GBP279 million of EMEA CMBS affected
London, 15 April 2011 -- Moody's Investors Service has today downgraded the following classes of
Notes issued by Draco (Eclipse 2005-4) plc (amounts reflecting
initial outstandings):
....GBP210.9M Class A Notes,
Downgraded to Aa3 (sf) and Remains On Review for Possible Downgrade;
previously on Mar 2, 2011 Aaa (sf) Placed Under Review for Possible
Downgrade
....GBP17.1M Class B Notes, Downgraded
to Baa1 (sf); previously on Jun 4, 2009 Downgraded to A1 (sf)
....GBP15.7M Class C Notes, Downgraded
to Baa3 (sf); previously on Jun 4, 2009 Downgraded to A3 (sf)
....GBP22.8M Class D Notes, Downgraded
to Ba1 (sf); previously on Jun 4, 2009 Downgraded to Baa2 (sf)
....GBP12.1M Class E Notes, Downgraded
to Ba2 (sf); previously on Jun 4, 2009 Downgraded to Ba1 (sf)
The rating of the Class A Notes was placed on review for possible downgrade
on 2 March 2011 following Moody's new operational risk criteria.
Moody's will complete the review of the rating on the Class A Notes by
September 2011, as required by European regulations. Moody's
does not rate the Class F Notes issued by Draco (Eclipse 2005-4)
plc.
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, Class B, Class C,
Class D and Class E Notes is driven by Moody's revised assessment of i)
the expected default probability of the loans at their respective maturity
date and (ii) the expected slow recovery over the next years of both the
property values securing the underlying collateral, as well as the
commercial real estate 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 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
Since closing of the transaction in December 2005, three loans representing
46% of the initial principal note balance have repaid and as of
the January 2011 Note payment date two loans are outstanding. The
two remaining loans are secured by six properties located in the UK.
Three properties are located in central London (83% by U/W market
value), two in Windsor (12% by U/W market value) and one
property in Birmingham (5% by U/W market value). As of January
2011, both loans are current and none are on the servicer's watchlist
or in special servicing. The loans do not have B-loans outside
of the transaction. Due to the larger relative size of the Flintstone
Portfolio Loan (94% of the current pool balance) compared with
the Herbert House Loan (6% of the current pool balance),
the credit risk of the transaction is largely dependent on the performance
of the Flintstone Portfolio Loan.
The Flintstone Portfolio Loan (94% of the current pool balance)
is secured by five properties located in London and Windsor. The
largely office use properties are let to approximately 42 tenants with
the three largest tenants contributing approximately 50% of the
total rental income. The current outstanding loan balance of GBP144.08
million is also expected to be outstanding at maturity, given the
interest only structure of the loan. Based on its updated assessment,
Moody's whole loan LTV at the loan's maturity date in October
2015 is approximately 81%. Given the loan's leverage
and size on its maturity date and the uncertainties surrounding commercial
real estate lending and the stability of the property values, Moody's
believes there is a considerable chance that this loan will not repay.
In its refinancing risk assessment, Moody's also took into
account (i) the average quality of the properties and (ii) the potential
rental income deterioration resulting from the existing lease expiry profile
(approximately 40% of the rental income expires or breaks over
the next four years).
The Herbert House Loan (6% of the current pool balance) is secured
by an office property located in Birmingham. The property is let
to a single tenant which is publicly rated by Moody's (Ba2).
The current outstanding loan balance of GBP9.04 million is expected
to decline to GBP8.09 million on the loan's maturity date
in January 2014 due to scheduled amortisation payments. Based on
its updated assessment, Moody's whole loan LTV at the loan's
maturity date is approximately 83%. In its refinancing risk
assessment, Moody's took into account (i) the tenant's
lease break option, which falls 1.5 years after the loan
maturity date and (ii) the below average quality of the property.
As a result, Moody's believes there is a substantial chance
that this loan will not repay at maturity.
Refinancing Risk: The Flintstone Portfolio Loan has its scheduled
maturity date in October 2015 and the Herbert House Loan in January 2014
while the legal final maturity date of the Notes is in October 2017.
Moody's adjustment of the refinancing risk assessment is primarily due
to its current expectations that commercial real estate lending will remain
scarce over the next two to three years. As highlighted in the
Moody's Special Report "EMEA CMBS: 2011 Central Scenarios,
Moody's assumes that CRE lending will slowly resume over the coming years
but it will remain subject to strict underwriting criteria and depend
heavily on the quality of the underlying properties. European non-prime
property values are still under pressure given the scarcity of financing
for this market segment and hence a meaningful recovery of non-prime
property values is not expected before 2012/13. Given the uncertainties
with respect to CRE lending and the stability of the property values in
the medium to long-term, Moody's expects an increased
refinancing risk for both loans compared to the last review in June 2009.
Portfolio Loss Exposure: Moody's expects a low amount of losses
for the Flintstone Portfolio Loan and considerable losses for the Herbert
House Loan, stemming mainly from the performance and the refinancing
profile of the securitised portfolio, and, with respect to
the Herbert House Loan from an adverse timing of the lease break option
of the tenant. Given the default risk profile and the anticipated
work-out strategy for potentially defaulting loans, these
expected losses are likely to crystallise only towards the end of the
transaction term.
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 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. The
last Performance Overview for this transaction was published on 26 January
2011.
For updated monitoring information, please contact monitor.cmbs@moodys.com.
To obtain a copy of Moody's New Issue 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
Manuel Rollmann
Associate Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
New York
Andrea M. Daniels
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades five classes of CMBS Notes issued by Draco (Eclipse 2005-4) plc
