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Rating Action:

Moody's downgrades Vesta to A3

31 Mar 2009

US$346 million of debt securities affected

Hong Kong, March 31, 2009 -- Moody's Investors Service announced today that it has downgraded the rating of Vesta Investment Corporation Limited (Vesta or Issuer) from Aaa to A3. This concludes the rating review for possible downgrade initiated on 9 January 2009.

For further details of this transaction, see Moody's New Issue Report published on 25 July 2007.

The complete rating action is as follows:

Issuer: Vesta Investment Corporation Limited

Floating Rate Notes due on 25 October 2011

Downgraded to A3; previously on 9 January 2009 Aaa and placed under review for possible downgrade

Repayment of the notes relies largely on cash flow generated by residential unit purchase receivables of two Singaporean real estate projects, Scotts Highpark and The Metropolitan Condominium. At transaction closing, 100% of the units had been sold under a Deferred Payment Scheme (DPS).

The rating downgrade results from Moody's opinion that purchaser default risk has increased significantly since expectations at closing. This is due to the property market downturn and tightened mortgage lending resulting in reduced available financing. In addition, potential loss severity upon purchaser default has increased due to declining residential property values in Singapore and reduced liquidity with respect to residential investments. As such, the expected purchaser default rate assumption of Vesta is now mid-20%.

Sales of units in Scotts Highpark and The Metropolitan Condominium began in the second half of 2006. By May 2007, both projects had been fully sold. Given the timing, the units have accumulated a certain degree of capital appreciation impacting both likely buyer default as well as severity of loss should a default occur.

By way of comparison, property price appreciation in Scott Highpark and The Metropolitan Condominium is lower than that of RiverGate (i.e. the project underlying the similar Okeanos transaction), as units in Scotts Highpark and The Metropolitan Condominium were launched later. As such, Moody's is of the opinion that the purchaser default risk in Vesta is higher than that in Okeanos (mid-teens/%).

Transaction Background

The transaction consists of two projects - Scotts Highpark, which is 100% originated by CapitaLand Residential Limited, the residential arm of CapitaLand Limited; and The Metropolitan Condominium, which is originated as a 50/50 split between CapitaLand Residential Limited and Lippo China Resources Limited.

Under a DPS, unit buyers are required to make a down payment (often around 20% of purchase price) within 8 weeks of the purchase; the remaining payment is due upon issuance of a temporary occupation permit (TOP) and thereafter. By the time the unit is close to completion, the unit buyer usually secures bank mortgage financing to pay for the unit.

The two main risks of this type of transaction are 1) failure of the developer and contractors to complete the construction as scheduled; and 2) the default risk of the residential unit buyers upon construction completion and potential losses upon default caused by falling property values.

1) Construction Related Risks

In relation to the construction risks, construction progress of Scotts Highpark and The Metropolitan Condominium is in line with the construction milestones as per the updated report from the Independent Technical Consultant. The sponsors expect to achieve the targeted TOP dates in March 2009 for Scotts Highpark and in July 2009 for The Metropolitan Condominium.

As the construction approaches completion, construction risks are sufficiently covered by the built-in transaction enhancements. These include legal and regulatory requirements on the residential property development projects, fixed-price construction contract, pre-funded construction reserve, experience of sponsors, underlying performance bond at contractor level, construction cost overruns undertaking provided by sponsors, and the contingent construction notes to be subscribed by Natixis (Aa3/P-1/D+).

2) Post Construction Buyers' Default Risks

In Moody's opinion, the transaction has become more exposed to potential buyers' defaults, in particular at the time of TOP. As per the Urban Redevelopment Authority of Singapore, overall condo price for 2008 had depreciated by 6% attributable to price slip that began in 2008 Q3. The price decline for 2H 2008 alone was 9%.

Moody's believes that Singapore property prices will be subject to further downward pressure in 2009. The revised expected market value decline assumption for 2009 is low-30%, which is equivalent to a low-teen percentage decline as of 2006 Q4, whereas our initial assumption for market value decline under a Aaa-stressed scenario was mid-40% to low-50%.

Given the softening of the property market coupled with the overall state of the Singapore economy, many banks have tightened their lending criteria to minimize exposure to the property market.

The changing dynamics of both the Singapore residential market and bank lending practices make it difficult for buyers to obtain financing. Moody's has obtained the updated buyer's profile of underlying portfolio on an aggregate basis and the number of buyers who have purchased multiple units from the project.

