EUR 270 million of EMEA CMBS affected
London, 03 June 2010 -- Moody's Investors Service comments on the performance of Odysseus (European
Loan Conduit No. 21) FCC (ELoC 21) (amounts reflect initial outstandings):
EUR270M Class A Commercial Mortgage Backed Floating Rate Notes due 2015,
Currently rated Aaa; previously on 12 December 2005 assigned definitive
EUR0.0003M Class X Commercial Mortgage Backed Floating Rate Notes
due 2015, Currently rated Aaa; previously on 12 December 2005
assigned definitive rating Aaa
Moody's does not rate the Class B, Class C, and Class R Notes
issued by Odysseus (European Loan Conduit No. 21) FCC (ELoC 21).
1) Transaction and Portfolio Overview
Odysseus (European Loan Conduit No. 21) FCC (ELoC 21) closed in
December 2005. The transaction represents the securitisation of
initially six commercial mortgage loans originated by Morgan Stanley Bank
International Limited. At closing, the loans were secured
by first ranking legal mortgages on 13 commercial properties located in
France and Belgium; the portfolio comprised almost exclusively office
Since closing, the pool has changed significantly. The Pascal
Noel Loan (largest Loan at closing with 34.0% of the total
pool) prepaid in November 2007. The proceeds were applied to the
Class A Notes. In addition, the Carillion and Lexin Crown
Portfolio Loans prepaid in 2007; such proceeds were applied modified
pro-rata to the Class A, Class B, and Class C Notes
according to certain loan buckets. Also, the Ford Loan provides
for limited scheduled amortisation, which is applied modified pro-rata
to the Notes.
Following the prepayment of the three loans, the transaction is
currently backed by three loans and secured by first ranking legal mortgages
on seven commercial properties located in France (88% of total
portfolio balance) and Belgium (12% of total portfolio balance).
The portfolio currently comprises, by property value, 95%
office properties, 3.77% mixed use and 1.08%
warehouse properties. The loans are not contributing equally to
the portfolio. The biggest loan, the France Telecom Loan,
represents 68% of the current portfolio balance, while the
Ford Loan represents 20% and the Belgium Bonds Loan 12%
of the portfolio balance. The Loan Herfindahl index is 1.9,
which compares to 4.4 at the closing date and reflects the increased
concentration of the portfolio. As of the last interest payment
date ("IPD"), the total balance of the pool was EUR109.4
million and the balance of the Class A Notes is approximately EUR67.5
Loan principal proceeds are currently allocated modified pro-rata
to the Notes as the transaction had not hit its sequential payment triggers
as of the last Note IPD. Based on the sequential redemption event
trigger definition, the transaction should switch to fully sequential
if (i) 23% of the aggregate principal outstanding amount of the
loans are specially serviced French Loans or are subject to an event of
default as far as the Belgium Bonds Loan is concerned; or (ii) the
cumulative percentage of the loans which have defaulted since closing
date is greater than 23% or more than two loans have defaulted
since closing date; or (iii) there has been any loss incurred by
the noteholders since the closing date.
2) Rating Rationale
Today's performance update concludes Moody's annual review for this
transaction. It follows a detailed re-assessment of the
portfolio's credit risk. Hereby, Moody's main focus was on
property values, term default risk, refinancing risk and the
anticipated work-out for potentially defaulting loans in the future.
In its performance review, Moody's especially concentrated on the
two largest Loans in the pool, the France Telecom Loan and the Ford
Loan, which in total account for 88% of the current pool.
The Class A Notes mainly benefit from the following strengths of the transaction:
(i) A strong increase of the subordination level available to the Class
A Notes to 38.3% from 17.4% at closing,
which mitigates the negative factors of increased loan concentration and
leads to a favourable Note-to-Value ("NTV")
of 37% for the Class A Notes based on Moody's property values;
(ii) Moderate leverage of the two largest loans in the pool, benefiting
Moody's refinancing risk assessment and it's loss given default
calculation for these loans;
(iii) Significantly increased rental cash flows in relation to the two
largest loans compared to closing. This has benefited the debt
service coverage ("DSCR") of the France Telecom Loan and the
Ford Loan and has largely balanced out the negative effects of the yield
widening experienced in the French property markets over the last few
(iv) Good credit strength of the tenant (France Telecom, A3) occupying
the property financed by the largest loan (68% of the current pool).
