GBP 13.5 million of CMBS affected
London, 17 February 2012 -- Moody's Investors Service has today confirmed the rating of the Class
B Notes issued by DECO 5 -- UK Large Loan 1 plc (the "Issuer")
(amounts reflecting the initial outstanding amount):
GBP13.5M B Certificate, Confirmed at Aa3 (sf); previously
on Aug 26, 2011 Aa3 (sf) Placed Under Review for Possible Downgrade
At the same time, Moody's affirmed the ratings of the Class
A1 and Class A2 Notes as follows:
GBP212.1M A1 Certificate, Affirmed at Aaa (sf); previously
on Oct 4, 2005 Definitive Rating Assigned Aaa (sf)
GBP56.5M A2 Certificate, Affirmed at Aa2 (sf); previously
on Jul 30, 2009 Downgraded to Aa2 (sf)
Today's rating action concludes the review for possible downgrade
that was initiated for the Class B Notes on 26 August 2011.
RATINGS RATIONALE
The confirmation of the Class B Notes follows Moody's conclusion
that the risk of future interest shortfalls to the Notes has been substantially
mitigated by the actions of various transaction parties. Since
the interest shortfall on the Notes on the July 2011 interest payment
date ("IPD"), there has not been further interest shortfalls
and the deferred interest from July 2011 has been paid to the noteholders.
Moreover, the transaction parties have entered into a restructuring
agreement whereby the excess spread that was available to be paid to the
Class X Certificate Holder will be trapped in an account of the Issuer.
This is to ensure that, going forward, the Issuer will have
access to additional funds in case of increased costs that could have
previously resulted interest shortfalls to the Class B Notes.
As part of its analysis, Moody's also reviewed the performance
of the transaction collateral. The key parameters in Moody's analysis
are the default probability of the securitised loan (both during the term
and at maturity) as well as Moody's value assessment for the properties
securing the single loan securitised in this transaction. Moody's
derives from those parameters a loss expectation for the securitised pool.
Based on Moody's revised assessment of these parameters, the loss
expectation for the loan remained broadly unchanged which resulted in
the affirmation of the Class A1 and Class A2, and the confirmation
of the Class B Notes. Moody's increased default probability
assessment for the maturity of the loan in October 2012 has been offset
by a revised portfolio value for the underlying assets that translates
into a note-to-value ratio of 50% for the Class A1
Notes, 64% for the Class A2 Notes and 67% for the
Class B Notes.
In general, Moody's analysis reflects a forward-looking view
of the likely range of commercial real estate collateral performance over
the medium term. From time to time, Moody's may, if
warranted, change these expectations. Performance that falls
outside an acceptable range of the key parameters such as property value
or loan refinancing probability for instance, may indicate that
the collateral's credit quality is stronger or weaker than Moody's had
anticipated when the related securities ratings were issued. Even
so, a deviation from the expected range will not necessarily result
in a rating action nor does performance within expectations preclude such
actions . There may be mitigating or offsetting factors to an improvement
or decline in collateral performance, such as increased subordination
levels due to amortisation and loan re- prepayments or a decline
in subordination due to realised losses.
Primary sources of assumption uncertainty are the current stressed macro-economic
environment and continued weakness in the occupational and lending markets.
Moody's anticipates (i) delayed recovery in the lending market persisting
through 2013, while remaining subject to strict underwriting criteria
and heavily dependent on the underlying property quality, (ii) strong
differentiation between prime and secondary properties, with further
value declines expected for non-prime properties, and (iii)
occupational markets will remain under pressure in the short term and
will only slowly recover in the medium term in line with anticipated economic
recovery. Overall, Moody's central global macroeconomic
scenario is for a material slowdown in growth in 2012 for most of the
world's largest economies fueled by fiscal consolidation efforts,
household and banking sector deleveraging and persistently high unemployment
levels. We expect a mild recession in the Euro area.
As noted in Moody's comment 'Rising Severity of Euro Area Sovereign Crisis
Threatens Credit Standing of All EU Sovereigns' (28 November 2011),
the risk of sovereign defaults or the exit of countries from the Euro
area is rising. As a result, Moody's could lower the maximum
achievable rating for structured finance transactions in some countries,
which could result in rating downgrades.
INTEREST DEFERRAL TO CLASS B NOTES
The interest shortfall of GBP 27.6k on the July 2011 IPD was repaid
to the Class B Notes on the following IPD in October. The shortfall
in July was caused by a one-time increase in the Issuer level costs
for the period which were not absorbed by the excess spread in the transaction.
Specifically, the spike in costs was due to an adjustment relating
to an erroneous use of the Issuer profit to pay Issuer level costs on
past IPDs.
In this transaction, due to the limited excess spread coming from
the interest payment on the loan, the Issuer runs the risk of not
having sufficient funds to fully pay the administrative costs and the
interest due on all classes of Notes. Moody's understands
that the issue is more prevalent on certain IPDs (October & January)
when there are concentrations of administrative costs borne by the Issuer.
