EUR 570 Million of EMEA CMBS affected
Frankfurt, May 25, 2010 -- Moody's Investors Service has today downgraded the Class A Notes issued
by Talisman-4 Finance plc (amount reflects initial outstandings):
EUR570M Class A Commercial Mortgage Backed Floating Rate Notes due 2015,
Downgraded to Aa3; previously on May 19, 2010 Aaa Placed On
Review for Possible Downgrade
Moody's has not assigned ratings to the Class X, Class B,
Class C, Class D, Class E, Class F and Class G Notes
issued by Talisman-4 Finance plc.
1) Transaction Overview and Performance Update
This transaction represents the securitisation of initially eight commercial
mortgage loans originated by ABN AMRO Bank N.V. (now Royal
Bank of Scotland plc). The Loans were initially secured by first
ranking legal mortgages on 98 commercial properties as well as 11 residential
properties and 20 mixed-use properties located in Germany.
By gross rental income, the portfolio comprised 41.2%
office properties, 33.8% retail properties,
7.7% nursing homes, 6.2% residential
and multifamily properties, 5.8% logistics properties
and 5.3% other.
Since closing, two loans have fully prepaid. As of April
2010, there were six Loans secured by 51 properties remaining in
the pool with an outstanding balance of approximately EUR 454.4
million. The remaining loans are not equally contributing to the
portfolio. The largest loan (DT-12 Loan) represents 38.1%
of the current portfolio balance, while the smallest loan (DC Properties
Loan) represents 3.7%. The DT-12 Loan and
the Valentine Loan (16.9%) are cross-collateralised.
The current Loan Herfindahl index is 4.1 compared to 5.1
at closing. According to the investor report as of April 2010,
the portfolio comprises 48.0% office properties and 41.1%
mixed-use properties, 6.4% multifamily properties,
4.2% logistics properties and 0.3% other properties.
As of April 2010, all loans in the portfolio were current.
However, following the re-valuation of the property securing
the DC Properties Loan, this Loan has breached the LTV covenant
and is now in default. The Barthonia Loan (22.7%
of the current pool) is currently in breach of its ICR Cash Trap trigger
and is on the servicer's watchlist. The transaction has not yet
breached its sequential payment trigger.
2) Rating Rationale
Today's rating action for the Class A Notes follows a detailed re-assessment
of the loan and property portfolio's credit risk that has been prompted
by (i) the deteriorating performance of the second largest loan,
the Barthonia Loan, which generates lower than initially expected
rental cash flows and (ii) the higher than expected value decline of the
property securing the DC Properties Loan as indicated by the latest re-valuation
and the subsequent default of the loan. Moody's main focus was
on property value declines, term default risk, refinancing
risk and the anticipated work-out timing for potentially defaulting
As outlined in more detail below, today's rating action is mainly
(i) The worse than expected performance of the second largest loan;
(ii) The most recent performance of the German commercial property markets;
(iii) Moody's opinion about future property market performance; and
(iv) The adverse refinancing profile of the transaction.
Moody's anticipates that a substantial portion of the portfolio will default
over the course of the transaction term. Coupled with the negative
impact of reduced property values, Moody's expects a considerable
amount of losses on the securitised portfolio. Those expected losses
will, given the anticipated work-out strategy for defaulted
loans, crystallise towards the end of the transaction term considering
that all of the loans except for the DIV Dandelion Loan (11.8%
of the current pool) mature in 2013 with the legal final maturity of the
Notes only two years later in 2015.
The current subordination level for the Moody's rated Class A Notes provides
protection against those expected losses. However, the likelihood
of higher than expected losses has increased as well, thereby resulting
in today's rating action.
Since closing, two loans amounting to 39.4% of the
initial Loan portfolio fully prepaid. The prepayment proceeds were
applied to the Notes on a modified pro-rata basis, i.e.
50% sequential and 50% pro rata between all Note classes.
The loan portfolio provides for limited scheduled amortisation over time.
As a result, the credit enhancement level of the Class A Notes increased
from 22.9% at closing to 30.3%.
