GBP 710 million of EMEA CMBS affected
London, 07 April 2011 -- Moody's Investors Service has today downgraded the Class A Notes
and Class B Notes issued by Hercules (Eclipse 2006-4) plc (amount
reflects initial outstandings):
....GBP666M Class A Notes, Downgraded
to Baa1 (sf); previously on Mar 2, 2011 Aa2 (sf) Placed Under
Review for Possible Downgrade
....GBP43.95M Class B Notes,
Downgraded to B1 (sf); previously on Jun 10, 2009 Downgraded
to Baa2 (sf)
Moody's does not rate the Class C, Class D and Class E Notes
issued by Hercules (Eclipse 2006-4) plc.
The Class A Notes were previously placed on review for possible downgrade
due to Moody's initial assessment of the transaction under Moody's
methodology "Global Structured Finance Operational Risk Guidelines:
Moody's Approach to Analyzing Performance Disruption Risk" published on
March 2, 2011. Moody's operational risk guidelines
stipulate the highest achievable rating if certain operational risk factors
are present which could disrupt payments to investors. In the case
of Hercules (Eclipse 2006-4) plc, the operational risk results
from having an unrated servicer combined with uncertainty about the cash
manager's access to the liquidity facility if the servicer defaults.
A single-A rating is the maximum achievable rating if the transaction's
cash manager is investment-grade rated (like in this transaction)
and the payment disruption would exceed two note interest payment dates.
The Class A Notes of Hercules (Eclipse 2006-4) plc are therefore
no longer on review for downgrade due to operational risk since the current
rating is now below the rating-cap that could be imposed due to
operational risk.
RATINGS RATIONALE
The key parameters in Moody's analysis are the default probability of
the securitised loans (both during the term and at maturity) as well as
Moody's value assessment for the properties securing these loans.
Moody's derives from those parameters a loss expectation for the securitised
pool. Based on Moody's revised assessment, the loss expectation
for the pool has increased since the last review in June 2009.
The rating downgrade of the Class A and Class B Notes is driven by Moody's
revised assessment of i) the expected default probability of the loans
especially at maturity, (ii) the expected slow recovery over the
next years of the property values securing the underlying collateral,
(iii) the expected slow recovery of the commercial real estate lending
market over the next years and (iv) the negative implications of the current
reductions of local authorities fees on the UK healthcare property market
and the deterioration of the credit quality of the tenant in respect of
the Ashbourne Portfolio A Loan (9% of the current pool balance).
Moody's analysis reflects a forward-looking view of the likely
range of 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
may indicate that the collateral's credit quality is stronger or weaker
than Moody's had anticipated during current review. Even so,
deviation from the expected range will not necessarily result in a rating
action. There may be mitigating or offsetting factors to an improvement
or decline in collateral performance, such as increased subordination
levels due to amortization 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 2012, while remaining subject to strict underwriting criteria
and heavily dependent on the underlying property quality, (ii) values
will overall stabilise but with a strong differentiation between prime
and secondary 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 the anticipated economic recovery. Overall,
Moody's central global scenario remains 'hooked-shaped' for 2011;
Moody's expects sluggish recovery in most of the world's largest economies,
returning to trend growth rate with elevated fiscal deficits and persistent
unemployment levels.
MOODY'S PORTFOLIO ANALYSIS
The underlying loan pool consists of seven loans with a total balance
of GBP793.0 million as of the January 2011 Note payment date.
Since closing of the transaction in December 2006, there were no
major prepayments or repayments. As of January 2011, the
property types by U/W market value are retail (43%), office
(41%), nursing homes (12%) and mixed and other uses
(4%). All properties are located in the UK with the largest
proportion in the Greater London area (46% by U/W market value).
As of January 2011, all loans are current and none of the loans
is on the servicer's watchlist or in special servicing. Three
loans have B-loans outside of the transaction. One loan,
the Ashbourne Portfolio A Loan, is a syndicated loan.
The Chapelfield Loan (27% of the current pool balance) is secured
by a secondary shopping centre located in Norwich, East Anglia.
Moody's loan-to-value ("LTV") at the loan's
scheduled maturity date in April 2016 is approximately 114%.
Compared to its last review, Moody's has significantly increased
its refinancing default risk assumption. Moody's expects
high losses for this loan.
