Class B Notes and Class C Notes affirmed
Frankfurt am Main, January 12, 2011 -- Moody's Investors Service has today downgraded the Class D Notes and Class
E Notes issued by Victoria Funding (EMC-III) PLC (amount reflects
initial outstandings):
GBP17.3M D Notes, Downgraded to Baa1 (sf); previously
on Jan 15, 2009 Upgraded to A2 (sf)
GBP3.3M E Notes, Downgraded to Ca (sf); previously on
Jun 3, 2010 Downgraded to Caa2 (sf)
At the same time, Moody's affirmed the Aaa (sf) rating of the Class
B Notes and the Class C Notes.
The rating on the Class A Notes was withdrawn on 24 November 2008 due
to redemption in full following the repayment of the Calamander Loan on
its maturity date. Moody's does not rate the Class R (the expense
account).
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 2010.
The rating affirmation of the Class B and C Notes is driven by (i) their
current credit enhancement levels (ii) the continued good performance
of the Zeloof Loan and (iii) a fully sequential payment allocation to
the Notes.
The rating downgrade on the Class D and Class E Notes is due to (i) Moody's
increased refinancing default risk and loss assessment for the remaining
loans in the pool and (ii) continued quarterly interest shortfalls occurring
on the Class E Notes that are the result of both, an available funds
cap/interest deferral mechanism as well as a base rate mismatch in relation
to the Brisk Loan.
In Moody's view the re-assessment is justified by (i) the
continuing upward yield pressure for secondary properties in the UK market,
(ii) the dormant refinancing market, especially for such properties,
and (iii) existing significant uncertainty with respect to the path and
timing for a recovery of the lending market.
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.
MOODY'S PORTFOLIO ANALYSIS
As of the October 2010 interest payment date, the transaction's
total pool balance was GBP 22.2 millon down by 84% since
closing due to repayments and prepayments, as only two of the original
18 loans remain in the pool.
The largest is the Zeloof Loan (90% of the current pool).
The loan is secured by an office/mixed-use property in the east
of the City of London, which is let to 103 tenants with Interxion
as the largest tenant, accounting for over half of the income.
The reported current interest coverage ratio ("ICR") of 4.57 x
(as of October 2010) is very strong and enable the property rental income
to cover the debt service even in case the largest tenant defaulted.
Moody's property value of GBP 42 million considers the (i) secondary quality
of the building and (ii) some potential rental income deterioration resulting
mainly from the existing lease expiry profile (the lease with the largest
tenant expires in April 2015; there are several leases at-will,
which could be terminated at any time). In estimating a sustainable
net cash flow of GBP 4.2 million, Moody's reduced the
reported net operating income of GBP 5.66 million by deducting
potential non-recoverable costs and/or management overhead costs.
From the information provided Moody's does not have any visibility
about the actual amount of such costs. The refinancing risk for
the loan which matures in March 2012, has increased only slightly
since Moody's last review as it benefits from a relatively low Moody's
Loan-to-Value ("LTV") ratio of 48%. The borrower
may request an extension of the loan term, which is subject to the
lender's consent. The servicing agreement in turn describes prohibited
actions, which include consenting to a loan term extension.
Consequently, Moody's does not expect an extension of the loan term
for the Zeloof Loan.
Brisk Loan (10% of the current pool): The loan is secured
by a small retail property in Coventry (West Midlands). The loan
underperforms Moody's expectations as the vacant space (reflecting about
20% of rental income) has not been re-let since end-2008,
when the former tenant went into administration. Moody's has adjusted
its rental income and property value assessment: The current Moody's
net cash flow of GBP 124,000 vs. the current reported net
operating income of GBP 137,225 is a result of an adjustment for
potential non recoverable and void costs. However, similar
to the Zeloof Loan, from the information provided, Moody's
does not have any visibility about the actual costs, if any.
The current Moody's property value of GBP 1.37 million is about
54% lower than the underwriter value of GBP 3.00 million
from July 2004. Given the high Moody's LTV ratio of 157.7%,
there is a very high likelihood that this loan will not repay as scheduled
on its maturity date in September 2011. Currently, the loan
benefits from low interest rates with a reported ICR 3.6x,
but the debt yield is only approximately 6% on current rental income.
However, in its refinancing risk analysis Moody's took into
consideration the small size of the loan and the long WA lease term of
approximatley 12.8 years, which could positively impact the
refinancing opportunity of this loan.
Portfolio Loss Exposure: Moody's notes the bifurcated nature of
the loan pool and expects a considerable amount of losses on the securitized
portfolio, stemming from the Brisk Loan. The Classes B and
C Notes can be fully repaid from the repayment proceeds of the Zeloof
Loan, for which Moody's assesses a low default risk. The
Class D Notes rely for their repayment to some extent on sufficient principal
proceeds from the Brisk Loan. Given Moody's reduced property
value and increased refinancing risk for this loan, the risk of
potential losses arising for the Class D Notes has increased resulting
in the today's rating downgrade for this Class of Notes.
Moody's expects very high losses for the Class E Notes given the sequential
allocation of proceeds and Moody's expected loss assessment for the Brisk
Loan. Additionally, quarterly interest shortfalls with respect
to this Class are continuously occurring (current outstanding interest
shortfall through October 2010 was GBP 113,879).
The Class E Notes are subject to an interest deferral mechanism when a
shortfall in revenue funds available to pay interest on the Class E Notes
is due to a prepayment of a loan. This is generally considered
to be an available funds cap (AFC), but compared to other AFC mechanisms,
the unpaid Class E Notes interest is not extinguished but deferred.
The significant sequential paydown of the Notes since closing due to repayments
and prepayments has resulted in a negative interest differential between
the loans and the notes which will result in interest shortfalls on the
Class E Notes in most quarters going forward. Furthermore,
the Brisk Loan, which pays interest based on the Bank of England
base rate, exposes the Issuer to an unhedged exposure in relation
to the spread between 3-month GBP-Libor and the Bank of
England base rate, which currently contributes to the negative interest
differential between interest due on the loans and interest due on the
Notes.
The current performance of the Zeloof Loan combined with the sequential
payment trigger which has been hit as the principal amount of the currently
outstanding Notes is less than 20% of the initial principal amount
of the Notes at closing, provides in Moody' view sufficient
comfort for the today's rating affirmation of the Class B and Class
C Notes.
RATING METHODOLOGY
The principal methodologies used in this rating were "Update on Moody's
Real Estate Analysis for CMBS Transaction 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. Moody's does not have access to the underlying
portfolio information relating to the non recoverable costs.
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 03 June 2010.
The last Performance Overview for this transaction was published on 22
December 2010. 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.
Frankfurt am Main
Leokadia Szalkiewicz-Zaradzka
Vice President - Senior Analyst
Structured Finance Group
Moody's Deutschland GmbH
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 Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Class D and Class E CMBS Notes issued by Victoria Funding (EMC III) PLC, UK CMBS
