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Rating Action:

Moody's downgrades Class B, C and D CMBS Notes issued by European Property Capital 3 plc

17 Feb 2011

EUR 95.2 million of EMEA CMBS affected

London, 17 February 2011 -- Moody's Investors Service has today downgraded the Class B, Class C and Class D Notes issued by European Property Capital 3 plc (amount reflects initial outstandings):

....EUR31.8M Class B Notes, Downgraded to A1 (sf); previously on Jan 20, 2011 Aa2 (sf) Placed Under Review for Possible Downgrade

....EUR32.1M Class C Notes, Downgraded to Ba1 (sf); previously on Jan 20, 2011 Baa1 (sf) Placed Under Review for Possible Downgrade

....EUR31.312M Class D Notes, Downgraded to Caa3 (sf); previously on Jan 20, 2011 B1 (sf) Placed Under Review for Possible Downgrade

The Class A Notes are rated Aaa (sf).

Moody's does not rate the Class X Notes.

Today's rating action concludes the review for possible downgrade that was initiated on 20 January 2011.

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 September 2009.

The rating downgrade on the Class B, Class C and Class D Notes is mainly due to the performance deterioration of the Randstad loan, the largest in the pool. The loan is in default because it did not repay at its scheduled maturity in August 2010. Since October 2010, the loan is in special servicing. According to a notice published on 15 February 2011, the special servicer is currently discussing a consensual sale of the underlying assets. Moody's re-assessed the value of the underlying properties and concluded a higher expected loss for the Randstad loan than at our last review in September 2009. In Moody's view the value re-assessment is justified by the upward yield pressure for secondary properties in the Netherlands as well as the properties adverse rollover profile.

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 realized 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; we expect 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

As of the November 2010 interest payment date, the transaction's total pool balance was EUR 168.1 million down by 59% since closing, as only two of the original five loans remain in the pool.

The largest loan is the Randstad Loan (67% of the current pool). The outstanding balance of the loan is EUR 128 million split between a securitised portion of EUR 113 million and a B-Note of EUR 15 million. The loan is secured by 17 office properties and two warehouse properties in the Netherlands with some concentration in the Randstad region. The portfolio is leased to about 80 tenants and the weighted average remaining lease length to first break is 4.4 years. The latest investor report (as of November 2010) exhibits a strong interest coverage ratio ("ICR") of 2.76 x. Moody's portfolio value of EUR 125 million considers the (i) secondary quality of the properties and (ii) some potential rental income deterioration. In estimating a sustainable net cash flow of EUR 9 million, Moody's reduced the reported net operating income of GBP 9.8 million by accounting for the adverse lease profile (nearly 30% of the rental income breaks or expires by the end of 2012). The loan is in default since August 2010 when it did not repay at its scheduled maturity. Since October 2010, the loan is in special servicing. Negotiations have been ongoing in relation to a potential extension of the loan but those discussions have failed. The borrower is now in discussion with the Special Servicer and the B lenders in relation to a consensual sale of the assets. Based on Moody's value, the loan-to-value (LTV) ratio on the securitised portion is 90%. This compares to 73% based on the most recent underwriter's value.

The second loan in the pool is the Portuguese Loan (33% of the current pool). It is secured by a single shopping centre in Albuifera, Portugal. The quality of the asset is above average and we assigned a property grade of 2.0 at closing. The loan has performed strongly and even outperformed Moody's expectations. As an example, the property currently exhibits 0% vacancy. Our current Moody's property value of EUR 100 million is about 25% lower than the underwriter value of GBP 134 million. This results from our adjustments (i) to the property yield reflecting an additional risk premium due the location of the asset in Portugal, and (ii) to the property cash flows. Moody's has assumed an annual sustainable net cash flow of EUR 7.3 million. This compares to a reported net operating income fluctuating between EUR 7.4 and 8.3 million over the last 4 quarters. Our adjustment is mainly due to future rollover (more than 40% of rental income breaks or expires in the next 3 years). Finally, we have assumed that the borrower will exercise his second extension option and that the loan will be up for refinancing in May 2012. Based on Moody's value, the LTV ratio is currently 55.4% decreasing to 51% in May 2012 thanks to amortisation. In our view, there is a very high likelihood that the loan will refinance.

Portfolio Loss Exposure: Moody's expects a considerable amount of losses on the securitised portfolio, mainly stemming from the Randstad Loan. As the sequential payment trigger was hit, the risk of potential losses on all the subordinated classes has increased resulting in the today's rating downgrade for those classes of Notes. Moody's expects very high losses for the Class D Notes.

Sensitivity analysis: In our re-assessment of the pool, we also considered the pool's exposure to country-related risks as the Algarve loan is secured by a property in Portugal, currently rated A1/P-1 on review for possible downgrade. We examined the impact on the ratings of a severe macroeconomic event occurring in Portugal, including the systemic default of the Portuguese banking sector. In such circumstances, the Algarve loan defaults and the underlying property may only be sold at a severely distressed value. Given the low probability of occurrence of this scenario, the impact on the ratings of the notes is fairly limited. However, in the event Portugal's government bond long term rating was to be downgraded by more than two notches as stated in a Press Release dated 21 December 2010, this analysis would be revisited.

RATING METHODOLOGY

The principal methodologies used in this rating were "Update on Moody's Real Estate Analysis for CMBS Transactions in EMEA" published in June 2005, and "Moody's Updates on its Surveillance Approach for EMEA CMBS" published in March 2009.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

The updated assessment is a result of Moody's on-going surveillance of commercial mortgage backed securities (CMBS) transactions. Moody's placed on review for possible downgrade Classes B, C and D CMBS Notes issued by European Property Capital 3 plc in a Press Release dated 20 January 2011. Moody's prior review is summarised in a Press Release dated 25 September 2009. The last Performance Overview for this transaction was published on 12 January 2011. 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 monitor.cmbs@moodys.com. 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).

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.

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
Raphael Smadja
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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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Class B, C and D CMBS Notes issued by European Property Capital 3 plc
No Related Data.
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