EUR 336 million of CMBS affected
London, 02 October 2009 -- Moody's Investors Service has today downgraded the following class of
Notes issued by Taurus CMBS (Pan-Europe) 2006-3 PLC (amount
reflects initial outstandings):
EUR336M Class A Commercial Mortgage Backed Floating Rate Notes due 2015
Notes, Downgraded to Aa2; previously on Apr 8, 2009 Aaa
Placed Under Review for Possible Downgrade
Moody's does not rate the Class B, Class C, Class D,
Class X1 and Class X2 Notes issued by Taurus CMBS (Pan-Europe)
2006-3 PLC. Today's rating action concludes the review for
possible downgrade that was initiated for on 8 April 2009 and takes Moody's
updated central scenarios into account, as described in Moody's
Special Report "Moody's Updates on Its Surveillance Approach
for EMEA CMBS".
1) Transaction and Portfolio Overview
Taurus CMBS (Pan-Europe) 2006-3 PLC closed in November 2006
and represents the securitisation of initially 7 mortgage loans originated
by Merrill Lynch. The loans were secured directly and indirectly
by first-ranking legal mortgages over initially 29 (currently 16)
commercial properties located in Switzerland (69.8% of initial
underwriter's market value), France (18.4%)
and Germany (11.8%). The properties use was mainly
retail (49.6%) and office (44.7%).
Since closing, approximately 30% of the initial pool repaid
or prepaid. The Dubendorf Loan (12% of the initial portfolio
balance) repaid in full in September 2009, two months after its
scheduled maturity date in July 2009. In addition, some partial
prepayments occurred in relation to the EPIC Loan (following the release
of security on the EPIC 2 Property in September 2009) and on the Phone
Loan (partially prepaid several times since closing following the disposal
of 11 properties). In addition, all the loans but the Triumph
Loan provide for scheduled amortisation. The two largest loans
in the pool are now the EPIC Loan and the Trafalgar Loan which contribute
44% and 19% to the total securitised balance. The
smallest loan is the Vich Brig Loan which contributes 4% to the
portfolio. The current loan Herfindahl index is 3.6,
compared to 4.8 at closing.
Since closing, all the scheduled amortisation has been applied 50%
sequential and 50% pro-rata to the notes. The various
prepayments of the Phone Loan were applied fully pro-rata.
On the next interest payment date ("IPD"), the prepayment that occurred
in relation to the EPIC Loan in September 2009 will be allocated fully
pro-rata. In contrast, the repayment of the Dubendorf
Loan that occurred in September 2009 will be applied 50% sequential
/ 50% pro-rata. Since closing and accounting for
the latest payments, the Class A subordination level has marginally
increased from 25.4% to 27.3%. As of
the last IPD, all loans were current. Only the Dubendorf
Loan was on the watch list as its maturity date was extended from 28th
July to 28th August 2009.
2) Rating Rationale
The downgrade of the Class A Notes follows a detailed re-assessment
of the loan and property portfolio's credit risk. Hereby,
Moody's main focus was on property value declines, term default
risk, refinancing risk and the anticipated work-out timing
for potentially defaulting loans in the future. In its review,
Moody's especially concentrated on the largest loans in the portfolio
accounting for on aggregate 88% of the current portfolio i.e.
the EPIC Loan, the Trafalgar Loan, the Triumph Loan and the
As outlined in more detail below, today's rating action is mainly
(i) the refinancing profile of the transaction
(ii) the performance of the European commercial property markets;
(iii) Moody's opinion about future property market performance; and
(iv) potential increase of credit quality dispersion within the portfolio
coupled with weak sequential pay triggers.
Driven by, in most cases, a higher default risk assessment
at the loan maturity dates, Moody's now 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 mostly towards the end
of the transaction term.
The current subordination level for the Class A Notes of 27% provides
protection against those expected losses. However, the likelihood
of higher than expected losses on the portfolio has increased substantially,
which results in today's rating action. In addition, as the
sequential redemption event triggers have not been met and not expected
to be met in the near future, it is unlikely that the credit enhancement
available to Class A will increase over the short term. Moody's
notes that the sequential redemption trigger events in this transaction
are relatively loose in comparison to other EMEA large multi-borrower
CMBS transactions: 20% of the closing securitised balance
needs to be in default for two consecutive interest payment dates.
Given the refinancing profile of the portfolio, it is likely that
any repayment occuring in 2010 and 2011 will still be allocated modified
pro-rata or even pro-rata, even if other loans default
at their maturity. From the viewpoint of the most senior class,
this increases the risk of credit quality dispersion in the portfolio
not being mitigated by sequential amortisation and increasing subordination.