3) Moody's Portfolio Analysis
Property Values. Property values across German markets have declined
until the beginning of 2010. Moody's expects them to remain flat
and in some instances continue to decline until early 2011. Compared
to the underwriter's ("U/W") values at closing, Moody's estimates
that the values of the properties securing this transaction will decline
on average by approximately 19.4% until the trough in 2010
(ranging from a 28.1% decline for the property securing
the DC Properties Loan to a 13.6% decline for the portfolio
securing the DT-12 Loan). Looking ahead, Moody's anticipates
the values to remain relatively constant until maturity of the loans.
Moody's has taken this property value assessment into account when assessing
the loans' refinancing risk and potential loss given default.
Based on the above property value assessment, Moody's estimates
that the current transaction's weighted average ("WA") securitised LTV
is 96.4% compared to the reported U/W LTV of 79.4%.
Based on Moody's values, the LTVs for the securitised loans range
between 88.7% (Valentine Loan) and 113.9%
(DIV Dandelion Loan). As the Barthonia Loan has additional debt
in the form of a B-Loan (amounting to EUR 13.9 million),
based on estimated Moody's values, the overall Whole Loan leverage
is on average 99.5%.
Refinancing Risk. The transaction's exposure to loans maturing
in the short term is considerable. 11.8% of the pool
matures in April 2011 (DIV Dandelion Loan). The remaining loans
mature in 2013. As Moody's expects property values in Continental
Europe to only slowly recover from 2011 onwards, all loans will
be still highly leveraged at their respective maturity dates. Consequently,
in Moody's view, for all of the loans, the default risk at
maturity has increased substantially compared to the closing analysis.
Term Default Risk. The occupational markets in Germany are currently
characterised by falling rents, increasing vacancy rates and higher
than average tenant default rates. In addition, two loans
in the pool are secured by properties which are subject to significant
lease rollover risk over the next few years (Valentine Loan and Barthonia
Loan, which represent on aggregate 39.6% of the pool).
These loans are especially exposed to weakening occupational markets.
Moody's has incorporated into its analysis an allowance for deterioration
in coverage ratios and weakening tenant quality, in turn increasing
the term default risk assumption for these loans.
Barthonia Loan. The loan represents the senior part of an initially
seven year loan, which pays a floating interest rate, hedged
with a swap at borrower-level. The scheduled amortisation
of 1.25% per year during the loan term will be allocated
to the junior loan tranche only, i.e. the securitised
loan portion will not amortise over the loan term. The property
securing the loan is a mixed use asset (retail, office and residential)
located within a residential area of Cologne, Germany. The
current vacancy rate of the property is 11.5% compared to
no vacancies at closing. As of the latest investor report,
the net operating income decreased from EUR 9.1 million at closing
to EUR 8.3 million. The latest reported ICR is at 1.32x,
which is below the cash trap trigger level of 1.40x. Therefore,
surplus on the rent account is currently trapped and the loan is on the
servicer's watchlist. The rental cash flow performance is below
Moody's expectations at closing. In addition, as mentioned
above, the loan is subject to lease rollover risk over the next
few years. Moody's has incorporated a higher than initially expected
default risk for this loan into its current analysis.
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 the loans is predominantly
driven by refinancing risk. In Moody's view, the DIV Dandelion
Loan and the Barthonia Loan have the highest default risk, while
the G-24 Loan (6.8% of the current portfolio) has
the lowest risk of defaulting.
Concentration Risk. The portfolio securitised in this transaction
exhibits an above average concentration in terms of property types and
Work-Out Strategy. In scenarios where a loan defaults,
Moody's current expectation is that the special servicer will most likely
not pursue an immediate fire sale of the property in today's market conditions.
Therefore, Moody's has assumed that in most cases, upon default,
a sale of the mortgaged properties and ultimate work-out of the
loan will occur at a later point in time, but taking into account
the legal final maturity date of the Notes in 2015.
Increased Portfolio Loss Exposure. Taking into account the increased
default risk of the loans, the most recent performance of the commercial
property markets in Germany, Moody's opinion about future property
value performance and the most likely work-out strategies for defaulted
loans, Moody's anticipates a considerable amount of losses on the
securitised portfolio, which will, given the in most cases
back-loaded default risk profile (refinancing risk) of the loans
and the anticipated work-out strategy for potentially defaulting
loans, crystallise only towards the end of the transaction term.
4) 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 15 February
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 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).
Senior Vice President
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 Talisman-4 Finance plc
Vice President - Senior Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454