Class X Notes remain on review for possible downgrade
London, 28 April 2011 -- Moody's Investors Service has today downgraded the following classes of
Notes issued by Titan Europe 2006-3 plc (amounts reflect initial
outstandings):
EUR471.975M Class A Notes, Downgraded to A3 (sf); previously
on Mar 2, 2011 Aa2 (sf) Placed Under Review for Possible Downgrade
EUR245.427M Class B Notes, Downgraded to Caa3 (sf);
previously on Mar 9, 2010 Downgraded to B2 (sf)
EUR51.917M Class C Notes, Downgraded to Ca (sf); previously
on Mar 9, 2010 Downgraded to Caa2 (sf)
EUR56.637M Class D Notes, Downgraded to C (sf); previously
on Mar 9, 2010 Downgraded to Ca (sf)
Moody's placed the Class A and Class X Notes on review for possible downgrade
following Moody's initial assessment of the transaction under the Moody's
"Global Structured Finance Operational Risk Guidelines: Moody's
Approach to Analyzing Performance Disruption Risk" methodology published
on 2 March 2011.
Moody's does not rate the Class G and Class H Notes issued by Titan Europe
2006-3 plc. Today's review 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 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 these parameters a loss expectation for the securitised
pool. Based on Moody's revised assessment, the loss expectation
for the pool has increased significantly since its last review in March
2010.
The increased loss expectation for the portfolio is due to a combination
of factors including:
(i) higher than expected losses to be realised for the SQY Ouest Shopping
Centre Loan ("SQY Ouest" -- 13% of the
pool balance as per January 2011);
(ii) the default of the second largest loan in the pool, the Weserstrasse
Loan (14% of the pool balance) which was not repaid at its maturity
date in April 2011;
(iii) the deterioration of the property values backing the Weserstrasse,
Monnet and Rivierstaete Loans which together contribute 28% to
the pool balance; and
(iv) higher expected default rates at maturity for the currently performing
loans, especially with respect to the largest loan in the pool,
the Target Loan (29% of current pool) which matures in July 2013.
The rating of the Class X Notes remains on review for possible downgrade
due to operational risk concerns. The Class X Notes currently rely
on draws from the liquidity facility for timely payment of interest.
In its review, Moody's will also analyse and factor in the
risk of potential shortfalls on the interest payments to the notes given
the high level of draws on the liquidity facility to date and the expected
future draws which are expected to significantly reduce the available
amount under the facility.
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 amortisation and loan re- prepayments or a decline
in subordination due to realised losses. Moody's understands
that the special servicer is awaiting potential recoveries from valuer
negligence claims in relation to the SQY Ouest and Quelle Nurnberg Loans.
In its analysis, Moody's has not given any benefit to future
additional recoveries from these claims which may ultimately result in
lower realised losses for the notes.
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.
MOODY'S PORTFOLIO ANALYSIS
As of the January 2011 interest payment date ("IPD"),
the transaction's total pool balance was EUR 814 million, down by
14% since closing due to the prepayment of four loans and the repayment
of one loan. The prepayment proceeds were allocated 50%
sequential and 50% pro-rata to the notes while the repayment
proceeds were allocated sequentially to the Class A Notes. Following
loan defaults, the sequential payment trigger in the transaction
has been breached; therefore, the proceeds from prepayments,
balloon payments and loan recoveries are being allocated sequentially
to the notes.
The investor report and cash flow figures for the April 2011 IPD are not
yet available. Based on the notices issued by the servicer,
with the latest issued on 21 April 2011, five of the remaining 13
loans are performing while seven loans (60% of the pool balance
per January 2011) are in special servicing and one loan (the Twin Squares
Loan -- 2% of the pool balance) is subject to a standstill
agreement following non-payment at maturity in January 2011.
This compares with three loans (32% of the then outstanding pool
balance) in special servicing during Moody's previous transaction
review in March 2010.
The work-out of the SQY Ouest Loan has been completed in that the
underlying property has been sold and the recovery proceeds have been
distributed to the Issuer in February 2011. However, a claim
against the valuer from the loan origination remains outstanding;
hence, the loan continues to be in special servicing and a final
recovery determination has not yet been made. Based on the sale
price achieved and taking into account liquidation costs, the net
proceeds available to the Issuer was EUR 35 million versus the EUR 109
million principal balance of the securitised loan. Moody's
understands that approximately EUR 6 million has been used towards repayment
of the liquidity facility drawn amounts and app. EUR 2 million
was used to pay the swap breakage costs. The Class A Notes were
repaid EUR 26.2 million on the April 2011 IPD from the loan recoveries.
Therefore, not giving any value to potential further recoveries,
Moody's expects the principal losses in relation to this loan to
be c. EUR 82 million, translating into a loss severity of
75% based on the original securitised loan amount. The loss
on the loan should result in a full write down of the Class H (not rated
(NR) by Moody's), Class G (NR) and Class F Notes (rated C),
as well as a partial write down of the Class E Notes (rated C).
