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Announcement:

Moody's confirms Class A CMBS Notes issued by Fleet Street Finance Two plc at Baa2 (sf)

Global Credit Research - 21 Dec 2010

EUR 780 Million of CMBS Notes Affected

Frankfurt am Main, December 21, 2010 -- Moody's Investors Service has today confirmed the following class of Notes issued by Fleet Street Finance Two plc (amount reflects initial outstanding):

EUR780M Class A Commercial Mortgage Backed Floating Rate Notes due 2017, Confirmed at Baa2 (sf); previously on May 14, 2010 Downgraded to Baa2 (sf) and Remained On Review for Possible Downgrade

Moody's does not rate the Class B, C and D Notes issued by Fleet Street Finance Two plc.

Moody's rating addresses the expected loss posed to investors by the extended legal final maturity in July 2017. The rating does not address the Additional Note Margin Amount payable as defined in the amended Master Definition and Construction Schedule nor the probability of payment of such additional amounts or any related payments to the noteholders. 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.

1) Rating Rationale

On 14 May 2010, Moody's downgraded the Class A Note to Baa2 (sf) and kept the rating on review for further downgrade pending (i) the decision with respect to either an extension of the existing liquidity facility or a new liquidity facility or implementation of a liquidity reserve account for the extended term of the transaction and (ii) the final outcome of the insolvency proceedings of the tenant, Karstadt.

As explained in more detail below, today's confirmation of the Baa2 rating of the Class A Note is primarily driven by both positive and negative credit developments. The positive developments are (i) the acquisition of the tenant, Karstadt by the investor Berggruen and the conclusion of the insolvency proceedings; (ii) the implementation of a liquidity reserve account for the extended term of the transaction; (iii) a recently provided legal memorandum confirming the legally valid existence of the borrower under German law and (iv) the overall net positive impact of the implemented changes both at loan and transaction level on the Class A Note. The offsetting negative issues are (i) the still weak credit quality of the tenant; (ii) the significant decline in the value of the property portfolio since closing and also compared to the previous rating action in April 2010 resulting from newly negotiated lower rents and (iii) the deterioration of the German property market since securitisation.

The current rating would be subject to downgrade pressure if certain base case assumptions change. Moody's base case assumes that i) Karstadt remains solvent during the remaining loan term and ii) the severity calculations uses market values for the best eight department store properties in the portfolio and vacant possession values for the remaining properties. Even though the default probability of the loan is high under the base case, a second bankruptcy, given the weak credit quality of the tenant would likely lead to a further downgrade. Additionally, if the recovery assumptions for the best eight department store properties did not hold, then the current rating of the Class A Note could potentially decline to a sub-investment grade level. On the other hand, there could potentially be a positive rating change if the credit quality of the tenant improved significantly beyond expectations combined with a considerably improved German commercial real estate market, as it would improve both property value and the ability of refinancing of the loan on its new maturity date in 2014. In addition, property sales that significantly delever the loan could have a positive impact on the rating of the Class A Note.

2) Transaction Overview and Current Performance

Fleet Street Finance Two plc closed in October 2006 and represents the securitisation of a single commercial mortgage loan originated by Goldman Sachs Credit Partners L.P. The securitised loan ("Senior Loan") is a part of a large financing transaction involving a senior-mezzanine structure, where the mezzanine loan is funded outside the transaction. The Senior Loan and a part of the mezzanine loan ("Mezzanine Loan", together "Loans") share substantially the same property collateral. Both Loans are secured by first-ranking, legal mortgages on primarily retail properties located in Germany; however the Mezzanine Loan is contractually subordinated. The Mezzanine Loan will not receive any rental or other cashlow until the Senior Loan is repaid in full.

The portfolio initially consisted of 109 properties and comprised 94.2% retail properties (89.6% department stores and 4.6% specialist stores), 3.5% parking, 1.3% office and 1.1% other use properties (by portfolio value) with concentration in Bavaria (26.7%), Berlin (18%) and North Rhine Westphalia (17.6%). Currently (as per the July 2010 investor report) there are 88 properties in the portfolio with a similar split in terms of property type and geographical distribution as per closing.

