Rating of the Class A-1A Notes affirmed
London, 18 April 2011 -- Moody's Investors Service has today downgraded the following class of
Notes issued by Deco 11 - UK Conduit 3 p.l.c (amount
reflects initial outstandings):
....GBP74.5M Class A-1B Notes,
Downgraded to A3 (sf); previously on Jul 3, 2009 Downgraded
to Aa3 (sf)
At the same time, Moody's Investors Service has affirmed the Aaa
(sf) rating of Class A-1A Notes issued by Deco 11 - UK Conduit
3 p.l.c. Moody's does not rate Class A2,
Class B, Class C, Class D, Class E Class or Class X
issued by Deco 11 - UK Conduit 3 p.l.c..
Today's rating action takes into account Moody's updated central scenarios,
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 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 13 loans
(compared to 17 at closing) has increased significantly since the last
review in July 2009.
The rating affirmation of the Class A-1A Notes is mainly driven
by (i) current credit enhancement level and (ii) modest note-to-value
(NTV) level.
The downgrade on Class A-1B Notes is mainly caused by (i) Moody's
increased refinancing default risk and loss assessment for the remaining
loans in the pool; and (ii) lease rollover risk mainly affecting
the performance of the Mapeley loan and Wildmoor Northpoint loan.
The overall default probability of the remaining underlying loans as assessed
by Moody's has increased compared to the last review due to a re-assessment
of the refinancing risk. Moody's weighted average whole loan-to-value
(LTV) ratio is considerable at 116%. As Moody's expects
only a limited increase in commercial property values over the next years,
nearly all of the loans in the pool will be highly leveraged at refinancing.
Therefore, we anticipate that a very large proportion of the pool
will default over the transaction term.
The loans are not contributing equally to the total size of the pool.
The ratings of the classes of Notes are in particular sensitive to the
performance of the Mapeley loan (56% of the securitised pool) and
the success of the borrower to renew upcoming lease expiries or re-let
vacated areas. A further 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 of this loan which matures in January 2017.
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 a 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 GBP401.9 million down by 10% since
closing. This is due to the repayment of four of the smaller loans
since closing. As a result 13 loans remain which are secured by
a diverse portfolio of 48 properties mainly in use as office (58%),
warehouse/distribution (14%), student housing (11%),
shopping centres (7%) and nursing homes (7%).
To date, the sequential payment triggers have not been breached.
The proceeds from prepayments and balloon repayments are allocated to
the Notes in a combination of fully sequential, modified pro-rata
and pro-rata basis, based on certain loan buckets.
The largest loan in the pool (56% of the pool balance) along with
two smaller loans will be allocated according to a pro-rata matrix.
Based on the matrix, 90.5% of the proceeds will be
allocated pro-rata amongst the Class A-1A, Class A-1B
and Class A2 Notes, 3.5% to the Class B Notes and
3.0% each to Class C and Class D Notes. The second
largest loan in the pool (10% of the pool balance) will be allocated
on a 100% pro-rata basis. In Moody's view,
the sequential payment triggers are comparably weak because the hurdles
to switch to a fully sequential allocation are set rather high.
Therefore, the payment allocation will potentially only change at
a relatively late stage when even several event of defaults and even loss
allocations to the notes could have occurred.
As of the last interest payment date, all the loans in the portfolio
were current. However, as discussed below four of the outstanding
loans (Mapeley, Wildmoor Northpoint, CPI Retail and the Chesterton
loan) are on the servicer's watchlist. The Wildmoor Northpoint
loan has defaulted due to a failure to repay at loan maturity in July
2010. As detailed below, this loan together with the CPI
Retail and Paladru loans are also in special servicing.
The largest loan is the Mapeley loan (56% of the pool) which is
secured by an office portfolio located throughout the UK. The portfolio
consists of 24 properties which are let to approximately 47 tenants with
the top-5 contributing approximately 63% of total rental
income. The current reported interest coverage ratio (ICR) is 1.27x
(as of January 2011). All surplus monies are now used to repay
the outstanding loan balance while the breach of the ICR cash trap trigger
(1.30x) continues. The lease rollover for this loan is modest
evidenced by a weighted average (WA) lease to expiry or break of 6.0
years. However, compared to 12 months ago the reported net
rental income decreased by 17% to GBP14.7 million resulting
in a continued elevated vacancy level of 18% as per latest IPD.
Over the next three years approximately 20% of rental income is
subject to either lease expiry or breaks. Following a voluntary
2-year cash sweep in place since April 2009, approximately
GBP7.1 million was used to repay the outstanding loan balance.
Based on the underwriter's (U/W) market value as per 2008 valuation the
current LTV is 84.5%. Moody's assumes a property
value of GBP205.5 million, representing a LTV of 109%,
which considers the (i) average quality of the properties; (ii) the
good credit quality of the top-5 tenants; and (iii) some potential
rental income deterioration resulting from the upcoming lease expiries
and breaks.
The second largest loan, the Wildmoor Northpoint loan (10%
of the pool), which failed to repay at its maturity in July 2010
is secured by a secondary shopping centre located in North East England.
Based on the valuation in December 2009, the current U/W whole loan
and securitised LTV are 174% and 156%, respectively.
The vacancy level of the property is modest at 5.6% (by
area) as per latest IPD. The current ICR (calculated 4 months backward
looking) is 2.13x on a whole loan basis which improved from 1.37x
in July 2010 as the loan switched to a floating interest rate with no
hedging currently in place. However, the coverage of the
loan and existing vacancy level, could be affected by the significantly
adverse lease expiry profile given that approximately 46% of the
existing rental income expires/ breaks before 2014. Moody's
understands from the recently appointed new special servicer that all
elements of the loan have been subject to extensive review with a view
to establishing a team and strategy that can maximise the potential of
the asset. Initial areas of focus will include, amongst others,
the improvement of tenant relationships, property cost control and
driving upcoming lease negotiations. Moody's currently assumes
an orderly work-out of the loan (i.e. no immediate
fire sale). Moody's assumes a property value of GBP24 million,
representing a LTV of 186% on a whole loan basis. No benefit
was given to any potential future cash trapping/ prepayments.
Out of the remaining pool, the CPI Retail loan (1.8%
of the pool) was moved to special servicing due to ICR/ DSCR covenant
breach in November 2010. As per latest IPD the reported ICR was
1.04x. Following an updated valuation in December 2010,
which resulted in an increased LTV to 123%, an appraisal
reduction amount was determined at GBP2.0 million. Currently,
the options regarding the best work-out plan are evaluated by the
(new) special servicer. Moody's assumes an orderly work-out
for this retail property. However, the loss expectation for
this loan is very high.
Furthermore, the Chesterton loan (1.4% of the pool)
is on the servicer's watchlist due to an ICR covenant breach.
Regarding the Paladru loan (1.2% of the pool) GBP4.7
million remains outstanding although the property initially securing the
loan was sold according to the investor report dated January 2010.
The net proceeds totalling GBP1.2 million were used to partially
repay the loan. The special servicer is pursuing claims against
the original valuer of this property.
Portfolio Loss Exposure: Moody's expects a high amount of losses
on the securitised portfolio, stemming mainly from the performance
and the refinancing profile of the securitised portfolio. Given
the default risk profile and the anticipated work-out strategy
for defaulted and 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 received and took into account one or more third
party due diligence reports on the underlying assets or financial instruments
in this transaction and the due diligence reports had a neutral impact
on the rating.
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 11 April
2011.
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 one class of CMBS Notes issued by Deco 11 - UK Conduit 3 p.l.c
