Rating of the Class A1 Notes confirmed
Frankfurt, June 12, 2009 -- Moody's Investors Service has today downgraded the following classes of
Notes issued by Deco 6 -- UK Large Loan 2 plc (amounts reflect initial
- GBP259,900,000 Class A2 Commercial Mortgage Backed
Floating Rate Notes due 2017 downgraded to Aa3, previously on 6
December 2005 assigned Aaa;
- GBP43,000,000 Class B Commercial Mortgage Backed
Floating Rate Notes due 2017 downgraded to Baa3, previously on 6
December 2005 assigned Aa2;
- GBP49,100,000 Class C Commercial Mortgage Backed
Floating Rate Notes due 2017 downgraded to B1, previously on 6 December
2005 assigned A2;
- GBP30,119,911 Class D Commercial Mortgage Backed
Floating Rate Notes due 2017 downgraded to Caa1, previously on 17
September 2007 downgraded to Ba1 from initially Baa3.
At the same time, Moody's Investors Service has confirmed
the Aaa rating of the GBP173,000,000 Class A1 Notes issued
by Deco 6 -- UK Large Loan 2 plc.
Today's rating action concludes the review for possible downgrade that
was initiated for the Class A1, Class A2, Class B, Class
C and the Class D Notes on 08 April 2009. The rating action takes
Moody's updated central scenarios in account, as described in Moody's
Special Report "Moody's Updates on Its Surveillance Approach for EMEA
1) Transaction and Portfolio Overview
Deco 6 -- UK Large Loan 2 plc closed in December 2005 and represents
the securitisation of initially four mortgage loans originated by Deutsche
Bank AG and secured by first-ranking legal mortgages over initially
24 commercial properties located across the UK. The properties
were predominantly offices (67%) and shopping centres (23%).
74% of the properties were located in England with the remainder
in Scotland (24%) and in Wales (2%).
Since closing, one of the originally four loans has prepaid (Canary
Wharf Loan, 33% of the original pool). The prepayment
proceeds were applied modified pro-rata, which reduced the
notional amount of the Class A1 Notes from GBP173 million to GBP65
million. The remaining loans are not equally contributing to the
portfolio: the biggest loan (the Mapeley Loan) represents 46.3%
of the current portfolio balance while the Brunel Shopping Centre Loan
and the St. Enoch Centre Loan contribute 27.9% and
25.8% to current pool, respectively. The current
loan Herfindahl index is 2.8, compared to 3.3 at closing.
Following the prepayment, the remaining loans are secured by 22
properties which are predominantly retail use (65%). 13%
of the properties are located in London with 37% in the rest of
England, 48% in Scotland and 2% in Wales. 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
As of the last interest payment date 22 April 2009, all of the remaining
3 loans in the portfolio were current and none of the loans is in special
servicing or has defaulted since closing.
2) Rating Rationale
The downgrade of the Notes follows a detailed re-assessment of
the loan and property portfolio's credit risk. Hereby,
Moody's main focus was on property value declines, term default
risk, refinancing risk and the anticipated work-out timing
for potentially defaulting loans. In its review, Moody's
has undertaken a detailed analysis of all three loans in the pool.
As outlined in more detail below, today's rating action is
mainly driven by the most recent performance of the UK commercial property
markets, Moody's opinion about future property value performance
and increased portfolio concentration. Driven by, in most
cases, a higher default risk assessment at the loan maturity dates,
Moody's now anticipates that a substantial portion of the portfolio
will default over the course of the transaction term. Coupled with
the negative impact of significantly reduced property values, Moody's
expects a substantial amount of losses on the securitised portfolio.
Those expected losses will, given the backloaded default risk profile
and the anticipated work-out strategy for defaulted loans,
crystallise only towards the end of the transaction term.
The current subordination levels for most Moody's rated classes,
82.9%, 26.5%, 17.2%
and 6.5% for the Class A1, Class A2, Class B
and the Class C Notes respectively, provide protection against those
losses. However, the likelihood of higher than expected losses
on the portfolio has increased substantially, which results in today's
Since closing, a third of the initial loan portfolio prepaid.
The prepayment proceeds were allocated modified pro-rata to the
transaction. As a result, subordination levels that benefit
the Class A1, Class A2, Class B and Class C Notes have moderately
increased compared to closing.
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 will 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.
3) Moody's Portfolio Analysis
Property Values. Property values across the UK have declined significantly
until Q1 2009 and are expected to continue to decline at least until 2010.
Moody's estimates that compared to the underwriter's ("U/W")
values at closing, the values of the properties securing this transaction
have declined by on aggregate 21% until the beginning of 2009 (ranging
from a 17% value decline for the St. Enoch Loan to a 27%
value decline for the Brunel Shopping Centre Loan). Looking ahead,
Moody's anticipates further declines until 2010, resulting
in an on average 29% value decline compared to the U/W value at
closing (ranging from a 23% decline for the St. Enoch Loan
to a 37% decline for the Brunel Shopping Centre Loan).
