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Rating Action:

Moody's downgrades the Class A2, B and C EMEA CMBS Notes issued by Deco 6 -- UK Large Loan 2 plc

29 Oct 2012

London, 29 October 2012 -- Moody's Investors Service has today taken a rating action on the following classes of Notes issued by Deco 6 -- UK Large Loan 2 plc (amounts reflect initial outstanding):

....GBP259.9M Class A2 Notes, Downgraded to Caa2 (sf); previously on Jan 18, 2012 Downgraded to B1 (sf)

....GBP43M Class B Notes, Downgraded to Ca (sf); previously on Jan 18, 2012 Downgraded to Caa3 (sf)

....GBP49.1M Class C Notes, Downgraded to C (sf); previously on Jan 18, 2012 Downgraded to Ca (sf)

RATINGS RATIONALE

Today's downgrade action on the Class A2, B and C Notes reflects Moody's increased loss expectation for the pool since its last review. This is primarily due to lower property values that Moody's attributes to the collateral.

The key parameters in Moody's analysis are the default probability of the securitised loans (both during the term and at maturity) as well as Moody's value assessment for the properties securing these loans. Moody's derives from those parameters a loss expectation for the securitised pool.

Based on Moody's reassessment of the underlying property values, the pool's weighted-average (WA) securitised loan LTV ratio is 201% and on a whole loan basis it is 204%. This compares with the prior review WA LTV of 131% on the securitised pool and 133% on a whole loan basis. The value re-assessment is driven by i) the upward yield pressure for secondary properties in Europe and ii) the adverse lease rollover profile of the Mapeley loan.

The ratings of the Classes of Notes are sensitive to 1) the work-out strategies for both loans, 2) the current and expected ongoing weak refinancing market for non-prime properties and 3) challenging occupational market trends for non-prime properties. The Mapeley loan (63% of the current pool) is marked by a severe value decline on the underlying portfolio. Sizeable out of the money swap mark-to-market (MtM) costs also exist that rank senior to noteholders. With the Special Servicer pursuing a liquidation strategy up to loan maturity in July 2015, Moody's anticipates these costs must be incurred over the loan life to maximise recoveries. For the Brunel loan, Moody's considered in its analysis, two work-out scenarios including the acceptance of a discounted payoff and a repositioning of the property through active asset management.

In general, Moody's analysis reflects a forward-looking view of the likely range of commercial real estate collateral performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside an acceptable range of the key parameters such as property value or loan refinancing probability for instance, may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated when the related securities ratings were issued. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions . There may be mitigating or offsetting factors to an improvement or decline in collateral performance, such as increased subordination levels due to amortisation and loan re- prepayments or a decline in subordination due to realised losses.

Primary sources of assumption uncertainty are the current stressed macro-economic environment and continued weakness in the occupational and lending markets. Moody's anticipates (i) delayed recovery in the lending market persisting through 2013, while remaining subject to strict underwriting criteria and heavily dependent on the underlying property quality, (ii) strong differentiation between prime and secondary properties, with further value declines expected for non-prime properties, and (iii) occupational markets will remain under pressure in the short term and will only slowly recover in the medium term in line with anticipated economic recovery. Overall, Moody's central global macroeconomic scenario is for a material slowdown in growth in 2012 for most of the world's largest economies fueled by fiscal consolidation efforts, household and banking sector deleveraging and persistently high unemployment levels. We expect a mild recession in the Euro area.

MOODY'S PORTFOLIO ANALYSIS

Deco 6 -- UK Large Loan 2 plc closed in December 2005 and represents the securitisation of initially four mortgage loans originated by Deutsche Bank AG, London Branch. Currently two loans remain in the pool and the loans are secured by first-ranking legal mortgages over 21 office and retail properties. The pool exhibits an above average concentration in terms of geographic location (100% United Kingdom, based on Underwriter (UW) market value) and property type (54% retail, 46% office). Moody's uses a variation of Herf to measure diversity of loan size, where a higher number represents greater diversity. Large multi-borrower transactions typically have a Herf of less than 10 with an average of around 5. This pool has a Herf of 1.9, the same as at Moody's prior review.