Due to the interest payment shortfalls in relation to the SQY Ouest,
Quelle Nurnberg and Monnet Loans, drawings have been made from the
liquidity facility since July 2009 in order to pay interest on the notes.
Following the repayment of the drawn amounts associated with the SQY Ouest
Loan, the cumulative outstanding draw as of the April 2011 IPD is
EUR 8 million while the total available commitment at the end of the period
was EUR 54 million. The total available liquidity facility commitment
has been reduced by 18% from the closing balance due to the appraisal
reductions arising from the value decreases of the properties securing
the SQY Ouest, Quelle Nurnberg and Monnet Loans.
The largest loan in the portfolio, the Target Loan (EUR 235 million
-- 29% of the pool) currently performs in line with
Moody's expectations. However, the loan matures in
July 2013 and Moody's views a successful refinancing of the loan
as unlikely. The loan is secured by a portfolio of 15 office and
light industrial properties located throughout France with a concentration
in the Ile-de-France (Paris) region. Approximately
73% of the rental income from the portfolio is generated by Thales
(rated A2), a major global electronics company serving Aerospace,
Defence, and Security & Services markets worldwide. Within
the portfolio, 48% of the leases (by rental income) have
a break option and/or expiry in 2011 and a total of 95% of the
leases have break options or expiries by 2015. Moody's loan-to-value
("LTV") ratio for this loan at maturity is 110% compared
with the underwriter's ("U/W") current LTV of 82%
based on a valuation dated December 2009. Moody's downward
value adjustment reflects its opinion of the secondary quality of most
of the properties in the portfolio along with the adverse lease expiry
profile. Moody's expects very high losses on the loan.
The second largest loan in the portfolio, the Weserstrasse Loan
(EUR 111 million -- 14% of the pool) was transferred
into special servicing in January 2011 due to an imminent default of the
loan at its maturity date in April 2011. The loan is secured by
an office property in Frankfurt, single let to subsidiaries of the
Allianz group (rated Aa3). The lease expires at the end of June
2013 and the tenant has already given notice to vacate the property at
the end of its lease term. Since the loan's transfer into
special servicing, a new valuation has been conducted which values
the property at EUR 61.5 million, 55% lower than the
value of the property at closing. The U/W A loan LTV based on the
latest valuation is 180%. The special servicer has so far
not revealed its strategy for the loan work-out; however,
the two possible options appear to be an outright/consensual sale of the
property with the second option being a longer term exit after finding
(multiple) tenants to replace Allianz. Moody's expects very
high losses on the loan.
The third largest loan (excluding the SQY Ouest Loan) is the Quelle Nurnberg
Loan (EUR 93 million -- 11% of the pool) which is
also in special servicing. According to the special servicer,
progress has been made on the redevelopment of the asset and the planning
process is substantially completed. Moody's understands that
the large scale redevelopment which would include partial demolishing
of the existing property and building of residential properties is estimated
to require approximately EUR 175 million of funds. The current
expected work-out of the loan involves a loan sale, and Moody's
expects a very small amount of principal recovery on the loan.
The remaining nine loans contribute between 8% and 0.7%
to the current pool balance. Three loans (together 14% of
the pool) were transferred into special servicing on 21 April 2011 due
to failure to refinance. Out of the currently performing five loans,
one of them (the AEA Loan -- 0.7% of the pool)
matures in July 2011 while the remaining loans mature in 2013.
The exit LTVs for the performing loans range from 66% to 173%.
For almost all of the currently performing loans, Moody's
has increased its refinancing risk assessment since its last review.
Portfolio Loss Exposure: Moody's expects a very high amount of losses
on the securitised portfolio, stemming mainly from (i) the adverse
performance of the loans in special servicing which make up 60%
of the pool and (ii) the expected deterioration of the performance of
the remaining loans driven by high default rates at their respective maturity
dates. The subordination level of 58% for the Class A Notes
as per April 2011 provides protection against these expected losses.
However, the likelihood of higher than expected losses on the portfolio
combined with Moody's expectation of the losses to be realised soon
on the SQY Ouest and Quelle Nurnberg Loans has resulted in today's rating
action. Given its leverage and subordinated position in the transaction's
capital structure, Moody's views the Class B Notes as subject
to a high credit risk. For the Class C and Class D Notes,
the prospect for repayment of principal has diminished substantially;
therefore, the ratings have been lowered to Ca and C, respectively.
RATING METHODOLOGY
The principal methodology used in this rating was "Moody's Approach
to Real Estate Analysis for CMBS in EMEA: Portfolio Analysis (MORE
Portfolio)" published in April 2006.
Other methodology and factors considered can be found in "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. Moody's
prior review is summarised in a Press Release dated 9 March 2010.
The last Performance Overview for this transaction was published on 22
February 2011.
For updated monitoring information, please contact monitor.cmbs@moodys.com.
To obtain a copy of Moody's Pre-Sale 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
Deniz Yegenaga
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.
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SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
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Moody's downgrades four classes of EMEA CMBS Notes issued by Titan Europe 2006-3 plc