At closing, 100 of the 109 properties were fully let to W2005/Seven BV ("Master Lessee"), which in turn sublet the properties to Karstadt Warenhaus GmbH, which accounted for approximately 98% of the rental income and Quelle GmbH accounting for approximately 2% of the rental income. Following the opening of formal insolvency proceedings in relation to both tenants in September 2009, Quelle GmbH is currently in the process of being liquidated and properties occupied by it have already been vacated; while for the Karstadt Warenhaus GmbH, the insolvency proceedings were concluded when the investor Berggruen acquired the company as of 1 October 2010. With the acquisition, significantly reduced rental levels were agreed between Karstadt and the borrower.

3) Final Loan and Transaction Restructuring

On 24 February 2010, 28 July 2010 and 2 September 2010, a restructuring of the transaction and the underlying financing as well as changes to the master lease agreement were approved by noteholders. There are some additional changes incorporated compared to the regulations that were initially approved on 24 February 2010. The final approved and agreed restructuring includes, inter alia, the following:

a) Main changes to the underlying financing:

(i) Extension of the Loan maturity date by three years to July 2014; (ii) no testing of the LTV covenant until 2013, from January 2013 the LTV covenant will be 90% and will decrease to 85% from the testing date in January 2014 onwards; (iii) no payments from rental income or disposal proceeds will be made to the mezzanine lenders or to the borrower before the full repayment of the securitised Senior Loan; (iv) in addition to scheduled amortisation, a new schedule of minimum additional total payments of cumulatively EUR 145 million until January 2014; and (v) new hedging arrangements including a fully paid cap with a strike of 2.25%.

b) Main changes to the transaction:

(i) Extension of the legal final maturity date of the notes by three years to 2017; (ii) a fully sequential allocation of excess cash flow from rents and all sales proceeds to the notes; and (iii) an increased margin on the notes of approximately 50 basis points per annum (Moody's rating does not address this Additional Note Margin Amount and the liquidity facility cannot be drawn to cover shortfalls on these amounts); and (iv) a liquidity reserve account substituting a liquidity facility during the extended transaction term after loan maturity until the legal final maturity date of the notes (please see below for further details).

c) Main changes to the master lease agreement:

(i) Rent reductions from originally EUR 123 million p.a. to EUR 95 million p.a. gradually increasing to approximately 108 million p.a. in 2017; (ii) termination of the lease agreement for four properties let to Karstadt and for all properties let to Quelle; and (iii) split of the lease agreement into three separate lease agreements (one for the sport stores, one for the premium department stores (currently only the KaDeWe department store is included, which is not part of the collateral for the Senior Loan) and one for the remaining portfolio); and (iv) Karstadt agreed to exercise its five year extension option for the majority of properties in the portfolio.

d) New basis swap for extended loan term:

The issuer entered into a new basis swap for the extended loan term. The swap documentation does not fully comply with Moody's current published criteria entitled "Framework for De-Linking Hedge Counterparty Risks from Global Structured Finance Cashflow Transactions Moody's Methodology", dated 18 October 2010. This does, however, not affect the rating of the Class A Notes at the current rating level.

4) Moody's Analysis

a) Impact of Restructuring on Class A Notes

In Moody's opinion, the changes implemented with the restructuring at Loan and transaction level are net positive for the Class A Notes. The regulation at Senior Loan level that no payments from rental income or disposal proceeds are made to the mezzanine lenders or to the borrower before the full repayment of the securitised Senior Loan is beneficial for the issuer as the senior lender. In addition, through the fully sequential allocation of excess cash flow from rents and all sales proceeds to the notes, the Class A Notes will most likely benefit from a faster repayment and a subsequent increase in credit enhancement as long as the tenant Karstadt meets its rental payment obligations.

b) Tenancy

Quelle, which only contributed a minor share to the total rental income, is being liquidated while the insolvency proceedings for the main tenant Karstadt have been concluded. Nevertheless, as there is a high likelihood of a renewed insolvency of Karstadt over the Loan term, the credit strength of the tenant is still weak and results in a high default probability during the Loan term.

c) Rental Cash Flows

The agreed changes to the master lease agreement result in significantly reduced rental cash flows over the following years. The rental payments are sufficient to cover the interest payments and the original scheduled amortisation of 1% p.a. To meet the additional minimum amortisation amounts, the borrower needs, however, to dispose of some of the properties. In Moody's base case the potential excess cash flow will be EUR 132 million compared to EUR 145 million of additional minimum amortisation amounts. In its modelling, Moody's has given partial benefit for the expected excess cash flow.

