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Rating Action:

Moody's downgrades the Class A and the Class B CMBS Notes issued by Windermere XIV CMBS Limited

02 Nov 2009

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% at closing).

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 driven by:

(i) The recent performance of the European commercial property markets; and

(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 location.

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 equal.

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 2009.

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).

London
Christian Aufsatz
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Oliver Moldenhauer
Asst Vice President - Analyst
Structured Finance Group
Moody's Deutschland GmbH
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
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