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Rating Action:

Moody's downgrades the Class A and Class B CMBS Notes issued by Gemini (Eclipse 2006-3) plc

11 Aug 2010

GBP 645 million of CMBS affected

Frankfurt am Main, August 11, 2010 -- Moody's Investors Service has today downgraded the Class A Notes and the Class B Notes issued by Gemini (Eclipse 2006-3) plc (amounts reflecting the initial outstanding amounts):

GBP615M Class A Commercial Mortgage Backed FRN due 2019, Downgraded to Caa1 (sf); previously on Jun 17, 2009 Downgraded to Ba3 (sf)

GBP30M Class B Commercial Mortgage Backed FRN due 2019, Downgraded to Ca (sf); previously on Jun 17, 2009 Downgraded to Caa2 (sf)

Liquidity Facility Agreement dated 14 November 2006 relating to Gemini (Eclipse 2006-3) plc ("Liquidity Facility"), Affirmed at Aa3 (sf); previously on Nov 5, 2009 assigned Aa3 (sf)

Moody's does not rate the Classes C, D, and E Notes issued by Gemini (Eclipse 2006-3) plc (the "Issuer").

A) Transaction Overview

Gemini (Eclipse 2006-3) plc closed in November 2006 and represents the true-sale securitisation of an initially GBP 918.9 million senior loan (the "Senior Loan") secured by a portfolio of initially 36 commercial properties throughout the UK. The predominant property types were retail (59%) and office (21%). The GBP 105.8 million junior loan (the "Junior Loan") 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 Senior Loan and the Junior Loan combined are the initially GBP 1,041.4 million whole loan ("Whole Loan"), which matures in July 2016. Following a property disposal, the Senior Loan currently amounts to GBP 850.4 million and the Junior Loan to GBP 105.2 million. The predominant property types are still retail (55%) and office (21%).

At closing, the Whole Loan had a loan-to-value (LTV) ratio of 84.3% based on the underwriter's (U/W) market value for the properties of GBP 1,235 million. The interest only loan is swapped on the borrower level from a floating interest rate into a fixed interest rate using an interest rate swap maturing in 2026, 10 years after loan maturity. In September 2008, the portfolio was valued at GBP 801.4 million, resulting in a A Loan LTV of 106.1%. Including the mark-to-market (MTM") of the hedging agreements, the A Loan LTV is 122% per April IPD, and the ICR is 0.94x. The Loan is in special servicing since August 2008. Since income from the property portfolio is insufficient, interest payments under the loan and the hedging agreements are partially paid by the Liquidity Facility.

In November 2009, Moody's assigned a Counterparty Instrument Rating of Aa3 (sf) to the Liquidity Facility.

2) Rating Rationale Summary

Today's downgrade mainly resulted from significantly decreased net cash flows received from the properties and Moody's expects further fluctuations going forward around a level below its initial assumptions. This assumption leads to increased expected future Liquidity Facility drawings and an decreased value assessment of the portfolio.

The affirmation of the Counterparty Instrument Rating is based on the seniority of the Liquidity Facility to the Notes. Even though Moody's value has deteriorated since the Counterparty Instrument Rating was assigned, the potential drawings under the Liquidity Facility continue to be covered by property value even in very stressful property value scenarios.

3) Rating Outlook

Given the default of the single loan in this transaction, the ratings of the Class A and Class B Notes are directly driven by the value of the property portfolio, both positively and negatively. Therefore the ratings will be linked to (i) the performance of the Special Servicer and the asset manager to improve the cash flow situation and stability of the property portfolio, and (ii) the market development with respect to secondary properties in the UK.

Moody's current expectation remains that the loan will not be accelerated before its maturity in 2016. In case legal aspects or property management related reasons would make an immediate acceleration necessary, the ratings would have to take the then current MTM of the hedging arrangements into account. In its current ratings, Moody's has reflected the expectation of decreasing MTM values of the hedging arrangements over time.

Moody's believes that currently the risk of a depletion of the Liquidity Facility is still limited, but this is again depending on the future performance of the property portfolio. In case Moody's were to change its assessment of future net cash flow, this could put the ratings on the Notes under pressure given a more imminent risk of a default of the Notes due to lack of liquidity.

4) Portfolio Analysis

Property Values and Cash Flows. The net cash flows received from the property portfolio have decreased significantly over the last year, mostly due to (i) a moderate decrease in gross rental income, (ii) increased property cost, and (iii) increased non-property related cost. In Moody's view the net cash flows will continue to fluctuate both upwards and downwards, but Moody's mid-term expectation is a stabilisation at around GBP 42 million annually. Based on this assumption, Moody's has revised its current value to GBP 516 million. In contrast to UK prime properties, Moody's does not expect this portfolio to recover significantly in value from its trough value. Hence Moody's property value at the loan maturity in 2016 is expected to be around GBP 527 million. Taking into account the MTM of the hedging arrangements of GBP 130.2 million per May 2010, Moody's current A Loan LTV is 190%.

The Borrower Level Interest Rate Hedging. The borrower has entered into an interest rate swap and a collar that matures in 2026. Upon termination of the hedges due to a default of the borrower or refinancing of the loan, the swap counterparty ranks senior to the Senior Loan in terms of swap breakage costs. Given the current low interest rate environment, the hedging instruments are in the money for the counterparty. As of May 2010, the MTM amounted to GBP 130.2 million. At the same time, even assuming constant interest rates, the negative swap exposure would decline over time as the remaining tenor of the swap shortens. Moody's continues to assume that the existence of the swap and the currently significant potential termination costs will impact the Special Servicer's enforcement strategy and make an outright sale of the properties unlikely. As swap termination costs are also payable upon a partial prepayment of the loan, the swap structure complicates selected property disposals for the foreseeable future.

Portfolio Loss Exposure. Moody's expects this transaction to be among the most affected transactions in EMEA CMBS. The loss expected from the single loan is very high. In addition, the senior ranking hedging arrangements increase the loss potential for noteholders. Nevertheless, the MTM of the hedging arrangement should reduce over time and thereby reduce the loss severity to investors.

The current subordination of 33.1% for the Class A and 29.8% for Class B provide some protection against losses on the Senior Loan. In its rating action, Moody's took also the Class A and Class B Notes Note-to-Value ratios ("NTV") into account. The NTV based on Moody's current value are approximately 136% for Class A and 141% for Class B, taking into account the latest MTM of the hedging arrangements. Nevertheless, Moody's expects these NTV to decrease over time, mostly due to a decline in the MTM of the hedging instruments and positive fluctuation of property values.

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 27 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).

Frankfurt am Main
Marie-Jeanne Kerschkamp
MD - EMEA Structured Fin
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Oliver Schmitt
Asst Vice President - Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany

Moody's downgrades the Class A and Class B CMBS Notes issued by Gemini (Eclipse 2006-3) plc
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