors Service has assigned the following definitive long-term
rating to the issue of Tesco Property Finance 4 plc:
....GBP685.1M Bonds, Definitive
Rating Assigned A3
The transaction represents a true-sale credit-tenant-linked
securitisation of one commercial mortgage loan (the "Loan") and is jointly
arranged by Goldman Sachs International, HSBC Bank plc and J.P.
Morgan Securities Ltd.
RATINGS RATIONALE
The collateral for the Loan is the long leasehold interest in a portfolio
of 20 supermarkets and one mixed use retail development located across
the United Kingdom. The existing properties (20) and one planned
supermarket are let to Tesco related entities on 29-year and 321-day
occupational leases with rental payments guaranteed by Tesco PLC (A3,
outlook negative). In addition to a supermarket (Tesco Extra),
the mixed use retail development will comprise of several retail units
occupied by non-Tesco-related tenants, the rental
income from which will be backed by Tesco PLC (approximately 4%
of total portfolio rent).
The definitive rating of the Bonds is based on the (i) creditworthiness
of Tesco as tenant, lease guarantor and subordinated loan provider;
(ii) Moody's assessment of the real estate quality and characteristics
of the underlying property portfolio; (iii) a detailed analysis of
the Loan; (iv) the Borrower and Issuer level inflation rate hedging
arrangements; and (v) the legal and structural features of the transaction.
Based on the structural transaction features, the rating of the
Bonds is closely linked to Moody's long term senior unsecured rating of
Tesco PLC.
Tesco Property Finance 4 Plc is the fifth sale and leaseback CMBS transaction
brought to the capital markets involving Tesco PLC. Apart from
the CMBS transactions, Tesco PLC completed several other (non-CMBS)
sale and leaseback transactions in the recent years.
This transaction is similar to the previous three Tesco Property Finance
(TPF) transactions, and especially to TPF3 considering the Issuer
and Borrower/Ownership structure and the more back loaded amortisation
profile. In addition, the tenant has also the option to terminate
the leases in March 2021 subject to certain conditions in the lease agreements
being fulfilled. Significantly, the tenant can only terminate
the leases provided that, among other things, all amounts
owing under the Bonds have been repaid by the Issuer. Compared
with the previous transactions, the key differences include:
(i) the Loan is secured by a portfolio of very recently opened stores
(77% of the existing stores (by rent) opened in last 12 months);
(ii) one site is currently under development (similar to TPF1),
and (iii) a limited part of the rent is contributed by non-Tesco-related
tenants (backed by Tesco PLC).
The key strengths of the transaction are: (i) 29-year and
321-day bondable occupational leases in place which are guaranteed
by Tesco PLC (A3, outlook negative) accounting for approximately
96% of total portfolio rent with remainder lease income ultimately
backed by Tesco PLC; (ii) the above average property quality;
and (iii) the amortisation profile of the Bonds resulting in full repayment
at maturity in October 2040.
The above strengths are also the main mitigants against (i) the single
tenant exposure; (ii) property type concentration (nearly all supermarkets);
(iii) the lack of a tail period after the expected maturity of the Bonds;
(iv) the Borrower's flexibility to substitute properties over time,
and (v) the limited trading history of the supermarkets at closing.
As mentioned earlier, Tesco has an option to terminate the leases
in year 10 of the transaction term; however, such option could
not be exercised while the Bonds are still outstanding and could only
be exercised by Tesco if all Issuer Secured Obligations have been unconditionally
and irrevocably paid or repaid and discharged in full, among other
conditions.
In the transaction, index-linked lease payments from Tesco
stores, the fixed rental income from the retail units and payments
under the inflation swaps allow for full amortisation of the Loan and
hence the full amortisation of the Bonds by October 2040. The projected
debt service coverage ratio for the Loan is 1.0x during the entire
loan term.
According to a third-party valuation, the vacant possession
value ("VPV") and market value ("MV") of the portfolio (including the
Yardley Property under development) are GBP491.8 million and GBP639.8
million, respectively. Based on the day-1 rental value
of GBP33.3 million, this implies a weighted average net initial
yield of 4.91% based on the MV. The rental values
of all 21 (planned) supermarkets are on average GBP20.7 per square
feet (on a gross area basis excluding the Yardley retail units).
Moody's has reviewed the valuations and formed its opinion of the MV of
the portfolio as GBP552.0 million taking into account the break
option of the leases in March 2021. Moody's Model Value which is
used to determine the recoverable property values in a scenario where
Tesco would default is based on VPV and is GBP397.7 million.
The downward adjustment to the value is driven by certain assumptions
including higher property yields and void costs. The resulting
loan-to-value ratio based on Moody's VPV day-1 is
172% and 124% based on Moody's MV.
The definitive rating for the Bonds addresses the expected loss posed
to investors by the legal final maturity. In Moody's opinion,
the structure allows for timely payment of interest and ultimate payment
of principal at par on, or before, the final legal maturity
date. Moody's ratings address only the credit risks associated
with the transaction; other non-credit risks have not been
addressed but may have significant effect on yield to investors.
The principal methodologies used in this rating were Update on Moody's
Real Estate Analysis for CMBS Transactions in EMEA published in June 2005,
and Moody's Updates on its Surveillance Approach for EMEA CMBS published
in March 2009.
More information can be found in Moody's Pre-Sale Report for this
transaction that is available on its website 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.
REGULATORY DISCLOSURES
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information and confidential
and proprietary Moody's Investors Service information.
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of each rating category and the definition of default and recovery.
London
Jeroen Heijdeman
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Christophe de Noaillat
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
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Moody's assigns definitive rating to EMEA CMBS issued by Tesco Property Finance 4 Plc
No Related Data.
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