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02 Jul 2010
EUR 871 million of EMEA CMBS affected
London, 02 July 2010 -- Moody's Investors Service has downgraded the Class A Notes issued by Epic
(Drummond) Limited (amount reflects initial outstandings):
EUR871.175M Class A Floating Rate Note due 2022, Downgraded
to Aa3; previously on May 4, 2010 Aaa Placed On Review for
Moody's does not rate the Class B, C, D, E, F
and G Notes issued by Epic (Drummond) Limited. The Class X Notes
were repaid in July 2009.
1) Transaction Overview and Performance Update
The transaction represents the synthetic securitisation of thirteen commercial
mortgage loans (reference obligations) originated by The Royal Bank of
Scotland plc (RBS), Aa3/P-1. Five reference obligations
are the senior portion of a whole loan. The loans were originated
by RBS between September 2006 and April 2007 and were secured over commercial
properties located in Germany (37% as of closing), Italy
(18%), Finland (26%), Spain (9.5%),
Greece (3.5%), Portugal (3.5%) and Poland
(2.0%). In terms of property types, approximately
80% represented several types of retail properties, the balance
were mainly office properties. The legal final maturity date of
the Notes is in January 2022.
Since closing in June 2007, the underlying loan pool has not changed
its composition. The loans are not equally contributing to the
portfolio: the largest loan (Countrywide Kaufland) represents 32%
of the current portfolio balance, while the smallest loan (Irus
Poland) represents 2%. The current loan Herfindahl index
is 5.7. Due to amortisation and partial prepayments,
the portfolio balance decreased from EUR 1,132 million to EUR 1,047
million as of the last interest payment date in April 2010. Due
to the amortisation and partial prepayments, the portfolio's country
mix has changed since closing. The contribution of Finnish properties
has decreased to 16% while the contribution of Italian properties
increased to 25%.
Interest and scheduled amortisation is allocated sequentially to the Notes.
Prepayments, disposal proceeds and release premia are allocated
modified pro-rata between the Class A to G Notes. Upon the
occurrence of a credit event and the delivery of a credit event notice
in respect of any reference obligation, the available redemption
funds will be applied sequentially to the Notes until the calculation
date following a cure of the relevant credit event or a removal of the
relevant defaulted reference obligation from the reference pool.
According to the last investor report as of April 2010, all loans
in the portfolio were current. However, the Countrywide Kaufland
and Project DD loans (54% of the loan pool) continue being on the
servicer's watchlist. The Countrywide Kaufland Loan (32%
of the current pool) is on the servicer's watchlist as a result of the
breach of its ICR covenant in October 2009. The breach resulted
from lower rental cash flows mainly due to the insolvencies of the tenants
Karstadt, Quelle and Deutsche Woolworths. The Project DD
Loan (22% of the pool) was placed on the servicer's watchlist in
October 2009 due to the breach of its LTV covenant. The U/W Market
Value based on a new valuation is EUR 250.1 million, a decline
of 37% compared to the U/W Market Value of EUR 395.0 million
as of closing. In addition, on the last interest payment
date in January 2010, the interest coverage ratio (ICR) covenant
of this loan was breached. The ICR declined to 1.25x which
is below the covenant level of 1.30x.
2) Rating Rationale
Today's rating action concludes the review for possible downgrade
of the Class A Notes, which Moody's initiated on 4 May 2010.
In its loan-by-loan review process Moody's main focus
was on property values and the term and refinancing default risk of the
underlying loans. In its transaction review Moody's applied
a country risk analysis to loans exposed to Greece (Ba1), Portugal
(Aa2 on review for possible downgrade) and Poland (A2) which represent
10% of the current loan pool. The transaction also has exposure
to Spain (Aaa on review of possible downgrade). Furthermore,
Moody's conducted scenario analysis to assess the impact of different
work-out strategies on the recovery proceeds of defaulted loans.
Moody's downgrade action is mainly driven by the performance of
the European commercial property markets to date and Moody's expectation
regarding property value performance and lending markets going forward.
This applies to a large degree to the three largest loans in the pool.
As a result of the increased leverage of the loans and due to still inadequate
functioning lending markets, Moody's anticipates higher default
rates across the pool compared to its assessment at closing. Especially
highly leveraged loans with maturity in the short to medium term and with
properties located in Greece and Portugal are in Moody's view most
Compared to closing the subordination of the Class A Notes is almost unchanged
since none of the loans has prepaid or repaid. Moody's anticipates
a substantial amount of losses on the securitised portfolio. The
current subordination level of 24% for Moody's rated Class
A Notes provides some protection against expected losses. However,
the likelihood of higher than expected losses has increased. This
is largely driven by the decline in property values, resulting in
an increased note-to-value level for the Class A Notes of
currently 68%, based on Moody's value assumptions,
compared to 52% at closing.
3) Portfolio Analysis
Property Values. Moody's estimates that compared to the underwriter's
("U/W") values at closing the values of the properties have
declined on aggregate 28.4% until mid 2010. Based
on its property value assessment, Moody's estimates the transaction's
current weighted average ("WA") securitised loan-to-value
("LTV") ratio is approximately 94% compared to the
reported U/W LTV of 69%. Based on Moody's current
value assessment, the LTVs for the securitised loans range between
35% for the Giugliano Loan and 107% for the Project DD Loan.
Considering the additional debt in form of B-loans (amounting to
EUR 160.4 million on aggregate), the overall Moody's whole
loan leverage is on average 107%.
