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14 May 2010
The rating remains on review for possible downgrade
Frankfurt, May 14, 2010 -- Moody's Investors Service has today downgraded the following class of
Notes issued by Fleet Street Finance Two plc (amount reflects initial
EUR780M Class A Commercial Mortgage Backed Floating Rate Notes due 2017,
Downgraded to Baa2 and Remains On Review for Possible Downgrade;
previously on Mar 26, 2010 Downgraded to A3 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 does not address the Additional
Note Margin Amount payable as defined in the amended Master Definition
and Construction Schedule and does not address the probability of payment
of such additional amounts or any related payments to the noteholders.
1) 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 and
rental cash flows. Both Loans are secured by first-ranking
legal mortgages on primarily retail properties located in Germany;
however the Mezzanine Loan is contractually subordinated.
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 January 2010 investor report) there are 98 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 (both "Sub-Tenants"). Following the
opening of formal insolvency proceedings in relation to both Sub-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, an insolvency plan was approved
by its creditors in April 2010. According to market information,
there are currently negotiations with one investor about a potential sale
of the tenant taking place. Such sale needs to be finalised by
28 May 2010. If no purchaser is found by that date the liquidation
of the Sub-Tenant seems to be the most probable outcome of the
As of the last IPD in January 2010 the Senior Loan is current.
As of 31 January 2010, the Quelle Sublease, which accounted
for approximately 2% of the total rent, was terminated by
the insolvency administrator and Quelle stopped paying rent; Karstadt,
however, has continued making its rental payments.
2) Rating Rationale
On 26 March 2010, Moody's downgraded the Class A Notes to A3 from
A1 and kept the rating on review for further downgrade. The rating
action was primarily driven by (i) Moody's expectation that the most likely
outcome of the insolvency proceedings of Karstadt Warenhaus GmbH will
be the approval of the insolvency plan by the creditors followed by the
stabilisation of the company (going concern); (ii) the overall net
positive impact of the implemented changes both at Loan and transaction
level; and (iii) the significant decrease of the property portfolio
The rating of the Class A Notes remained on review for possible downgrade
pending 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.
The rating was and is also sensitive to the actual final outcome of the
insolvency proceedings in relation to Karstadt Warenhaus GmbH, if
different to Moody's expectation of a going concern and stabilisation
of the tenant.
Today's rating action is caused mainly by uncertainties regarding the
valid existence of the borrowing entity under German law as detailed below
and follows an assessment of the legal opinions provided by the servicer
as part of the transaction restructuring documents as well as further
research by Moody's. Additionally, the most current
publicly available information on the tendering process for Karstadt's
sale, in particular (i) the limited number of interested investors,
(ii) a prospective buyer's requests for additional concessions (including
concessions from the landlord) and consequently (iii) the delayed sale
process, increases the uncertainty around the implementation of
the approved insolvency plan, which is the base case assumption
for Moody's current rating.
The rating of the Class A Notes remains on review for possible downgrade
due to the (i) pending implementation of a final solution on liquidity
facility/ liquidity reserve account arrangements for the extended tail
period and (ii) higher uncertainty around the stabilisation of Karstadt
on the basis of the approved insolvency plan.
3) Moody's Analysis
Valid existence of the borrower under the German law: the borrower
of the Senior Loan is established as a civil law partnership under German
law (Gesellschaft buergerlichen Rechts, "GbR") with
its statutory and administrative seat in the Netherlands. Based
on the existing prevailing view of German courts and literature,
a German partnership may not have come into existence in Germany if there
never was an administrative seat in Germany.
The legitimacy of the position represented by the prevailing view in Germany
was confirmed by a ruling of the European Court of Justice after closing
of the transaction. If necessary, it could result in the
following potential consequences for the borrower: it would need
to be liquidated under German law and re-established under Dutch
law or its corporate form would need to be changed in a form permitted
under the Dutch law.
Moody's does not assume that the the agreements entered into by the borrower
or that the security provided by the borrower are invalid. However,
from Moody's perspective, the uncertainties about the valid
existance of the borrower and connected therewith its legal capacity may
negatively impact any legal actions to be potentially taken by or against
the borrower, in particular any potential enforcement process upon
loan default. It could result in delays and increased costs of
enforcement. Moody's has therefore stressed its enforcement
cost and time to foreclosure assumptions, which decreases the expected
recovery proceeds and increases the expected loss on the Loan and the
Notes, thereby causing today's rating action.
Proposed Liquidity Reserve Account
Moody's has been provided with a proposal on providing liquidity
to the transaction during its extended term. However, there
is currently no final decision whether or to which extent such proposal
will be implemented.
Based on the presented proposal, during the extended tail period,
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 credit and fill the Account up until an
amount of approximately EUR 78 million is trapped. The Account
should be managed by the servicer and be fully controlled by the Issuer.
Based on the respective provision included in the deed of amendments only
the servicer should have the sole signing and withdrawal rights to this
account, which he could only exercise upon an instruction from the
Issuer. The Issuer should be entitled to make withdrawals from
this account to cover any potential shortfall in Issuer's available
interest collections destined for payment of senior expenses and interest
due under the Class A Notes. The borrower should 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 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 in case of the implementation of the proposed
solution in relation to liquidity arrangements, the future upside
potential of the current rating of the Class A Notes (in case of a tenant
stabilisation and an improved commercial property market) is limited due
to the above mentioned structural and operational weaknesses. If
(i) the liquidity reserve account is set up as proposed and (ii) Moody's
base case of a stabilisation of the tenant (going concern) is realised,
Moody's will likely confirm the Baa2 rating of the Class A Notes.
4) 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
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 firstname.lastname@example.org.
To obtain a copy of Moody's New Issuer 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 downgrades Class A CMBS Notes issued by Fleet Street Finance Two plc to Baa2
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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