3) Moody's Portfolio Analysis
Property Values. Property values across the Continental European
markets have declined, in some markets significantly, until
mid 2009 and are expected to continue to decline at least until 2010-2011.
Moody's estimates that compared to the underwriter's ("U/W") values at
closing, the values of the properties securing this transaction
have declined on average by approximately 10% until mid 2009 (ranging
from a 20% decline for the Phone Loan to a 6% decline for
the EPIC Loan). Looking ahead, Moody's anticipates further
declines until 2010 and 2011, resulting in, on average,
a 16% value decline from the closing U/W value to Moody's
trough value (ranging from a 24% decline for Triumph Loan to a
8% decline for the Vich Brig Loan). Moody's has taken
the anticipated property value development, including a gradual
recovery from 2011 onwards, into account when analysing the default
risk at loan maturity and the loss given default for each securitised
Based on this property value assessment, Moody's estimates that
the transaction's early-2009 weighted average ("WA")
securitised loan-to-value ("LTV") ratio was
74.9% compared to the current U/W LTV of 67.1%.
Due to the further envisaged declines, the WA LTV will increase
in Moody's opinion to 77.9% in 2010 and will only
gradually recover thereafter. Based on Moody's anticipated
trough values, the LTVs for the securitised loans range between
72.5% (Phone Loan) and 86.54% (Trafalgar Loan).
As 5 loans have additional debt in the form of B-loans (amounting
to EUR 49.9 million on aggregate), based on estimated trough
values, the overall whole loan leverage is on average 90.3%.
Refinancing Risk. Following the repayment of the Dubendorf Loan,
the transaction has no exposure to loans maturing in 2009. However,
four loans accounting for approximately 74% of the pool are due
to refinance in 2010 and 2011 (30% in 2010 and 44% in 2011).
The remaining loans have maturity dates in 2013. Moody's adjustment
of the refinancing risk assessment is primarily due to the decline in
property values and its expectations that commercial real estate lending
will remain scarce over the next 2 to 3 years. As Moody's expects
property values in the Continental European markets 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 loans, the default risk at maturity has increased substantially
compared to the closing analysis.
Term Default Risk. The occupational markets in Continental Europe
are currently characterised by falling rents, increasing vacancy
rates and higher than average tenant default rates. In particular,
loans secured by Properties which will experience significant lease rollover
over the next few years (Triumph, Phone and EPIC) could be,
in Moody's view, especially exposed to weakening occupational markets.
As a consequence, Moody's has incorporated into its analysis an
allowance for deterioration in coverage ratios and weakening tenant qualities,
in turn increasing the term default risk assumption for some of the loans.
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 all loans is predominantly
driven by refinancing risk. In Moody's view, the Triumph
Loan (17% of current portfolio balance) has currently the lowest
default risk, while the Trafalgar Loan (8% of the current
portfolio) has the highest risk of defaulting.
Concentration Risk. The portfolio securitised in this transaction
exhibits an average concentration in terms of property types and property
Property Disposals. Moody's notes that the Phone Loan and the EPIC
Loan have witnessed several prepayments that were driven by property disposals
(Phone Loan) or security releases (EPIC Loan) since closing. The
resulting loan prepayments were allocated pro-rata to the notes
and unless the sequential redemption event triggers are met, future
prepayments will continue to be allocated pro-rata. In relation
to the EPIC Loan, it is not excluded that there may be further prepayments
that will result in potential security releases. According to the
loan documentation, prepayments that are not the result of property
disposals do not trigger a release premium. As such, those
prepayments and security releases will most likely not, as already
witnessed in 2009, reduce the overall leverage of the EPIC Loan.
However, they would reduce the overall loan balance, potentially
increasing the refinancing prospects of the remaining loan. In
Moody's view, due to the lack of a release premium being payable,
those potential repayments and security releases increase the risk of
negative selection and credit quality dispersion within the loan and the
portfolio. This risk is from the viewpoint of the most senior noteholder
not sufficiently mitigated as future prepayments of the EPIC Loan will
most likely continue to be allocated pro rata to the Notes.
Work-Out Strategy. In scenarios where a loan defaults,
Moody's current expectation is that the servicer will most likely not
pursue an immediate sale of the property in today's depressed 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.
Increased Portfolio Loss Exposure. Taking into account the increased
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 considerable amount of
losses on the securitised portfolio, which will, given the
anticipated work-out strategy for defaulted loans, crystallise
only towards the mid to end of the transaction term.
4) Rating Methodology
The principal methodologies used in rating and monitoring the transaction
are "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 are available on 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 20 August
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 firstname.lastname@example.org.
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
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Moody's downgrades the Class A CMBS Notes issued by Taurus CMBS (Pan-Europe) 2006-3 PLC to Aa2
Asst Vice President - Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454