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Rating Action:

Moody's assigns definitive ratings to third tap issuance of Vukile Investment Property Securitisation (Proprietary) Limited - Series 1, South African CMBS

08 Nov 2010

ZAR 462 million of EMEA CMBS rated

London, 08 November 2010 -- Moody's Investors Service has today assigned the following definitive Global Local Currency Rating and South African National Scale Rating to the additional debt issuance of Vukile Investment Property Securitisation (Proprietary) Limited - Series 1:

....Rand300M Class A5 Notes, Definitive Rating Assigned Aa2 (sf) and Aaa.za (sf)

....Rand112M Class B3 Notes, Definitive Rating Assigned A1 (sf) and Aa1.za (sf)

....Rand50M Class C3 Notes, Definitive Rating Assigned Baa1 (sf) and A1.za (sf)

Moody's has also withdrawn the rating on the following classes of Notes due to their redemption in full :

....Rand261.03M Class A1 Notes, Withdrawn (sf); previously on July 20, 2009 downgraded Aa2 (sf)

....Rand64.68M Class B1 Notes, Withdrawn (sf); previously on Aug 3, 2007 Assigned A1 (sf)

....Rand136.29M Class C1 Notes, Withdrawn (sf); previously on Aug 3, 2007 Assigned Baa1 (sf)

At the same time, Moody's has affirmed the ratings for the following classes of Notes issued within Series 1:

Rand174 M Class A2 Notes, Affirmed at Aa2 (sf)/Aaa.za (sf); previously on July 20, 2009 downgraded the Global Local Currency to Aa2 (sf) and affirmed the National Scale Rating of Aaa.za (sf)

Rand150 M Class A3 Notes, Affirmed at Aa2 (sf)/Aaa.za (sf); previously on July 20, 2009 downgraded the Global Local Currency to Aa2 (sf) and affirmed the National Scale Rating of Aaa.za (sf)

Rand100M Class A4 Notes, Affirmed at Aa2 (sf)/Aaa.za (sf); previously on Sep 21, 2009 assigned Aa2 (sf)/Aaa.za (sf)

Rand43.1M Class B2 Notes, Affirmed at A1 (sf)/Aa1.za (sf); previously on August 3, 2007 assigned Global Local Currency A1 (sf) rating and upgraded the National Scale Rating to Aa1.za (sf)

Rand90.9M Class C2 Notes, Affirmed at Baa1 (sf)/A1.za (sf); previously on August 3, 2007 assigned Global Local Currency Baa1 (sf) rating and upgraded the National Scale Rating of to A1.za (sf)

RATINGS RATIONALE

The definitive rating of the new Class A5, Class B3 and Class C3 Notes and the rating affirmation on the existing Classes of Notes, are based among others, on (i) Moody's assessment of the real estate quality and characteristics of the underlying property portfolio; (ii) the non-SPV borrower structure, (iii) the cash trap ("Early Warning Cash Trap Trigger"), loan to value ratio ("LTV"), interest coverage ratio ("ICR") and administrative expenses covenants; iv) the availability of a committed liquidity facility of 40 per cent of the balance under the Notes from ABSA Bank Limited (A1, P-1); (v) and the legal and structural characteristics of the issue.

The transaction has a hybrid structure as it incorporates structured finance characteristics, while also retaining exposure to the sector's fundamental business risk due to the flexibility provided to the Borrower (Vukile Property Fund Limited). The Borrower is allowed to incur additional debt, to have employees and to change the composition of the underlying portfolio through disposals and substitutions. The resulting operational risk is partially mitigated by: (i) Early Warning Cash Trap Trigger covenants relating to the Borrower and the Series, including a WA LTV of 60%, WA ICR of 1.55x; (ii) limitation of the Borrower's administrative expenses (which include staff-related costs) to a maximum 7% of net rental income and interest receipts; (iii) additional lenders need to be party to the intercreditor agreement; (iv) the total permitted indebtedness of the borrower is limited to a 60% LTV level; and (v) disposal and substitutions being subject to certain limits.

This transaction is the third tap issuance of Vukile Investment Property Securitisation (Proprietary) Limited ("the Issuer") - Series 1, which closed in November 2005. The proceeds of the initial issuance were used to acquire two loans advanced to the Borrower, one with a five-year term maturing in November 2010 and one with a seven-year term maturing in November 2012. There were two tap issuances under the transaction in 2009 whereby the Issuer acquired two additional loans granted to the Borrower, with both maturing in May 2012.

Within Series 1, the Issuer is allowed to acquire new loans prior to the maturity date of the existing loans. The new loans may be non-fungible with the existing loans in respect of interest rate payable and tenor.

For this third tap issuance, the Issuer acquired a new three-year loan maturing in November 2013, which is cross-collateralised and cross-defaulted with the existing loans. The tap issuance of Rand 462 million is attributed to the refinancing of the Rand 462 million five-year term loan which matured on 7 November 2010.

The underlying pool of mainly retail, office and industrial properties has not changed significantly since the first tap issuance in July 2009. The portfolio consists of 38 properties compared to 40 as of the first tap issuance since two properties have been sold. Currently, the pool comprises 43.3% retail, 30.8% office, 18.9% industrial and 7.0% other properties. The properties are located throughout South Africa: 52.6% are located in Gauteng, 29.8% in KwaZulu Natal, 7.7% in the Western Cape, 5.1% in the Freestate, 2.0% in the Eastern Cape, 1.7% in Mpumalaga and 1.1% the Northwest.