Based on this property value assessment, Moody's estimates that
the transaction's early-2009 weighted average ("WA")
securitised loan-to-value ("LTV") ratio was
92% compared to the reported U/W LTV of 76%. Due
to the further envisaged declines, the WA LTV will increase in Moody's
opinion to 103% in 2010 and will only gradually recover thereafter.
Based on Moody's anticipated trough values, the LTVs for the
securitised loans range between 90% (St. Enoch Loan) and
126% (Brunel Shopping Centre Loan). As there is an additional
subordinated debt in the form of a B-loan in place for the Brunel
Shopping Centre Loan in an amount of GBP 6 million, based on estimated
trough values, the overall whole loan leverage is on average 105%.
Moody's has taken the anticipated property value development,
including a gradual recovery from 2011 onwards, into account when
analysing the default risk at loan maturity and the loss given default
for each securitised loan.
Refinancing Risk. The transaction's has no exposure to loans
maturing in the short-term (2009 and 2010). The St.
Enoch Loan and Brunel Shopping Centre Loan mature in April 2012,
while the Mapeley Loan matures in April 2015. None of the three
loans benefits from an extension option. Since Moody's expects
property values in the UK to only slowly recover from 2011 onwards,
all loans will still be highly leveraged at their respective maturity
dates. Consequently, in Moody's view, the default
risk at maturity has increased substantially for all three loans compared
to the closing analysis. The refinancing risk of the Brunel Shopping
Centre Loan, which matures in April 2012, is significantly
higher compared to the other loans in the pool due to its high leverage,
also taking the B-loan of this loan into account.
Term Default Risk. The occupational markets in the UK are currently
characterised by falling rents, increasing vacancy rates and higher
than average tenant default rates. Based on the current lease profile,
Moody's has incorporated into its analysis an allowance for deterioration
in coverage ratios on the loans, in turn increasing the term default
risk. The St. Enoch Loan and the Brunel Loan, both
secured by shopping centres, are already affected by some tenant
defaults, rental arrears and increasing vacancies albeit to a different
degree, with the St. Enoch shopping centre showing an overall
better performance. The Mapeley Loan has a significantly lower
term default risk compared to the other loans in the pool due to its tenant
and lease profile, although Moody's has reduced the lease
renewal assumptions for some of the properties securing this loan.
Overall Default Risk. Based on its revised term and maturity default
risk assessment for the securitised loans, Moody's anticipates
that a substantial portion of the portfolio will default over the course
of the transaction term. The default risk of all loans is predominantly
driven by refinancing risk. In Moody's view, the Brunel
Shopping Centre Loan has currently the highest default risk, while
the Mapeley Loan has the lowest risk of defaulting.
Concentration Risk. The portfolio securitised in Deco 6 --
UK Large Loan 2 plc exhibits an above average concentration in terms of
property types (65% retail) and property location (100%
UK). In Moody's view, this limits the potential benefits
from different markets performing differently over time.
Work-Out Strategy. In scenarios where a loan defaults,
Moody's current expectation is that the servicer will most likely not
pursue an immediate sale of the property in today's depressed market conditions.
Moody's expects that, upon default, a sale of the mortgaged
properties and ultimate work-out of the loan will occur at a later
point in time.
Increased Portfolio Loss Exposure. Taking into account the increased
default risk of the loans, the most recent performance of the UK
commercial property markets, Moody's opinion about future
property value performance, the most likely work-out strategies
for defaulted loans and the portfolio concentration, Moody's
anticipates a substantial amount of losses on the securitised portfolio,
which will, given the backloaded default risk profile and the anticipated
work-out strategy for defaulted loans, crystallise only towards
the end of the transaction term. Moody's view of the expected
loss ranking of the loans has changed since closing. Initially,
the Mapeley Loan and St. Enoch Loan were of a similar credit risk
from an expected loss perspective with the Brunel Loan being the weakest
loan in the pool. While Moody's relative ranking for the
Brunel Loan has not changed, it views the Mapeley Loan now as better
than the St. Enoch Loan from an expected loss perspective.
4) Rating Methodology
The principal methodologies used in rating and monitoring the transaction
are "Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA"
June 2005 and "Moody's Updates on its Surveillance Approach for EMEA CMBS"
March 2009, which can be found at www.moodys.com in
the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating this issue can also
be found in the Credit Policy & Methodologies directory. The
last Performance Overview for this transaction was published on 21 January
For updated monitoring information, please contact firstname.lastname@example.org."
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).
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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Moody's downgrades four classes of Notes issued by Deco 6 -- UK Large Loan 2 plc
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454