Rating of the Class A1 Notes affirmed
London, 03 March 2011 -- Moody's Investors Service has today downgraded the following classes of
Notes issued by Deco 6 -- UK Large Loan 2 plc (amounts reflect
initial outstandings):
....GBP259.9M Class A2 Notes,
Downgraded to Baa1 (sf); previously on Jun 12, 2009 Downgraded
to Aa3 (sf)
....GBP43.0M Class B Notes, Downgraded
to B2 (sf); previously on Jun 12, 2009 Downgraded to Baa3 (sf)
....GBP49.1M Class C Notes, Downgraded
to Caa2 (sf); previously on Jun 12, 2009 Downgraded to B1 (sf)
....GBP30.1M Class D Notes, Downgraded
to Caa3 (sf); previously on Jun 12, 2009 Downgraded to Caa1
(sf)
At the same time, Moody's Investors Service has affirmed the Aaa
(sf) rating of the GBP173.0M Class A1 Notes issued by Deco 6 --
UK Large Loan 2 plc. Today's rating action takes Moody's updated
central scenarios into account, as described in Moody's Special
Report "EMEA CMBS: 2011 Central Scenarios".
RATINGS RATIONALE
The key parameters in our analysis are the default probability of the
securitised loans (both during the term and at maturity) as well as our
value assessment for the properties securing these loans. We derive
from those parameters a loss expectation for the securitised pool.
Based on Moody's revised assessment of these parameters, the loss
expectation for the remaining pool, which now consists of three
loans (compared to four at closing) has increased significantly since
the last review in June 2009.
The rating affirmation of the Class A1 Notes is mainly driven by (i) current
credit enhancement levels and (ii) low note-to-value (NTV)
level.
The downgrade on Class A2, B, C, and D Notes is mainly
caused by (i) Moody's increased refinancing default risk and loss assessment
for the remaining loans in the pool; and (ii) high lease rollover
risk affecting the Mapeley loan (46% of the current pool).
As reported in the latest investor report (January 2011), the second
largest tenant of the Mapeley property portfolio (27% of total
rent) served notice to their lease which matures in September 2011.
The overall default probability of the remaining underlying loans as assessed
by Moody's has increased compared to the last review in June 2009 due
to a re-assessment of the refinancing risk. Moody's weighted
average whole loan to value (LTV) ratio is considerable at 104%.
The Mapeley loan exhibits a Moody's whole loan LTV of 101%.
The two other loans, Brunel Shopping Centre (28% of current
pool) and St Enoch Shopping Centre loan (26% of current pool),
which show current Moody's whole loan LTVs of 116% and 96%
respectively, are due to be repaid in April 2012. As Moody's
expects limited increase in commercial property values in the next two
years, these loans will be highly leveraged at their respective
maturity dates in April 2012.
The ratings of the Classes of Notes are sensitive to the performance of
the Mapeley loan and the success of the borrower to renew upcoming lease
expiries or re-let vacated areas. Deterioration of rental
cash flows would lead to higher default probability during the term and
a lower property value. In addition, a more adverse lease
profile will further increase the refinancing risk.
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.
MOODYS PORTFOLIO ANALYSIS
As of the January 2011 interest payment date (IPD), the transaction's
total pool balance was GBP367.8 million down by 34% since
closing. This is mainly due to the repayment of the largest loan
at closing (Canary Wharf Loan) in March 2006. The prepayment proceeds
were applied modified pro-rata. As a result, three
loans remain which are secured by 22 properties and mainly in use as retail
(65%) and office (35%). The transaction structure
provides for the allocation of amortisation and prepayment proceeds to
the Notes switching from currently modified pro-rata to fully sequential
subject to certain triggers that have not been hit to date.
Even though the Class A1 Notes and the Class A2 Notes were to rank pari
passu in a post-enforcement scenario following the service of a
Note acceleration notice, Moody's assesses the credit risk of the
two Classes of Notes to be different as the pre-enforcement priority
of payments should prevail in most cases for the remaining term of the
transaction. In terms of sequential principal proceeds, the
Class A1 Notes rank ahead of the Class A2 Notes in the pre-enforcement
priority of payments, i.e. the Class A2 Notes are
timely subordinated to the Class A1 Notes.
The Class A2, Class B, Class C and Class D Notes are timely
subordinated or subordinated in the transaction's capital structure.
Due to this additional leverage, the higher portfolio risk assessment
has a relatively bigger impact on the expected loss of the more junior
Notes than on the expected loss of the more senior Notes.
As of the last IPD, all of the remaining three loans in the portfolio
were current and none of the loans are in special servicing or have defaulted
since closing. The Brunel Shopping Centre loan is on the servicer
watch list due a breach of debt service coverage ratio (DSCR) covenant
which is ongoing since February 2006.