The credit strength of Ford Motor Company, the parent company of
the tenant in the properties financed by the second largest Loan (20%
of the pool), is significantly weaker; however, the recent
upgrade of Ford Motor Company's Corporate Family Rating ("CFR")
to B1 indicates some improvement of the tenant's credit strength
compared to 2008 when Ford Motor's CFR was Caa3.
The credit risk of the Class A Notes is negatively affected by the following
weaknesses of the transaction:
(i) Weak sequential payment triggers, which results in a continuous
modified pro-rata allocation of Note level cash flows despite increased
loan pool concentration and the default of the Belgium Bonds Loan (12%
of the current pool); and
(ii) The underperformance of the Belgium Bonds Loan compared to our expectations
To summarise, Moody's expects a low amount of losses on the
securitised loan portfolio. The current ratings of the Class A
Notes and the Class X Notes are in Moody's view well positioned for the
What Could Change the Rating -- Down?
There could be negative rating pressure in case (i) France Telecom indicates
that they will exercise their lease break in 2013 which would negatively
affect the property value and refinancing risk of the France Telecom Loan
in 2012; or (ii) the property securing the Ford Loan becomes vacant
at the loan's maturity date as a result of an unfavourable outcome
of the current lease negotiations; or (iii) significant rental cash
flow or underwriter ("U/W") property value deterioration of
the Belgium Bonds Loan. The occurrence of one of these scenarios
would likely result in only limited rating sensitivity due to still favourable
NTV levels for the Class A Notes in many scenarios.
3) Moody's Portfolio Analysis
The France Telecom Loan (68% of the pool). The France Telecom
Loan is overall performing in line with Moody's expectations at closing.
It is an initially seven year fixed-rate loan maturing in August
2012. The loan has no scheduled amortisation and is secured by
one property located in France (Paris). Since closing, the
property is fully occupied by France Telecom (A3, unchanged since
closing). In late 2007, France Telecom extended their initial
lease agreement to December 2016 from March 2011 with a remaining break
option in 2013. Based on an updated external valuation from 2007
the current U/W Loan-to-value ("LTV") is 48.0%.
Moody's expects the actual LTV based on market value to be higher at 57.6%,
taking into account (i) the lease extension with France Telecom;
(ii) increased rental cashflow since closing; and (iii) the adverse
property market performance over the past few years. In case of
loan default scenarios during its term, Moody's bases some
its severity calculations on the property vacant possession value ("VPV")
as the property is single let. Moody's current VPV LTV is
77%. The interest coverage ratio ("ICR") of
this Loan was 3.3x as of the last IPD compared to 2.7x at
closing. In Moody's view, the likelihood that this
Loan will default at its maturity date has increased compared to closing.
However, the refinancing default risk of this Loan remains low given
(i) the LTV of 57.6% based on Moody's market value;
and (ii) the exit debt yield ("EDY") of the Loan of 12.4%
based on current rental cash flows. Moody's understanding
is that the property securing the loan is used as France Telecom's
headquarters, which supports Moody's value as well as refinancing
default risk assessment.
The Ford Loan (20% of the pool). The Ford Loan is performing
below Moody's expectations at closing. It is a fixed-rate
loan maturing in August 2011. Due to scheduled amortisation the
loan balance reduced to EUR21.6 million from EUR26.0 million
at closing. The loan is secured by one property located in France
(Greater Paris). The property is currently fully occupied.
In anticipation of the single lease maturity in March 2011, the
borrower reported as of the last IPD that negotiations with Groupe Ford
France (parent company Ford Motor Company rated B1) and the current sub-tenants
to renew the lease were in an advanced stage. Based on a re-valuation
in 2007 the U/W value decreased by 11% to EUR35.2 million,
which reflects an U/W LTV of 61.4% compared to 65.7%
Moody's expects that the current LTV is slightly lower at 57.0%
considering as base case that the property will be (partially) re-let
to new or the existing (sub-) tenants. Moody's has
incorporated in its value assessment some uncertainty that the same level
of rental cashflows can be maintained in the medium term. Currently,
the DSCR of this Loan is 3.05x compared to 1.44x at closing
due to increased rental cash flows. In Moody's view,
the likelihood that this loan will default at its maturity date has increased
compared to closing. The refinancing risk of this loan is still
moderate given (i) Moody's LTV of 57.0%; and
(ii) the EDY of 19.0% based on current rental cash flows.
In a scenario where the loan defaults, Moody's current expectation
is that the servicer will most likely not pursue an immediate sale of
the property in today's depressed market conditions. Therefore,
Moody's has assumed that in most cases, upon a default,
a sale of the mortgaged property and work-out of the loan will
occur at a later point in time.