d) Portfolio Value

Moody's was provided with a valuation as of October 2010. According to the valuer, the updated market value was approximately EUR 1,330 million and the update vacant possession value was approximately EUR 625.7 million, a 58% decline as compared to EUR 1,497 million at closing and a 49% decline as compared to EUR 1,239 million as of year-end 2008. In its base case, Moody's does not assume a fire sale of the portfolio even in a renewed insolvency scenario of the tenant. The most likely work-out scenario in Moody's view is that the best properties would be re-let and operated as department stores and the remaining properties in the portfolio would be sold without a tenant. As such, Moody's did not use the updated vacant possession value as the basis for its severity calculation, but a blended value considering the market value for the eight best properties.. For the remaining properties in the portfolio, Moody's has taken into account the vacant possession value. Moody's current LTV for the securitised Senior Loan is 117% based on the blended severity value of EUR 906 million.

e) Liquidity Reserve Account

The existing liquidity facility will expire in 2014 at the initial final maturity date of the Notes, which is now the new loan maturity date. During the extended tail period until 2017, instead of a liquidity facility, amounts deposited in the borrower's English law account (the "Account") can be used, among others, to cover cash flow shortfalls to pay interest on the Class A Notes. On each IPD, the borrower should fund the Account until a maximum amount of approximately EUR 82.6 million is trapped, which will be continously reduced in line with the amortisation of the Loan. The Account will be managed by the servicer and fully controlled by the Issuer. Based on the respective provision included in the deed of amendments, only the servicer will have the sole signing and withdrawal rights to this account, which it could only exercise upon an instruction from the Issuer. The Issuer will be entitled to make withdrawals from this account to cover any potential shortfall in Issuer's available interest collections destined for payment of interest due under the Class A Notes excluding the Additional Note Margin Amount. The borrower will grant a security interest over the Account in favour of the Issuer pursuant to an English law security agreement.

In Moody's opinion, due to the pronounced cross- jurisdictional aspects and dependencies in relation to the intended solution, there remain some considerable legal and operational risks for an uninterrupted availability of such liquidity within the transaction. Especially in the case of a potential insolvency of the borrower, the Issuer's access to the Account and its ability to withdraw funds from the Account might not be possible without any interruptions. This might have negative consequences for the timely payment of interest on the Class A Notes. Furthermore, there are in Moody's opinion, uncertainties about (i) any potential preferential claims which might come into existence in case of a reclassification of the intended English law fixed charge over the account into a floating charge and (ii) the status of such English security under Dutch law, if such law would apply in a foreclosure scenario.

Moody's notes that through the implementation of the liquidity reserve account as substitute of a liquidity facility, the future upside potential of the current rating of the Class A Notes (in case of a significantly improved tenant credit quality and an improved commercial property market) might be limited due to the above mentioned structural and operational weaknesses.

f) Valid existence of the borrower under the German law

In its press release on 14 May 2010, Moody's highlighted its concern about the uncertainty over the legally valid existence of the borrower under German law, given that it has never had an administrative seat in Germany. At the time, Moody's was not provided with a confirmation by the transaction lawyers on the valid existence of the borrower under German law. As a result,, Moody's stressed the enforcement timing and cost assumptions in its modelling of the transaction. This was done to reflect the additional delays and increased costs stemming from a potential enforcement process upon a loan default.

Moody's takes comfort from a legal memo prepared for the servicer and provided to Moody's that confirms that the borrower legally validly exists under German law. It has therefore reduced its enforcement cost and timing assumptions to the previously assumed levels.

5) Rating 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, "Moody's Updates on its Surveillance Approach for EMEA CMBS" March 2009 and "Moody's Approach to Evaluating Distressed Exchanges", March 2009, which are available on 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 web site. The last Performance Overview for this transaction was published on 2 February 2010.

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 web site, at www.moodys.com/SFQuickCheck.

For updated monitoring information, please contact monitor.cmbs@moodys.com. To obtain a copy of Moody's Pre-Sale 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).

Frankfurt am Main
Oliver Moldenhauer
Vice President - Senior Analyst
Structured Finance Group
Moody's Deutschland GmbH
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 Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's confirms Class A CMBS Notes issued by Fleet Street Finance Two plc at Baa2 (sf)
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