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Rating Action:

Moody's downgrades the Class A Notes issued by Titan Europe 2007-1 (NHP) Limited

22 Dec 2008
Moody's downgrades the Class A Notes issued by Titan Europe 2007-1 (NHP) Limited

GBP435.85 million of CMBS Affected

Frankfurt, December 22, 2008 -- Moody's Investors Service has today downgraded the Class A Notes issued by Titan Europe 2007-1 (NHP) Limited (amount reflecting the initial outstanding):

- GBP435,850,000 Class A Commercial Mortgage Backed Floating Rate Notes due October 2017 downgraded to Aa2; previously on 30 May 2007 assigned Aaa.

Moody's does not rate the Class X, Class B, Class C, Class D and Class E Notes.

Titan Europe 2007-1 (NHP) Limited represents a true-sale securitisation of a GBP638 million senior loan (the "Senior Loan") secured by a portfolio of 297 care home properties located across the UK. The borrowers have also been granted a GBP534 million junior loan (the "Junior Loan") which has not been securitised in this transaction but is secured by the same properties. The relationship between the Senior Loan lenders and Junior Loan lenders is governed by an intercreditor agreement. The whole loan is interest-only and matures in January 2009 with a one year extension option subject to financial covenants (whole loan ICR of minimum 1.05x and whole loan LTV of maximum 92.7%) being met. For the ICR Test, the in-place cash reserve initially amounting to GBP17.5 million can be taken into account. At closing, both loans combined represented an LTV ratio of 88% for the whole loan based on the underwriter's market value and 104% based on Moody's initial model value. Moody's highlighted in its pre-sale report the refinancing risk and the high overall leverage as the central weaknesses of the transaction.

The downgrade has been prompted by (i) the updated valuation for the property pool as of November 2008, which results in a value of GBP930 million compared to GBP1,338 million at closing of the transaction and GBP 1,338 million when the portfolio was revalued in April 2008; (ii) Moody's adjusted expectations with respect to property value declines going forward and (iii) subdued lending market activities that reduce the likelihood that the loans get refinanced in January 2009. In addition, Moody's has changed its view with respect to potential sponsor support backing the whole loan.

As a result of the revaluation in November 2008, the whole loan LTV increased to 125%. This LTV calculation also takes into account the current value of the interest rate swap. As of November 2008, the swap was in the money (GBP9.6 million) for the borrower and was therefore deducted from its liabilities. Considering the deterioration of the UK property market conditions, Moody's estimates that a further value decline of approximately 15% to around GBP800 million can be expected in 2009. This translates into a Moody's expected LTV ratio of around 145% on the whole loan over the course of 2009. The care home properties are fully let on long term leases and the rental income generated by the underlying properties has been stable since closing; therefore to date the value decline has been mostly driven by a widening of property yields and by the change in the perceived credit quality of the dominating tenant and operator Southern Cross Healthcare Limited (81% of all properties).

Due to the breach of the LTV covenant, a loan event of default occurred as the sponsor, Quatar Investment Authority, did not cure the covenant breach within 10 business days. A standstill agreement between the senior borrower, the mezzanine borrower, the special servicer, the senior lenders and the mezzanine lenders was agreed that ends on 14 January 2009, one day before the loan maturity date.

The transaction is fully exposed to the current adverse market and tight financing environment. Moody's has determined a very high likelihood that the loan will remain in default. The credit risk in relation to ongoing rental cashflow enabling the borrower to service its interest payments due on the Senior Loan is largely influenced by the following factors: (i) the dominating tenant (Southern Cross; lease term until 2028) recently had significant refinancing problems which were finally solved by restructuring its debt, but there is still uncertainty with respect to its credit worthiness; (ii) there is a cash reserve in place that will cover any shortfalls on the whole loan debt service until the end of 2010 if the rental income remains stable; (iii) given the considerable size of the Junior Loan (45.6% of the whole loan), a potential rent reduction of some degree would still enable the borrower to pay the debt service on the Senior Loan. The credit risk of the Senior Loan is negatively influenced by the high absolute amount of the whole loan that needs to be refinanced considering Moody's expectation of very limited lending activity in 2009 and 2010 and the expected high leverage of around 145% based on the whole loan amount.

Moody's notes that upon a loan event of default, the cash flow waterfall switches to fully sequential between the Senior Loan and the Junior Loan. Also, the legal final maturity of the Notes is in January 2017, i.e. seven years beyond the loan maturity date. Based on this, Moody's tested for its base case several scenarios assuming different recovery strategies, recovery timing, recovery costs and property values, which included (i) the scenario of an immediate sale of the entire property portfolio; and (ii) the scenario of disposals over time assuming an administration of the properties by the special servicer until the legal final maturity of the Notes. To date, in Moody's opinion and taking into account the current state of the UK commercial property market, the most likely action by the special servicer will be collecting the rental cashflow and servicing the Senior Loan for the foreseeable future until the property markets have sufficiently recovered. In Moody's view, the updated rating appropriately reflects the expected loss of the Class A Notes, considering the Class A note-to-value ratio of approximately 54% based on Moody's expected value over the course of 2009. There is rating sensitivity with regards to further actions by the relevant parties and further negative developments in relation to the property values and / or the largest tenant.

The principal methodology used in rating and monitoring the transaction is "Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA" June 2005, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Credit Policy & Methodologies directory.

London
Christian Aufsatz
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Alexander Zeidler
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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