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/%).
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
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.
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
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
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
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.
VP - Senior Credit Officer
Structured Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077
Moody's downgrades Vesta to A3
Structured Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077