Moody's took into consideration an anticipated property value development,
including a gradual recovery from 2011 onwards, when analysing the
default risk at loan maturity and the loss given default for each securitised
loan. Moody's however does not expect a notable value recovery
going forward for the properties located in Greece, Spain and Portugal.
Refinancing Risk. The refinancing exposure of the loans referenced
in this transaction mainly occurs in the medium term between 2012-2014
(71% of the pool balance) and in the long term in 2017 (22%
of the current pool balance). Only one loan, the Project
Magnum Loan (7% of the pool balance), matures in the near
term (2011). Moody's expects the loans still to be highly
leveraged on their maturity dates, also taking into account the
respective B-loans. Moody's expects only a slow recovery
for the Continental European property markets and took conservative assumptions
especially regarding the property and lending markets in Greece,
Spain and Portugal. Consequently, in Moody's view,
for all the loans, the default risk at maturity has increased substantially
compared to the closing analysis.
Term Default Risk. Most occupational markets in Continental Europe
are still characterised by falling rents, increasing vacancy rates
and higher than average tenant default rates. This puts particularly
pressure on loans secured by properties with a weak tenant structure and/or
a high rate of lease expiries throughout the loan term. Most of
the loans have benefited since closing from increased rents and the low
interest environment (12 loans bear interest at a floating rate based
on the three month EURIBOR), evidenced by an increase of the WA
senior loan ICR to 1.92x in April 2010 compared with 1.77x
as of closing. Based on the respective lease profiles of the properties
securing the loans, Moody's has incorporated into its analysis an
allowance for deterioration in coverage ratios and weakening tenant qualities
on most of the loans, in turn increasing the term default risk assumption
for the respective loans.
Moody's believes that the Countrywide Kaufland Loan (32%
of the current pool balance) is weaker than the pool average from a term
default risk perspective. For the Countrywide Kaufland Loan the
term risk has increased compared to closing due to the increased voids
and the insolvencies of the three tenants Karstadt, Quelle and Woolworths
(approximately 5% of the properties rental income) which has subsequently
resulted in the breach of the loan's ICR covenant.
Overall Default Risk. Based on Moody's revised term and refinancing
default risk assessment of the underlying loan pool, Moody's
assesses the highest overall default risk for the three largest loans
in the pool, the Countrywide Kaufland, Project DD and Project
Magnum loans (on aggregate 60% of the current pool balance) and
the lowest overall risk for the Irus Poland and Beni Stabili loans (on
aggregate 11% of the current pool balance). The default
risk of all loans is predominantly driven by refinancing risk.
Overall, Moody's expects a very large portion of the portfolio to
default over the transaction term.
Portfolio Loss Exposure: Taking into account the higher than initially
assessed default risk of the loans, the most recent performance
of the commercial property markets in Continental Europe, Moody's
opinion about future property value performance and the most likely work-out
strategies for defaulted loans, Moody's anticipates a substantial
amount of losses on the securitised portfolio. In addition,
the likelihood of higher than expected losses on the portfolio has increased
substantially, resulting in a downgrade of the most senior class
Country Risk. In its country risk analysis Moody's mainly
considered the public finance situation of Greece and Portugal as an additional
risk factor for loans and their respective property security exposed to
these countries. In the event that the local economies come under
further stress, the default probability of the underlying loans
may potentially increase. In its assessment, Moody's
focused on macroeconomic factors which include in particular the state
of the lending market, the performance of the property markets,
tenant industry and other factors related to or highly correlated to the
strength of public finances. Long-term fiscal austerity
and the non-availability of credit in the event of a liquidity
crisis, amongst others, would impact the performance of the
securitised assets. In this respect Moody's conducted different
sovereign stress scenarios and analysed the likely impact on the underlying
loans. The conducted scenarios assume a different significance
with respect to the default probabilities of the loans and impact of the
properties' recovery values.
Work-Out Strategy. Moody's conducted scenario runs
assuming different work-out strategies upon the default of a loan
at maturity, especially for loans with a high likelihood of default
at maturity. Moody's generally expects that the servicer/special
servicer will most likely not pursue an immediate sale of the properties
taking into account the current market conditions. Therefore,
Moody's has assumed for loans with a high likelihood of default
at maturity, a work-out of the loan and an ultimate sale
of the properties at a later stage. However, Moody's
also took into account that there is uncertainty which work-out
strategy the servicer/special servicer will pursue. Consequently,
Moody's analysed the impact of an immediate sale in a distressed
market environment which would result in a higher expected loss on an
individual loan and on loan pool level.
4) Rating Outlook
There could be negative rating pressure in case (i) the servicer/special
servicer would pursue a fire-sell strategy of the property security
rather than a consolidating/controlled work-out; and/or (ii)
a further and more significant deterorientation of the sovereign,
property and lending markets, especially for Spain, Italy,
Portugal, Greece and Poland (40% of the loan pool).
5) Rating Methodology
The principal methodologies used in rating and monitoring the transaction
were "Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA"
June 2005, "Moody's Updates on its Surveillance Approach for EMEA
CMBS" March 2009 and "Moody's European Country Tiering for
CMBS Recovery Rate Assumptions: Focus on Key Jurisdictions"
January 2005, which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website. The
last Performance Overview for this transaction was published on 30 April
Further information on Moody's analysis of this transaction is available
on www.moodys.com. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our website, at www.moodys.com/SFQuickCheck.
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades the Class A CMBS Notes issued by Epic (Drummond) Limited to Aa3
No Related Data.
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