The Belgium Bond Loan (12% of the pool). As of the February
2009 IPD, the Belgium Bonds Loan was in default and in special servicing
following the failure to repay the principal at loan maturity.
Based on an updated valuation, as instructed by the servicer in
October 2009, the current U/W LTV increased to 69.6%
compared to a closing LTV of 59.3%. After the departure
of one of the main tenants in December 2007 the vacancy level (by area)
increased considerably. Although recently some lease-up
was reported, the current total vacant area is with 47.4%
still very high, which compares to 13.7% as of closing.
However, the ICR is still favourable at 1.90x as of the last
IPD. In line with the transaction documentation, the servicer
applies all surplus excess cash to repay the outstanding loan balance.
As a result, the loan balance has reduced to EUR13.1 million
from EUR14.0 million at closing. According to a notice in
March 2010, the parties to the Belgium Bonds Loan agreed to extend
the loan to February 2011. The loan will be removed from special
servicing until two IPDs after the loan extension documents have been
formally executed. Since its initial loan maturity in February
2009, the loan has been unhedged. Currently, the borrower
pays a floating interest rate plus default margin. The default
margin, less any administrative fees, is paid to the Class
Property Values. Property values across France and Belgium have
declined until the end of 2009. Compared to the U/W values at closing,
Moody's estimates that the values of the properties securing this transaction
have declined on a like-for-like basis on average by approximately
16.2% (ranging from a 36.4% decline for the
Belgium Bonds Loan to a 5.1% decline for the Ford Loan).
Looking ahead, Moody's expects only a sluggish recovery of
the property markets. For the properties in this pool, Moody's
anticipates that the property values will be at a similar levels when
the Loans mature in 2011/2012. Moody's has taken this property
value estimation into account when assessing the loans' refinancing risk
and potential loss given default.
Based on the above property value assessment, Moody's estimates
that the current transaction's weighted-average ("WA") securitised
LTV is 74.5% compared to the current U/W LTV of 64.8%.
Based on Moody's values, the LTVs for the securitised Loans range
between 87.3% (Belgium Bonds Loan) and 57.0%
(Ford Loan). None of the loans in the pool have additional debt
in the form of B-Loans.
Refinancing Risk. The transaction's exposure to loans maturing
in the short term is high. The Belgium Bond Loan (12% of
the pool) matures in February 2011, the Ford Loan in August 2011
(20% of the pool), and the France Telecom Loan (68%
of the pool) is due for refinancing in August 2012. As Moody's
expects property values in this pool to remain stable, all loans
will remain at least moderately leveraged at their respective maturity
dates. In Moody's view, for all of the three loans,
the default risk at maturity has increased considerably compared to the
Term Default Risk. The occupational markets in France and Belgium
are currently bottoming out, showing compared to the market peak
reduced rents and increased vacancy rates driven by, inter alia,
higher than average tenant default rates. The loans in the pool
are secured by properties which are subject to lease rollover risk closely
before or after their loan maturities. Moody's has incorporated
into its analysis some allowance for a deterioration in coverage ratios
and weakening tenant quality; overall, compared to closing
the term default risk assumption for the loans has remained similar.
Overall Default Risk. Based on its revised default risk assessment
for the securitised loans, Moody's anticipates that a small portion
of the Loans will default over the course of the remaining transaction
term. The default risk of the loans is predominantly driven by
refinancing risk. In Moody's view, the Belgium Bonds Loan
and the Ford Loan (32% of current portfolio balance) have currently
the highest default risk, while the France Telecom Loan (68%
of the current portfolio) has the lowest risk of defaulting.
Concentration Risk. The Loan portfolio securitised in this transaction
exhibits an above average concentration in terms of property types (office)
and property location (Paris).
Increased Portfolio Loss Exposure. Taking into account the moderate
default risk of the loan portfolio, the recent performance of the
commercial property markets in France and Belgium, Moody's opinion
about future property markets performance and the most likely work-out
strategies for any defaulted loan, Moody's anticipates a low amount
of losses on the securitised loan portfolio, which (if any) will,
given the anticipated work-out strategy for defaulted loans,
crystallise only towards the end of the transaction term (legal final
maturity date of the Notes is in August 2015).
3) Rating Methodology
The principal methodologies used in rating and monitoring the transaction
were "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. 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 19 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 firstname.lastname@example.org."
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).
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's comments on the performance of the CMBS Odysseus (European Loan Conduit No. 21) FCC