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Rating Action:

Moody's downgrades the Class A CMBS Notes issued by Epic (Brodie) plc to A1

21 Jul 2010

EUR 181 million of EMEA CMBS affected

London, 21 July 2010 -- Moody's Investors Service has downgraded the Class A Notes issued by Epic (Brodie) plc (amount reflects initial outstandings):

....EUR580M Class A Floating Rate Notes due 2016 Notes, Downgraded to A1; previously on Mar 30, 2010 Aaa Placed On Review for Possible Downgrade

Moody's does not rate the Class B, C, D, E, F, G and X Notes issued by Epic (Brodie) plc.

1) Transaction and Portfolio Overview

The transaction represents the fully funded synthetic securitisation of initially five commercial mortgage loans (reference obligations) originated by The Royal Bank of Scotland (RBS), Aa3/P-1. The mortgage loans were all originated by RBS between January and June 2006 and were, as of closing, secured by 70 commercial properties located in Finland, Germany, France and Spain.

Since the closing date, three of the loans have prepaid in full and the proceeds were allocated modified pro-rata to the notes, resulting in an improvement of the credit enhancement level for the Class A Notes from 23.3% at closing to now 40.7%. The mortgage loans which prepaid in full were the Kamppi loan, the La Roca loan and the Las Rozas loan, which accounted at closing for 52.2% of the total loan pool. The composition of the remaining loan and property pool has changed and the pool is now significantly more concentrated than at closing; the loan pool Herfindahl index reduced to 1.4. The two mortgage loans remaining are:

- The Terry loan, with EUR 247.3 million outstanding A-loan principal accounting for 80.9% of the current pool, is secured by 10 properties in Germany, primarily retail (71.4% by value), office (18.6%) and leisure (10.0%).

- The Kenmore loan, with EUR 57.7 million outstanding A-loan principal equals 19.1% of the pool and is presently secured by 27 light industrial warehouse properties in France. There have been significant property disposals since closing, which resulted in a de-leveraging of the loan.

According to the latest investor report as of April 2010, both loans are current. However, the Terry loan continues to be on the servicer's watchlist due to its April 2011 maturity and the pressure expected on the loan-to-value (LTV) ratio upon receipt of a new valuation.

In terms of Note level cash flow allocation, prepayments, disposal proceeds and repayments are allocated modified pro-rata to 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.

2) Rating Rationale

Today's rating action concludes the review for possible downgrade of the Class A Notes, which Moody's initiated on 30 March 2010. In its loan-by-loan review Moody's main focus was on property values, the loans' maturity default risk and the possible impact of different loan work-out strategies on the recovery proceeds. Moody's conducted a What-If analysis for a scenario in April 2011 assuming that only the Kenmore loan is refinanced successfully while the Terry loan fails to be repaid and considered that there is an increased uncertainty which work-out strategy the servicer / special servicer will pursue.

Moody's rating downgrade action is mainly driven by the performance of the commercial property markets in Germany and France and the European lending markets to date and Moody's expectation regarding these markets going forward. As a result of the increased leverage of the loans and due to still inadequate functioning lending markets, Moody's assesses a higher default risk for the remaining loans in the pool compared to its assessment at closing. This applies especially to the Terry loan which has in Moody's view a very high refinancing default probability.

Driven by the higher default risk assessment on the loan maturity dates, Moody's now anticipates that a very large 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 high amount of losses on the securitised portfolio. A large portion of the expected losses will, given the default risk profile and the anticipated work-out strategy for defaulted loans, crystallise in the medium term.

Compared to closing, the subordination of the Class A Notes has increased significantly from 23.3% to currently 40.7%, which provides protection against aforementioned expected losses on the underlying reference obligations. However, the likelihood of higher than expected losses on the portfolio has increased substantially and the increase in credit enhancement is not sufficient to balance the increased loss risks stemming from (i) increased loan and property concentration; (ii) bifurcation of the loan pool that is not balanced by the sequential payment triggers; (iii) increased leverage due to the property value decline of 36% (weighted average on Moody's value) compared to closing; (iv) significantly higher refinancing default risk; and (v) uncertainty regarding the timing and amount of recoveries in case of a loan default. The Class A Notes-to-value ("NTV") ratio is currently 60% based on a Moody's property pool value of EUR 300.0 million.

Due to the circumstance that both remaining loans mature on the same day (20 April 2011), the repayment proceeds of a loan that successfully repays get allocated modified pro-rata to the Notes even in case the other loan defaults at the same time. This is because the Note cash flow allocation only changes once a credit event has happened and a credit event notice has been issued. In Moody's opinion, the sequential payment triggers incorporated in Epic (Brodie) plc are weaker than seen in other EMEA CMBS comparable conduit transactions. Moody's does neither assign a high chance to a full repayment of the Class A Notes in April 2011 nor a high probability of a significant NTV reduction for the Class A Notes.

