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
- 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
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
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%
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
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
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
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 email@example.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).
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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