EUR 27.5 million of EMEA CMBS affected
Johannesburg, June 04, 2010 -- Moody's Investors Service has today confirmed the rating of the Class
C Notes issued by Talisman-3 Finance p.l.c.
(amount reflects initial outstanding):
EUR27.5M C Notes, Confirmed at Aaa; previously on Feb
3, 2010 Aaa Placed On Review for Possible Downgrade
At the same time, Moody's has affirmed the rating of the Class A,
B and X Notes. Moody's does not rate the Class D, E and F
1) Transaction Overview and Performance History
Talisman-3 Finance p.l.c. closed in June 2006
and represents the securitisation of initially 13 commercial mortgage
loans originated by ABN AMRO BANK N.V., London Branch
that were secured by mainly first ranking mortgages on 88 commercial and
multi-family properties located across Germany and France.
The Berlin Loan and the Dresden Loan are cross defaulted but not cross-collateralised.
The properties of the portfolio were predominantly office (57.4%)
with the remaining collateral pool consisting of retail (28.8%),
multi-family (3.7%), mixed-use (4.7%)
and other (5.4%). 69% of the properties were
located in Germany and 31% in France.
Since the closing date in June 2006, eight of the initial thirteen
loans have pre-paid, representing 81% of the original
pool balance. Until the principal amount outstanding under the
Notes reduced to a threshold of 50% of the principal amount outstanding
at the closing date, prepayments were allocated to the Notes on
a 50% sequential and 50% pro rata basis. Subsequent
to the 50% threshold being reached, the transaction switched
to sequential payment allocation.
Following the prepayments, the five remaining loans are currently
secured by 26 properties all located in Germany which are office use (36.3%),
retail use (35.8%) and multi-family (27.9%).
The five loans are not equally contributing to the portfolio: the
cross defaulted Berlin and Dresden Loans represent 51.7%
of the current portfolio balance, while the smallest loan (the Trier
Loan) represents 7.0%. The current loan Herfindahl
index is 2.8. None of the remaining loans have additional
debt in the form of B-loans.
The Berlin and Dresden Loans defaulted on their maturity date in January
2010 and were subsequently transferred into special servicing.
The remaining three loans are current.
2) Rating Rationale
Moody's placed the Class C Notes on review for possible downgrade
in February 2010 due to (i) the payment default of the Berlin and Dresden
Loans on their maturity date; and (ii) the updated valuation for
the properties securing these two loans as of October 2009, based
on which the current underwriter's (U/W) LTV is 143%.
Today's rating action follows a detailed re-assessment of
the loan and property portfolio's credit risk against our expectations
as of September 2009, taking into account the updated valuations
for the Berlin, Dresden, Waterloo and Bastion Loans as well
as Moody's expectation of the likely work-out scenario for
the defaulted Berlin and Dresden Loans.
The portfolio's credit risk has increased compared to Moody's
assessment in September 2009 however, this is mitigated for the
Class A, B and C Notes by the (i) good credit enhancement levels;
(ii) low note-value levels; and (iii) sequential payment allocation
of all further principal receipts. This results in the rating affirmation
for the Class A and B Notes and the rating confirmation for the Class
3) Moody's Loan Analysis
The Berlin and Dresden Loans are secured by two office properties (in
Berlin and Dresden) with a government-linked insurance/compensation
provider as the main tenant (91% of the rental income).
The weighted average (WA) remaining lease term for the two properties
is 12.7 years and the loans have a combined interest coverage ratio
of 2.08x, taking into account the default margin.
The main reason for the high interest coverage is that the loans are no
longer hedged since their maturity date and their base rate is now the
A standstill agreement was in place for the Berlin and Dresden Loans until
18 May 2010 and based on the latest special servicer report, the
special servicer and the loan sponsor (Wichford plc) are in discussions
concerning a restructuring and extension of the loans. The report
also mentions that as part of the envisaged restructuring, there
would be a brief marketing period at the outset pursuant to which the
borrower would be bound to sell the properties if a minimum price is achieved
(the minimum price was not disclosed).
In its base case scenario, Moody's assumes that the loans
will either be extended or a standstill agreement will remain in place,
but the properties will not be sold in the near future and excess cash
from the properties will be trapped by the servicer to partially amortise
the loans at some point. However, even with an extension
of the loans, Moody's default risk assessment for the Loans
remains very high, driven by Moody's LTV for the loans of
136% (slightly lower than the current U/W LTV of 143%).
Moody's has also assumed for its base case scenario that the Trier
Loan (the smallest loan in the portfolio) will likely repay on its maturity
date. This loan is secured by a retail building in the inner-city
of Trier with Interbook GmbH contributing 62% to the rental income.
The WA remaining lease term for the property is approximately 7 years
and the covenant compliant interest coverage ratio is 1.83x.
The property was last valued in October 2005 based on which the current
U/W LTV is 78.8%. Moody's has not taken a haircut
on this value. According to the servicer report, the borrower
under the loan is in negotiations to sell the property. Based on
the moderate LTV ratio, small loan size, relatively long remaining
lease term and high debt yield of 9.1%, Moody's
refinancing default risk assessment for this loan is low (but higher than
it was at closing of the transaction).
