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Rating Action:

Moody's assigns definitive rating to EMEA CMBS issued by Tesco Property Finance 4 Plc

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.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning 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.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns definitive rating to EMEA CMBS issued by Tesco Property Finance 4 Plc
No Related Data.
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