The prepayment of two loans has reduced the pool balance by 51% since closing. As of the July 2012 interest payment date (IPD), the transaction's total balance was GBP272.1 million. This reduction mainly resulted from the prepayment of the largest loan at closing (the Canary Wharf loan) in March 2006. The prepayment proceeds were applied modified pro-rata. In October 2011, the GBP95.0 million St. Enoch Shopping Centre loan prepaid, with proceeds also applied modified pro-rata. As a result, the remaining outstanding balance of Class A1 (GBP61.5 million) repaid along with GBP33.7 million of the A2 Class. Going forward, the sequential payment trigger in the transaction has been breached with all principal proceeds allocated sequentially to the notes.

Both remaining loans were in special servicing at last review after being transferred due to coverage covenant breaches. The Mapeley loan (63% of the pool) transferred in October 2011 and is specially serviced by Hatfield Philips International Limited, and The Brunel Shopping Centre loan (37% of the pool) transferred in June 2011 and is specially serviced by Solutus Advisors Limited.

Moody's anticipates that both loans will likely pay interest in full in the short term. Coverage on the Brunel loan has significantly improved to greater than 2.5x, after converting to a floating interest rate at its April 2012 maturity date. The Mapeley loan remains current despite a reported Interest Coverage Ratio (ICR) below 1.0x and declining reported net rental income. Available at the borrower level is also a GBP11.6 million cash reserve that can assist loan payment requirements. Over the medium to long term, meeting the required interest payments will be challenging given the significant projected income decline as well as the reserve that can be diverted to other uses.

Appraisal reductions are believed to have led to interest shortfalls that spiked to the Class B Notes in April 2012. With only GBP745 paid to the Class B Notes, if interest had not been paid on the outstanding senior notes, a Note Event of Default would have occurred. During this IPD, the Liquidity Facility Available Balance was GBP22.0 million (adjusted for appraisal reductions) and the maximum aggregate principal amount available for drawdown was GBP23.2 million. The difference was a drawing for the mortgage loan shortfall on the Brunel loan of GBP1.2 million.

During the July IPD, appraisal reductions increased to GBP127.3 million (47% of the outstanding principal balance) from GBP22.8 million, reducing potential drawings from the liquidity facility from the GBP23.2 million (a stepped reduction based on the principal amount outstanding) to a minimum liquidity commitment of GBP9.0 million. A current drawing of GBP687,000 remains outstanding due to the ongoing Brunel loan mortgage shortfall resulting in a Liquidity Facility Available Balance of GBP8.3 million. While the shortfall peaked at GBP1.2 million in April 2012, it has reduced to the current level due to repayments from excess cash flow from the Brunel loan. Continued surplus cash should repay most of the drawings in the next IPD.

Lower projected cash inflow for the Mapeley loan may require use of the facility in the medium term. While the maximum amount available for drawdown is subject to the GBP9.0 million floor, uncertainty exists on the ability to draw on the facility due to the appraisal reduction workings.

The largest loan is the Mapeley loan (63% of the pool) which is a GBP170.9 million loan secured by an office portfolio located in regional towns spread throughout England, Scotland and Wales. Currently, the portfolio consists of 20 properties which are let to more than 20 tenants, with the top-3 tenants contributing approximately 65% of total rental income. Significant deterioration has occurred largely due to the second largest tenant vacating the Delta Point property at the end of 2011, which has negatively impacted rental cash flows. The current portfolio vacancy is 27.5% and will be further impacted with the portfolio's WA lease to expiry or break of 2.3 years. While the loan remains current, covering the nearly GBP10 million in annual interest payments will be challenging with the Special Servicer projecting a 12-month forward looking net rental income of GBP 6.1 million. This forecasted number incorporates the upcoming expiry of leases and contrasts with the annual contracted rent of GBP 12.5 million. To buffer this anticipated shortfall, a borrower level cash reserve of GBP11.6 million can be used to fund loan and property expenses. A loan interest shortfall appears unlikely in the short term; however, given that these funds can be diverted to cover other property-related initiatives and expenses, the amount could rapidly exhaust.

The workout strategy defined by the Special Servicer is enforcement and asset management with a goal to dispose of the portfolio up to the July 2015 loan maturity. To date, the loan has been accelerated and a Fixed Charged Receiver was appointed over 18 assets in England and Wales and a Scottish Receiver over the asset located in Scotland. The Special Servicer most recently appointed a new Asset Management Company over the 19 assets. The transfer of one property's security was not recorded at securitisation but was expected to complete by end of September. Moody's did not receive an update as to whether this occurred but the action will allow the appointment of an LPA Receiver.