Subsequent to the interest deferral on the Class B Notes and before the
January 2012 IPD, transaction parties including the Class X Certificate
Holder entered into a restructuring agreement. According to this
agreement, the excess spread that would otherwise be paid to the
Class X Notes will instead be deposited in a new account of the Issuer.
The Issuer will be able utilise these funds to cover for administrative
costs that if paid with only the interest income available to it,
would result in an interest shortfall to the Class B Notes.
Having analysed the remedy put in place by the transaction parties,
Moody's is of the opinion that the excess spread which will be trapped
should be sufficient to cover for potential shortfalls in Issuer income
for the remainder of the transaction term.
MOODY'S PORTFOLIO ANALYSIS
DECO 5 -- UK Large Loan 1 plc closed in October 2005 and
represents the true-sale securitisation of a GBP 282.1 million
loan secured by a property portfolio of three office properties in London.
The loan has been granted RREEF Investment GmbH as asset manager on behalf
of the German open-ended real estate fund Grundbesitz Europa.
The fixed rate, interest only loan matures in October 2012.
The loan is current and no disruptions have occurred to the interest payments
to date including the January 2012 IPD. The reported interest coverage
ratio on the loan is 2.12x as per January 2012.
Tower Place is the largest building securing the loan with 52%
of the underwriter's ("U/W") property value of the portfolio. It
is located next to the Tower of London and is predominantly let to Marsh
& McLennan entities under a lease until 2028 that is guaranteed by
Marsh & McLennan Inc (Baa2/P-2). The second property
(26% by U/W value) is in the West End of London on St. James'
Street and is leased to HSBC Bank plc (Aa2, on review for possible
downgrade) until 2023. The third property, Northcliffe House
in the City of London (22% by U/W value) is leased to Freshfields
Bruckhaus Deringer on a lease until August 2021 with a break option in
August 2018.
Apart from mortgages on the properties, the loan is secured by --
inter alia -- an assignment of the indemnification claim
of the fund manager against the real estate fund, which effectively
gives recourse to all unencumbered assets of the fund. As per December
2011, the fund reports to own EUR 2.8 billion of real estate
assets while holding liquid assets of EUR 1.1 billion and being
granted loans that total EUR 740 million.
In its review of the transaction, Moody's attributed a value
of GBP 422 million (-9% to U/W value) to the property portfolio
which took into account the good quality of the underlying assets with
long leases to relatively creditworthy tenants. Based on its portfolio
value, Moody's estimates the loan-to-value ratio
at the refinancing date as 67%.
Compared with its previous review of the transaction and in line with
Moody's latest Central Scenarios per 2012, Moody's refinancing
risk assessment for the loan has increased. However, default
risk on the loan's maturity date still remains low. This is due
to a combination of factors including (i) the attractiveness of the underlying
portfolio with its location and lease profile, (ii) the relatively
moderate leverage of the loan, and (iii) the experience of the asset
manager in addition to the regulated nature of German open-ended
real estate funds.
The methodologies used in this rating were Moody's Approach to Real Estate
Analysis for CMBS in EMEA: Portfolio Analysis (MoRE Portfolio) published
in April 2006, and Update on Moody's Real Estate Analysis for CMBS
Transactions in EMEA published in June 2005. Please see the Credit
Policy page on www.moodys.com for a copy of these methodologies.
Other factors used in this rating are described in European CMBS:
2012 Central Scenarios published in February 2012.
The updated assessment is a result of Moody's on-going surveillance
of commercial mortgage backed securities (CMBS) transactions. Moody's
prior rating action is summarised in a press release dated 26 August 2011.
The last Performance Overview for this transaction was published on 10
November 2011.
In rating this transaction, Moody's used both MoRE Portfolio
and MoRE Cash Flow to model the cash-flows and determine the loss
for each tranche. MoRE Portfolio evaluates a loss distribution
by simulating the defaults and recoveries of the underlying portfolio
of loans using a Monte Carlo simulation. This portfolio loss distribution,
in conjunction with the loss timing calculated in MoRE Portfolio is then
used in MoRE Cash Flow, where for each loss scenario on the assets,
the corresponding loss for each class of notes is calculated taking into
account the structural features of the notes. As such, Moody's
analysis encompasses the assessment of stressed scenarios.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s)
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, parties not involved in the ratings
and public information.
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of this transaction
in the past six months.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a 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.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
two years preceding the credit rating action. Please see the special
report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure
page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%)
and for (B) further information regarding certain affiliations that may
exist between directors of MCO and rated entities as well as (C) the names
of entities that hold ratings from MIS that have also publicly reported
to the SEC an ownership interest in MCO of more than 5%.
A member of the board of directors of this rated entity may also be a
member of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's 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 www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has
issued the rating.
Deniz Yegenaga
Analyst
Structured Finance Group
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
Andrea M. Daniels
Senior Vice President
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
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 confirms the rating of the Class B EMEA CMBS Notes issued by DECO 5 -- UK Large Loan 1 plc