The second largest loan, River Court (26% of the current
pool balance), has a Moody's whole loan LTV of approximately
86% at its scheduled maturity date in October 2016. The
B-loan, which is not securitised, currently represents
13% of the whole loan. The property securing the loan is
the headquarter building of Goldman Sachs International (rated A1 by Moody's),
which is contributing 97% of the total annual rent. The
remaining 3% are contributed by Boots UK (not rated by Moody's).
In Moody's view there is an increased default risk for the loan
during its term. Currently the loan relies on the rental payments
of Boots in order to meet the whole loan interest payments (the current
whole loan ICR is 1.09x). The likelihood of a default during
the term might occur at the lease expiry date, one year ahead of
the loan maturity date, of Boots and a subsequent non-renewal.
Overall Moody's expected loss for the loan is moderate given its
78% senior loan LTV at maturity.
The Cannon Bridge Loan (20% of the current pool balance) is secured
by an office property located in Central London. Since Moody's
last review, the loan has been restructured and extended until January
2015 from its previous maturity date in July 2011. Following the
completion of the restructuring in March 2010 the loan was removed from
special servicing. Currently the servicer uses funds from escrow
accounts to meet the whole loan interest payments. However,
starting on the loan payment date in July 2011 a lower interest rate will
apply and commencing in March 2013 additional rental cash flows of GBP1.6
million are generated by a tenant after a three year rent free period.
This will most likely decrease the default risk during the loan term.
Given Moody's whole loan LTV of 106% at the new maturity
date in 2015, Moody's is expecting high losses for the loan.
The Ashbourne Portfolio A Loan, the fourth largest loan in the pool
(9% of the current pool balance), has a Moody's whole loan
LTV of approximately 162% (senior loan LTV of approximately 68%)
at its scheduled maturity date in October 2015. The securitised
debt represents the 50% pari passu ranking portion of the super
senior tranche of a whole loan. The remaining 50% is securitised
in Equinox (Eclipse 2006-1) plc. The subordinated,
non-securitised tranches currently represent 56% of the
whole loan. The loan is secured by 90 nursing homes across the
UK. In its re-assessment Moody's took into account (i) the
negative implication of the current reductions of local authorities fees
on the UK healthcare property market and (ii) uncertainties about the
stability of the rental income in relation with the perceived deterioration
of the credit quality of the three operating tenants, whose lease
obligations are guaranteed by Ashbourne Holdings Ltd., part
of Southern Cross Healthcare Group. Following the re-assessment,
Moody's loss expectations for the loan has increased significantly compared
to the last assessment in July 2009.
The remaining three loans account for 18% of the current loan pool
balance and have their scheduled maturity dates either in 2015 or 2016.
While Moody's expects moderate losses for the Booker Loan (8%
of the current pool balance) and the Welbeck Loan (4% of the current
pool balance), Moody's expected loss for the Endeavour Loan
(6% of the current pool balance) is high, given the combination
of high refinancing risk based on Moody's LTV of 93% at the
loan's maturity date in 2016 and the secondary nature of the mixed
use and office properties securing the loan.
Moody's expects a substantial amount of losses on the securitised
portfolio, stemming mainly from the increased refinancing risk and
performance of the property values. Moody's weighted average
whole loan refinancing LTV is 101%. Given the default risk
profile and the anticipated work-out strategy for potentially defaulting
loans, the expected losses are likely to crystallize only towards
the end of the transaction term. The current subordination levels
of 19% for the Class A, and 13% for Class B provide
some protection against these expected losses. However, the
likelihood of higher than expected losses on the portfolio has increased
substantially, which results in today's rating action.
RATING METHODOLOGY
The principal methodology used in this rating was "Update on Moody's Real
Estate Analysis for CMBS Transactions in EMEA" published in June 2005.
Moody's Investors Service received and took into account a third party
due diligence report on the underlying assets or financial instruments
in this transaction and the due diligence report had a neutral impact
on the rating.
The updated assessment is a result of Moody's on-going surveillance
of commercial mortgage backed securities (CMBS) transactions. Moody's
prior review is summarised in a Press Release dated 10 June 2009.
The last Performance Overview for this transaction was published on 24
January 2011.
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).
REGULATORY DISCLOSURES
The rating has been disclosed to the rated entity or its designated agents
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 Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
London
Manuel Rollmann
Associate Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Christophe de Noaillat
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
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Moody's downgrades Class A and Class B CMBS Notes issued by Hercules (Eclipse 2006-4) plc
