EUR 933.5 million of CMBS affected
Frankfurt, November 02, 2009 -- Moody's Investors Service has today downgraded the Class A and Class B
Notes issued by Windermere XIV CMBS Limited (amounts reflect initial outstandings):
EUR836.43M Class A Commercial Mortgage-Backed Notes due
2018, Downgraded to Baa1; previously on Sep 15, 2008
Aaa Placed Under Review for Possible Downgrade
EUR97.1M Class B Commercial Mortgage-Backed Notes due 2018,
Downgraded to B1; previously on Sep 15, 2008 Aa3 Placed Under
Review for Possible Downgrade
Moody's does not rate the Class C, Class D, Class E,
Class F and Class X Notes issued by Windermere XIV CMBS Limited.
Today's rating action concludes the review for possible downgrade that
was initiated on 15 September 2008 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
Windermere XIV CMBS Limited closed in November 2007 and represents the
true-sale securitisation of 8 mortgage loans originated by Lehman
Brothers Commercial Paper Inc. United Kingdom Branch, Lehman
Brothers Bankhaus AG London Branch and Lehman Brothers Bankhaus AG Milan
Branch. The loans are secured directly and indirectly by first-ranking
legal mortgages over 596 commercial properties (currently 383) located
in France (30.9% of initial underwriter's value),
Finland (30.2%), and Italy (25.1%).
The properties use is mainly office (75.5%) and retail (14.5%),
the rest being warehouse (5%), mixed use (4.5%)
and other (1.4%).
Since closing, approximately 17.6% of the initial
pool repaid, through partial prepayments and scheduled amortisation.
None of the loans have fully repaid or prepaid. The three largest
loans in the pool are the Haussmann Loan, the Fortezza II Loan and
the Sisu Loan, which contribute 28.4%, 27.5%
and 24.6% of the total securitised balance, respectively.
The smallest loan is the Harbour Loan, which contributes 1.3%
of the total current securitised loan balance. The current loan
Herfindahl index is 4.44, compared to 4.30 at closing.
Since closing, the Sisu Loan and Queen Mary Loan have partially
prepaid following the disposal of properties. The Fortezza II Loan
balance has also decreased due to the repayment of a VAT loan.
All the loans provide scheduled amortisation except for the GSI Loan.
Scheduled amortisation is applied sequentially to the Notes whereas balloon
repayments and disposal proceeds are applied 50% pro-rata
/ 50% sequential to the Notes. As a consequence the credit
enhancement levels have only slightly improved since closing. The
Class A currently exhibits a credit enhancement of 27.3%
(24.8% at closing) and the Class B 17.7% (16.0%
As of the last interest payment date, the Fortezza II and Harbour
Loans were on the Servicer watchlist, the first one because of a
cash sweep trigger and the second one due to the 2010 loan maturity date.
However, all the loans were current and no loan was in special servicing.
2) Rating Rationale
The downgrade of the Class A and Class B 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 three largest loans in the portfolio
accounting for on aggregate 80.5% of the current portfolio
i.e. the Haussmann Loan, the Fortezza II Loan and
the Sisu Loan.
As outlined in more detail below, today's rating action is mainly
(i) The recent performance of the European commercial property markets;
(ii) Moody's opinion about future property value performance.
Driven by, in most cases, a higher default risk assessment
at the loan maturity dates, Moody's now anticipates that a large
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 substantial 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 levels for the Class A Notes of 27.3%
and Class B Notes of 17.7% provide 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.
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 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 a like for like basis on average by approximately 29%
to date (ranging from a 45% decrease for the property securing
the Harbour Loan to a 19% increase for the portfolio securing the
Sisu Loan). Looking ahead, Moody's anticipates further declines
until 2010 and 2011, resulting in, on average, a 38%
value decline from the closing U/W value to Moody's trough value (ranging
from a 49% decline for the property securing the Harbour Loan to
a 23% increase for the property securing the GSI Loan).
Moody's has taken this property value assessment, including the
moderate recovery from 2011/2012 onwards, 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 transaction's mid-2009 weighted average ("WA") securitised
loan-to-value ("LTV") ratio was 94.8% 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 108.4% in 2011 and will only gradually recover thereafter.
Based on Moody's anticipated trough values, the LTVs for the securitised
loans range between 91% (GSI Loan) and 124% (Fortezza II
Loan). As three loans still have additional debt in the form of
B-loans, based on estimated trough values, the overall
whole loan leverage is on average 114.5%.
Refinancing Risk. With only the Harbour loan (currently 1.3%
of the pool) due for repayment in January 2010, the transaction's
exposure to loans maturing in the short term (2009 and 2010) is low.
60% of the pool is due for repayment in 2014 (Haussmann,
Fortezza II and GSI Loans) while 29% is due in 2012 (Sisu and Queen
Mary Loans). The remaining 9% are due to repay in 2011 and
2013. 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 of the loans, the default risk at
maturity has increased considerably 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 are subject to significant lease rollover
over the next few years (for example, the Haussmann Loan,
where 100% of the leases expire before loan maturity) could be,
in Moody's view, 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 quality,
in turn increasing the term default risk assumption for most 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 large 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 GSI Loan (4.05%
of current portfolio balance) has currently the lowest default risk,
while the Queen Mary Loan (4.80% 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
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. Due to legal specificities,
the work out process in the three jurisdictions where the properties are
located can be lengthy and costly. As for the closing analysis,
Moody's has incorporated into its analysis higher recovery costs
and longer recovery timing than for other pan-European CMBS transactions.
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 substantial amount of
losses on the securitised portfolio, which will, given the
anticipated work-out strategy for defaulted loans, crystallise
only towards the end of the transaction term.
4) Lehman Brothers Insolvency and Subsequent Events
In its rating review, Moody's also analysed and concluded on the
credit impact of the Chapter 11 filing of Lehman Brothers Holding Inc
("LBHI") on the transaction. Lehman Brothers entities
were acting as counterparty in the following capacities: Swap Provider,
Swap Guarantor, Security Agent, Loan Facility Agent,
Capex Provider and VAT Loan Lender.
The original Swap and Swap Guarantee hedging agreements allowed the Issuer
to exchange the cashflows it receives from the loans into 3 month Euribor
cashflows to match the Notes interest rate. On 10 July 2009,
Moody's received confirmation that new swaps had been entered into with
HSBC Bank plc (Aa2, P-1), effectively replicating the
economic and legal characteristics of the original Lehman Brothers swaps.
The HSBC Bank swaps became effective from 15 April 2009, and the
Issuer did not have to bear any replacement costs. Furthermore,
the replacement swaps are substantially in line with Moody's published
criteria entitled "Framework for De-Linking Hedge Counterparty
Risks from Global Structured Finance Cashflow Transactions Moody's Methodology",
10 May 2007. As a result, Moody's views the replacement of
the swaps as being credit neutral to the Issuer, all else being
The transaction is also exposed to Lehman Brothers as Loan Security Agent
and Loan Facility Agent. Regarding these roles, Moody's
learned on 27 July 2009 that replacements are currently underway.
The cost of replacing the Agents will be a senior ranking waterfall cost,
however Moody's understands it will not impact the classes of Notes
which it rates.
Lehman Brothers entities also act as Capex Provider and VAT Loan Lender.
Moody's based its analysis on the assumption that the capex amounts
will no longer be available, and the VAT Loan for the Fortezza II
Loan has been repaid.
5) 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 27 October
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
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades the Class A and the Class B CMBS Notes issued by Windermere XIV CMBS Limited
Asst Vice President - Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454