The largest loan is the Mapeley loan (46% of the pool) which is
secured by an office portfolio located in regional towns spread throughout
England, Scotland and Wales. Currently, the portfolio
consist of 20 properties which are let to 21 tenants with the top-3
tenants contributing approximately 71% of total rental income.
The current reported interest coverage ratio (ICR) is 1.35x (as
of January 2011) with 50% of the surplus cash flow being trapped
over a two-year period ending July 2011. The balance (currently
GBP6.4 million) is placed in a deposit for any future loan and
property payment requirements. This partially mitigates the existing
adverse lease profile for this loan evidenced by a short weighted average
(WA) lease to expiry or break of 2.6 years. In addition,
the second largest tenant (27% of total rent) has notified the
borrower that they will not renew the lease in September 2011 which will
have a negative impact on the rental cash flows. In case this tenant
vacates the single let property the overall vacancy of the 20 properties
will be approximately 26% by area compared to 7% to date.
The rental income (supported by the deposit) should enable the properties
to cover the debt service even in case the second largest tenant of the
portfolio leaves. Moody's property value of GBP170 million considers
the (i) secondary quality of the properties and (ii) some potential rental
income deterioration resulting mainly from the existing lease expiry profile.
The refinancing risk for this loan which matures in July 2015, has
increased considerable since Moody's last review based Moody's LTV ratio
of 101% , the size of the loan and average quality of the
portfolio. The refinancing risk is also depending on the success
of the borrower to renew upcoming lease expiries and/or re-let
vacated areas and thereby increase the WA lease (beyond the loan maturity
date).
The Brunel Shopping Centre loan (28% of the pool) which matures
in April 2012 is secured by a shopping centre located in Swindon town
centre, approximately 80 miles west of London. Based on the
valuation as of closing, the current underwriter's whole loan
and securitized LTV is 83% and 78% respectively.
The loan underperforms Moody's expectations as the whole loan projected
DSCR is 0.91x as per January 2011 IPD and limited visibility exists
regarding the duration of ongoing loan restructuring negotiations between
the servicer and the borrower. Although some refurbishments were
completed over the past two years, the vacancy level of the shopping
centre remained stable at approximately 9%. Given the high
Moody's whole LTV ratio of 116%, there is a very high likelihood
that this loan will not repay as scheduled on its maturity date in April
2012. In its refinancing risk analysis Moody's also took into consideration
(i) the large size of the whole loan; (ii) the long WA lease term
of approximately 10.5 years but also the low exit debt yield;
and (iii) the good quality of the asset. Moody's assumes
an orderly work-out of this loan (i.e. no fire sale
of the property) following loan maturity in 2012.
St Enoch Shopping Centre loan (26% of the pool). This GBP95
million loan is a 50% tranche of a syndicated loan secured by a
prime shopping centre located in the centre of Glasgow. The property
provides approximately 800,000 square feet of retail and restaurant
area combined with a 750 space car park. The centre experienced
a considerable refurbishment and extension (approximately 64,000
sq ft) over a two-year period ending late 2009/ early 2010.
As a result some new tenants have been attracted over the past 12 months.
However, the current vacancy by area remains high at 16%
as per latest IPD and similar to January 2009 (17%). Given
the high Moody's whole LTV ratio of 96%, there is a considerable
risk that this loan will not repay as scheduled on its maturity date in
April 2012. In its refinancing risk analysis Moody's also took
into consideration (i) the large size of the whole loan; (ii) the
WA lease term of approximately 7.3 years potentially offset by
future rollover (approximately 25% in the next three years);
and (iii) the prime quality of the (refurbished) asset. Moody's
assumes an orderly work-out of this loan (i.e. no
fire sale of the property) in the case of a loan default at its maturity
date.
Portfolio Loss Exposure: Moody's notes the bifurcated nature of
the loan pool and expects a considerable amount of losses on the securitised
portfolio, mainly stemming from the Brunel Shopping Centre loan
and to some extent from the St Enoch Shopping Centre and Mapeley loans.
Given Moody's reduced property value and increased refinancing risk for
these loans, the risk of potential losses arising for the Class
A2, B, C and D Notes has increased resulting in the today's
rating downgrade for these Classes of Notes.
RATING METHODOLOGY
The principal methodologies used in this rating were "Update on Moody's
Real Estate Analysis for CMBS Transactions in EMEA" June 2005 and "Moody's
Updates on its Surveillance Approach for EMEA CMBS" 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. The
last Performance Overview for this transaction was published on 8 December
2010.
For updated monitoring information, please contact [email protected]
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
Jeroen Heijdeman
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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Moody's downgrades four classes of CMBS Notes issued by DECO 6 -- UK Large Loan 2 plc