3) Rating Outlook

There could be negative rating pressure in case the Terry loan is not refinanced in April 2011 and the servicer / special servicer would pursue a fire-sale strategy of the property security rather than a consolidating / controlled work-out in view of the legal final maturity date of the Notes in January 2016. For more details, see further below Moody's What-If analysis regarding the work-out strategy.

4) 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 36% until mid 2010. Based on its property value assessment, Moody's estimates that the transaction's current weighted average ("WA") securitised loan-to-value ("LTV") ratio is approximately 105% compared to the reported U/W LTV of 77%. Based on Moody's current value assessment, the LTV is 112% for the Terry loan and 72% for the Kenmore loan, reflecting the bifurcated loan quality of the pool. Considering the additional debt in form of B-loans (amounting to EUR 27.8 million on aggregate), the overall Moody's whole loan leverage is 114% (weighted average).

Refinancing Risk. The refinancing exposure of the loans referenced in this transaction occurs only in the near term as both loans mature on 20 April 2011. In Moody's view, for both loans, the default risk at maturity has increased substantially compared to the closing analysis. Moody's assesses an elevated refinancing default risk for the Kenmore loan, which has benefited from prepayments and release premiums due to property disposals and features a good exit-debt-yield ("EDY") of 11% that provides a buffer for upcoming lease expiries in the medium term. The likelihood that the Terry loan fails to refinance in 2011 is very high given (i) its very high leverage, (ii) tight EDY of 6%, and (iii) the large loan amount considering current lending conditions.

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. While the aforementioned also affects the securitised loans, Moody's sees limited risks for a debt service payment shortfall under the loans before their maturity given (i) the whole loan ICR of 1.2x for the Terry loan and 2.7x for the Kenmore loan; (ii) sufficient tenant diversity; and (iii) limited lease roll over risk over the remaining loan term. Moody's notes that both loans are fully hedged and that the interest rate swaps are co-terminus with the loan maturities.

Overall Default Risk. Moody's believes that the Terry loan (81% of the current pool balance) is significantly weaker than the Kenmore loan from a default risk perspective. The default risk of both 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 recent performance of the commercial property markets in Germany and France, Moody's opinion about future property value performance and the likely work-out strategies for defaulted loans, Moody's anticipates a very high 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 of Notes.

What-If Analysis. Moody's conducted a What-If analysis for a scenario in April 2011 when the Kenmore loan successfully refinanced and the Terry loan failed to be repaid. The servicer advised that in such scenario the proceeds of the Kenmore loan would be allocated modified pro-rata, resulting in a slightly increased Moody's Class A NTV as the principal allocation rule does not fully outweigh the high leverage of the remaining loan. A slight increase of the NTV levels and the increase of the loan pool concentration (the Notes are then backed by a single loan pool and fewer properties) would not necessarily lead to further rating sensitivity (subject to the work-out strategy for then remaining defaulted loan, see below).

Work-Out Strategy. Moody's central scenario for such a loan pool is that special servicers, upon loan default, follow an orderly work-out strategy with a sale of the mortgaged properties at a later point in time considering the legal final maturity of the Notes. To calculate the expected loss given default for the loans, Moody's uses a Monte Carlo simulation that anticipates property value developments. Moody's assumed a gradual value recovery from 2011 onwards when calculating the loss given default and notes that the property value recoveries will depend largely on the chosen work-out strategy.

Moody's conducted in its What-If analysis several scenario runs assuming different work-out strategies upon the default of the Terry loan at maturity. Moody's expects that this servicer / special servicer will likely not pursue an immediate sale of the properties taking into account the current market conditions. Therefore, Moody's base case assumption is a work-out of the loan and an ultimate sale of the properties in the medium term. Moody's also took into account that there is uncertainty which work-out strategy this servicer / special servicer will pursue. Consequently, Moody's analysed the impact of a somewhat quicker-than-expected property sale under current market conditions and incorporated this in the rating decision. However, a fire-sale strategy and/or a sale in a more distressed market environment would result in a higher expected loss on the loan and Note level, which could lead to negative rating pressure.

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 and "Moody's Updates on its Surveillance Approach for EMEA CMBS" March 2009, 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 2010.

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.

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).

London
Christian Aufsatz
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Alexander Zeidler
Asst Vice President - Analyst
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 (Brodie) plc to A1
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