Rating Methodology

For Singapore deferred payment residential project transactions, Moody's evaluates the credit risks of the underlying assets and the transaction structure. The analysis of the underlying assets is further divided into two stages:

1) Construction Stage -- Construction Costs Overruns and Delay will be affected by:

a) Developer's and contractor's default

On-time completion of the construction will be linked to performance risks of the developer and main contractor. Failure of the developer and/or contractor may lead to higher construction costs and delayed construction completion. Unless the deal has sufficient structural protection, the rating may be linked to those of the developer and contractor.

The credit quality and track record of the developer and main contractor play an important role during construction stage.

In terms of developer support, we consider its explicit commitment, track record (such as construction cost control), financial strength, market share, market position, and its ability to engage other contractors.

b) Legal and regulatory framework

Construction work is typically subject to a variety of government approval and scrutiny processes. Comprehensive supervision by the regulators -- including pre-approval of construction, on-going reporting and monitoring of the construction progress, and control of the fund flow mechanism -- can help alleviate uncertainty and reduce the likelihood of fraud.

According to Singaporean law, submission of plans for approval must be made to the Singapore Building and Construction Authority (BCA), while all building works must be constructed in accordance with drawings approved by the Commissioner of Building Control of BCA.

Building plans are required to be submitted by a Qualified Person and verified by an Accredited Checker. During the construction stage, the duties and responsibilities defined under the various regulations -- which require certificates and endorsement by different professionals to confirm that the work has been properly carried out. The authorities' stringent submission procedure for building approval and work helps ensure construction compliance and mitigates potential construction delay.

In addition, the Housing Developers (Control and Licensing) Act, the Housing Developers Rules and the Housing Developers (Project Account) Rules have control over the project account of the specified project from where funds will be withdrawn and deposited.

c) Construction Progress

Construction can be broadly divided into piling, substructure and superstructure. The piling work is the riskiest stage but once completed construction risk is significantly reduced. To evaluate the impact of the construction stage on cost overruns and construction delay, different risks and volatility factors are assigned to each project according to its construction stage.

d) Project complexity

Higher complexity implies higher volatility with regard to cost overruns and delays. Residential projects in Singapore typically involve construction of high rise buildings (more than 20 stories) with underground parking space. In addition, residential units are pre-sold according to the pre-defined specifications which may be adopted from similar condominium designs, thereby reducing complexity and uncertainty.

e) Fluctuation in Mark-to-Market Construction Costs

Project construction is usually conducted under a fixed-price contract. However, without the full support of the developer at the time of contractor default, the costs for engaging a replacement developer and/or contractor will be based on the construction progress and the then current construction material costs.

The cost overrun assumption should also take into account the cumulated increase in construction costs since the fixed-price contract date.

2) Post Construction Stage

a) Buyers' default

Principal repayments to the investors depend primarily on the payments made by the existing buyers of the residential units. The transaction is exposed to the default risk of the unit buyers; in particular, buyers are not required to obtain pre-arranged financing under the Sales and Purchase Agreement.

Buyers who bought homes at the peak of the boom could see the value of their properties fall sharply by the time they have to apply for a mortgage for the remaining unit price they owe the developer. In a property market downturn, it may not be possible for the buyers to obtain a mortgage if banks balk at lending out more than the property is worth. Thus the likelihood of buyer default may increase.

Buyer default risk will also be affected by the willingness and ability of the buyer to fulfil their obligations under the Sale and Purchase Agreement. This will be influenced by the buyer profile, including the buyer's legal status (residents, non-residents and corporate), the intention of purchase (owner occupied versus investment), the legal right to recourse against the defaulted buyer, and the financial standing of the buyer.

b) Market Value Decline

Investors are exposed to potential price declines for any unsold unit as well as any reclaimed unit should a buyer default. As such, in the event of a residential market downturn in Singapore, any price decline will lower the value of the unit and thus diminish the receivable value of the transaction. In addition, an additional price cut may also be required in order to liquidate the defaulted unit during a down cycle.

In terms of the transaction structural analysis, Moody's has applied the same approach to rating other structured finance transactions. For the subject transaction, Moody's has reviewed the various transaction structural features, including the receivables assignment, bankruptcy remoteness of note issuer, security package offered to the investors, different pre-funded reserves and issuance of contingent notes to cover construction costs, potential cost overruns and delay, on-going payments of senior fees/expenses, note interest payments, and the incorporation of a cross-currency swap to cover the currency and interest mismatch between the SGD-denominated receivables and USD-denominated notes.

A more detailed explanation of the rating analysis is included in the New Issue Report which is available at www.moodys.com.

Hong Kong
Jerome Cheng
VP - Senior Credit Officer
Structured Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077

Hong Kong
Bonnie Chung
Analyst
Structured Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077

Moody's downgrades Vesta to A3
No Related Data.
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