Property disposals in line with the Special Servicer's liquidation strategy would trigger swap termination costs. The estimated MtM on the swap is roughly GBP15 million and ranks senior to noteholder payments.

The most recent appraisal of the underlying Mapeley properties is as of December 2011, and values the portfolio value at GBP74.7 million (a value decline of GBP 170.0 from securitisation). Based on this valuation, an appraisal reduction of GBP104.5 million has been realised. The valuation's severe fall in market value is largely attributed to decreases in both passing rent and the average remaining length of leases, the deteriorating physical condition of the secondary properties and weakening local investment markets. Whereas Moody's prior review included significant value deterioration citing similar factors as above, the most recent portfolio valuation incorporates further stress observed in the market. Moody's market value of GBP73.2 million aligns with the most recent valuation producing a Moody's LTV of 233%, compared to 139% at last review. Based on our current value assessment, we project a loss range of 50-75% on this loan.

The Brunel Shopping Centre loan (37% of the pool), which matured in April 2012, is secured by a shopping centre located in Swindon town centre, approximately 80 miles west of London. The loan, with a securitised balance of GBP101.3 million and whole loan balance of GBP107.1 million, transferred to special servicing in June 2011 due to a DSCR breach. The ICR on the whole loan has markedly increased to 2.65x as of the July IPD, from 0.96x at last review. The coverage improvement resulted from the fixed rate interest rate swap expiring at the April 2012 loan maturity. The loan has now converted to a floating interest rate and the lower interest payments have started repaying the unpaid interest and liquidity draws from the January and April IPD's. Per the Q2 2012 Quarterly Investor report from the Special Servicer, the shopping centre vacancy climbed to 12%, compared to 6% at last review. Despite increased vacancy, gross rent remains stable around GBP1.9 million per quarter. Based on the most recent 2011 valuation of GBP87.3 million, an appraisal reduction of GBP22.8 million has been realised. The Special Servicer recently replaced the Asset Manager and is also currently assessing an offer by the Sponsor to buy the property at a discount. Moody's whole loan LTV ratio of more than 150% compares to 123% at last review. The current value reflects both weakening secondary property values over the next two years, along with a depressed retail climate. We therefore project a loss range of 25-50% on this loan.

Portfolio Loss Exposure: Moody's expects a very large amount of losses on the securitised portfolio, stemming mainly from the adverse performance of the loans in special servicing which make up 100% of the pool. The likelihood of higher than expected losses on the portfolio has resulted in today's rating action. Given the existing credit enhancement and their respective payment priority in the capital structure (given sequential trigger breach), the Class A2 Notes have been downgraded to a level commensurate with our loss expectations. For the Class B & C Notes, the prospect for repayment of principal has further diminished; therefore, the ratings have been lowered to Ca and C, respectively.

The methodology used in this rating was Moody's Approach to Real Estate Analysis for CMBS in EMEA: Portfolio Analysis (MoRE Portfolio) published in April 2006. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Other factors used in this rating are described in European CMBS: 2012 Central Scenarios published in February 2012.

The updated assessment is a result of Moody's on-going surveillance of commercial mortgage backed securities (CMBS) transactions. Moody's prior assessment is summarised in a press release dated 18 January 2012. The last Performance Overview for this transaction was published on 04 September 2012.

In rating this transaction, Moody's used both MoRE Portfolio and MoRE Cash Flow to model the cash-flows and determine the loss for each tranche. MoRE Portfolio evaluates a loss distribution by simulating the defaults and recoveries of the underlying portfolio of loans using a Monte Carlo simulation. This portfolio loss distribution, in conjunction with the loss timing calculated in MoRE Portfolio is then used in MoRE Cash Flow, where for each loss scenario on the assets, the corresponding loss for each class of notes is calculated taking into account the structural features of the notes. As such, Moody's analysis encompasses the assessment of stressed scenarios.

Moody's ratings are determined by a committee process that considers both quantitative and qualitative factors. Therefore, the rating outcome may differ from the model output.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources.

However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Tiffany Putman
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Oliver Moldenhauer
Vice President - Senior Analyst
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades the Class A2, B and C EMEA CMBS Notes issued by Deco 6 -- UK Large Loan 2 plc
No Related Data.
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