Since closing, the transaction has performed in line with Moody's expectations with the reported WA LTV well below and WA ICR well above the Early Warning Cash Trap Trigger covenants. Following the third tap transaction, the Underwriter LTV is 31.5% and the Underwriter ICR is 3.33x for the Series.. The WA vacancy rate of the underlying portfolio has remained stable at under 4.1% of the lettable area.

Compared to the initial issuance, there have been limited legal and structural changes. The Borrower level LTV covenant restricting property portfolio changes and the borrower level early warning cash trap trigger LTV covenant has been tightened to 60% from 65%. Furthermore, Series level LTV and ICR covenants and cash trap triggers have been introduced at 60% LTV and 1.55x ICR respectively (same level as the Borrower level covenants). Permitted indebtedness level has also been lowered to a 60% LTV at Borrower level and permitted indebtedness also at 60% has been introduced at Series level. The two loans bought by the Issuer in 2009 were not hedged until the maturity date of the loans. Since then the interest rate swaps with respect to these two loans have been extended and at the third tap issuance date, all the loans in the portfolio are fully hedged until their respective maturity dates.

Moody's assigned a Composite V Score of "Medium/High" to this transaction based on Moody's V Score rating methodology as published in the report "V Score and Parameter Sensitivities in the EMEA CMBS Sector" in April 2009 on www.moodys.com. This has remained unchanged since the first tap issuance under the transaction in July 2009. In Moody's view, this South African single borrower transaction is more exposed to the experience of the key transaction parties due to the operating nature and the flexibility provided to the Borrower compared to a typical EMEA Single Borrower CMBS transaction. Further, the impact on the ratings from unknown legal and regulatory uncertainty is believed to be moderate to high compared to low to moderate uncertainty expected for typical EMEA CMBS single borrower transaction. This explains in part the overall "Medium/ High" score assigned to this transaction compared to the overall "Medium" score of typical EMEA single borrower CMBS transaction.

V Scores are a relative assessment of the quality of available credit information and the potential variability around the various inputs in determining the rating. V Scores are intended to rank transactions by the potential for significant rating changes owing to uncertainty around the assumptions.

Moody's Parameter Sensitivities: Moody's principal portfolio model inputs are Moody's loan default probability (Moody's DP) and Moody's modeling value (Moody's Model Value). As this transaction allows that borrower to retain a degree of flexibility both in terms of incurring additional debt and to alter the composition of the portfolio -- both subject to certain criteria and covenants -- Moody's has used the ICR and LTV covenants as its main portfolio model inputs. This means that loan portfolio's default probability is based on the covenant ICR of 1.55 (for default during the term of the loans) and the LTV covenant of 60% (for default at maturity of the loans). Moody's Model Value is an amount that would result in an LTV of 60%.

In the Parameter Sensitivity analysis, we assumed two value and two default probability scenarios: Moody's Model Value stressed by -20% and -40% and Moody's DP increased five times (+400%) and 20 times (+1900%). At a -20% stress to Moody's Model Value the loan portfolio's LTV is 75% while at a -40% stress the LTV would be 100%. Given the level at which the covenants are set and including other factors like the quality of the borrower/sponsor and the state of the current property and lending markets in South Africa, the initial Moody's DP is low. However, a deterioration of the underlying property portfolio's value would likely lead to an exponential increase in the loan portfolio's default probability (for these scenarios Moody's consider the likelihood of a payment default and not a default due to covenant breach). The two main parameter sensitivity scenarios are the combinations where the Moody's Model Value is stressed by -20% and the Moody's' DP increased five times and where the value is stressed by -40% in conjunction with a 20 times increase in default probability. The 0%/0% scenario represents the base case used to assign the ratings.

The parameter sensitivity of the Global Local Currency ratings in the transaction ranges from 0 to 11 notches compared to a range of 0 to 9 notches for a typical EMEA Single Borrower CMBS transaction. If the Moody's DP used in determining the initial rating was increased five times and the Moody's Model Value decreased by 20%, the initial model-indicated rating of the Class A5 Notes would be A2. If Moody's Model Value stress would increase to 40% and Moody's DP increased 20 times, the rating of the Class A5 Notes would move to Ba2.

Moody's Parameter Sensitivities provide a quantitative/model-indicated calculation of the number of rating notches that a Moody's-rated structured finance security may vary if certain input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged and is not intended to measure how the rating of the security might migrate over time, but rather how the initial rating of the security might have differed if key rating input parameters were varied. Parameter Sensitivities for the typical EMEA Single Borrower securitisation are calculated by stressing key variable inputs in Moody's primary rating model.

Moody's has also assessed the impact of a large scale systemic event on the ratings of the senior notes. Moody's assumed two inputs in its analysis i) the economic resiliency of the country (country's economic strength and its institutional strength) and ii) a worst case scenario for the loan whereby the loan defaults and properties can only be sold at a severely distressed value.

The definitive rating for the Class A5, Class B3 and Class C3 Notes address the timely payment of interest and ultimate repayment of principal on or before the rated 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 a 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.

Additional research, including the new-issue report for the transaction and reports for prior transactions, are available at 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.

Moody's Investors Service received and took into account one or more third party due diligence reports on the underlying assets or financial instruments in this transaction and the due diligence reports had a neutral impact on the rating.

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

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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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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.

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Johannesburg
Viola Karoly
Analyst
Structured Finance Group
Moody's Investors Service South Africa (Pty) 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 ratings to third tap issuance of Vukile Investment Property Securitisation (Proprietary) Limited - Series 1, South African CMBS
No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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