The other two loans in the portfolio are the Waterloo Loan (20.9%
of the portfolio) and the Bastion Loan (20.3%). The
Waterloo Loan, which will mature in January 2013, is secured
by ten residential properties located in Munster and Mannheim.
The portfolio was re-valued as of December 2009. Compared
to the last valuation as of December 2005, the value has decreased
by 1.2%. Moody's LTV for this loan is 75.2%,
same as the current U/W LTV. The Bastion Loan is secured by 13
retail box properties let to Edeka with WA remaining lease term of 10.4
years. The loan's maturity date is in July 2012. The
property portfolio was re-valued as of end September 2009 and reflects
a 4.4% increase in value compared to the last valuation
in July 2005. Moody's LTV for this loan is 84.7%
versus the current U/W LTV of 76.1%.
4) Moody's Portfolio Analysis
Property Values. Property values across German markets have declined
until the beginning of 2010. Moody's expects them to remain flat
and in some instances continue to decline until early 2011. In
aggregate the U/W value for the portfolio has decreased by 22.4%
since closing and compared to the current U/W market value, Moody's
current market value for the total portfolio is 1% lower.
On a WA basis, Moody's LTV for the portfolio is 108.9%
versus the current U/W WA LTV of 110.7% (Moody's WA
LTV is lower due to Moody's lower LTV assumption for the Berlin
and Dresden Loans). Looking ahead, Moody's anticipates the
values to remain relatively constant until maturity of the loans.
Moody's has taken this property value assessment into account when assessing
the loans' refinancing risk and potential loss given default. For
the Waterloo Loan, Moody's has incorporated a moderate recovery
in value from 2011 onwards.
Refinancing Risk. The transaction's exposure to loans maturing
in the short-term (2010) is very high. 59% of the
current portfolio matured or will mature in 2010, 20% in
2012 and the remaining 21% in 2013. As Moody's expects property
values in Germany to only slowly recover from 2011 onwards and expects
property lending to remain subdued, in Moody's view, the default
risk at maturity has increased substantially for all the loans compared
to its closing analysis.
Term Default Risk. The occupational markets in Germany are currently
characterised by falling rents, increasing vacancy rates and higher
than average tenant default rates. Except for the Waterloo Loan,
which is secured by multi-family properties and a granular tenant
base, the remaining loans benefit from long leases expiring only
after the loan maturity dates. However, Moody's incorporated
into its analysis in September 2009 higher than average tenant default
rates for a majority of the loans thereby increasing the term default
risk assumption for the respective loans.
Overall Default Risk. Since 52% of the portfolio has already
defaulted, Moody's default risk assessment for the overall
portfolio is very high. The default risk of all loans is predominantly
driven by refinancing risk. Besides the defaulted Berlin and Dresden
loans, in Moody's view, the Bastion Loan has the highest default
risk while the Waterloo Loan has the lowest risk of defaulting.
Work-Out Strategy. In scenarios where a loan defaults,
Moody's current expectation is that the special servicer will most likely
not pursue an immediate fire sale of the property in today's market conditions.
Therefore, Moody's has assumed that in most cases, upon default,
a sale of the mortgaged properties and ultimate work-out of the
loan will occur at a later point in time, but taking into account
the legal final maturity date of the Notes in January 2015.
Concentration Risk. The portfolio securitised in Talisman-3
Finance p.l.c exhibits an average concentration in terms
of property types and property location.
Increased Portfolio Loss Exposure. Taking into account the (i)
increased default risk of the loans compared to closing of the transaction;
(ii) the recent performance of the commercial property markets in Germany;
(iii) Moody's opinion about future property value performance; and
(iv) the most likely work-out strategies for defaulted loans,
Moody's anticipates very high amount of losses on the securitised portfolio.
Given the default risk profile and the anticipated work-out strategy
for defaulted and potentially defaulting loans, these expected losses
are only likely to crystallise towards the end of the transaction term.
However, due to the repayments and prepayment since the closing
of the transaction and their mostly sequential allocation, the credit
enhancement available for the Class A, B and C has increased significantly.
The current subordination levels for Moody's rated classes (74.3%
for the Class A, 59.3% for the Class B and 44.2%
for the Class C) provide protection against these expected losses.
Scenario Analysis. Moody's has also looked at a scenario
whereby the properties under the Berlin and Dresden Loans are sold at
a value below the current U/W market value and losses and recoveries are
allocated to the notes (in this scenario Moody's has also assumed
that the Trier Loan would repay at maturity). All else being equal,
this scenario would not result in rating sensitivity for the Class A,
B and C Notes due the sequential allocation of all principal receipts.
A default of the Trier Loan coupled with a decline in the underlying property's
value may result in some rating sensitivity on the Class C notes.
5) 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 26 April
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 email@example.com.
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
Moody's confirms the Aaa rating of the Class C CMBS Notes issued by Talisman-3 Finance p.l.c.
Structured Finance Group
Moody's Investors Service South Africa (Pty) Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454