GBP 194 Million of CMBS affected
London, 22 September 2009 -- Moody's Investors Service has today downgraded the following class of
Notes issued by Perseus (European Loan Conduit No. 22) plc (amounts
reflect initial outstandings):
GBP194M Class A2 Commercial Mortgage Backed Floating Rate Notes due 2014,
Downgraded to Aa3; previously on Sep 15, 2009 Aaa Placed Under
Review for Possible Downgrade
At the same time, Moody's has affirmed the Aaa rating of the Class
A1 Notes Issued by Perseus (European Loan Conduit No. 22) plc.
Moody's does not rate the Class A3, Class B, Class C and Class
D Notes issued by European Loan Conduit No. 22 p.l.c.
Today's rating action concludes the review for possible downgrade that
was initiated for the Class A2 Notes on the 15 September 2009.
The rating action 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
Perseus (European Loan Conduit No. 22) plc represents the securitisation
of five commercial mortgage loans originated by Morgan Stanley Bank International
Limited that are secured by first ranking mortgages on 368 mainly office
and retail properties located across the UK.
Since closing, there have been no changes in the portfolio composition
except for minor prepayments on the Mapeley Columbus Loan and the Major
Balle Loan due to disposals of properties. The loans are not equally
contributing to the portfolio: the largest loan (the Mapeley Columbus
Loan) accounts for approximately 59% of the pool's principal balance,
while the smallest loan (the Ladysmith Shopping Centre Loan) represents
6%. The current loan Herfindahl index is 2.5,
compared 2.7 to closing. The loans are secured by 368 office
(52%) and retail (48%) properties. 41% of
the properties are located in London and the South East and 15%
in South West England.
To date, the sequential payment trigger has not been breached.
The proceeds from prepayments and balloon repayments are allocated to
the notes on a modified pro-rata basis, based on certain
loan buckets. The largest loan in the pool (Mapeley Columbus -
59% of current pool) will be allocated pro-rata between
the Class A1, Class A2, Class A3 and Class B Notes only while
the second largest loan (Columbus Court -- 14% of
current pool) will be allocated pro-rata between the Class A1 and
Class A2 Notes only. In Moody's view the repayment allocation of
the second largest loan is positive for the Class A2 Notes as this reduces
the amount of senior ranking Class A1 Notes and also reduces Class A2
Notes without decreasing the absolute amount of available subordination.
2) Rating Rationale
The downgrade of the Class A2 Notes follows a detailed re-assessment
of the loans 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 its review, Moody's
reassessed each loan in the transaction.
As outlined in more detail below, today's rating action is mainly
driven by the most recent performance of the UK commercial property markets
and 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 significantly reduced property values,
Moody's expects a considerable amount of losses on the securitised portfolio.
Those expected losses will, given the back-loaded default
risk profile and the anticipated work-out strategy for defaulted
loans, crystallise only towards the end of the transaction term.
The current subordination levels for Moody's rated classes of 60%
and 22% for the Class A1 and the Class A2 Notes, respectively
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 on the Class
Since closing no loan has prepaid. At the same time, the
loan portfolio only provides for limited scheduled principal repayment
over time. As a result, unlike other large multi-borrower
transactions ("EMEA CMBS conduit deals"), the Class A1 and the Class
A2 Notes do not benefit from a meaningful increase in subordination levels
In addition, the Class A2 Notes are subordinated to the Class A1
Notes in the capital structure. Due to this additional leverage,
the higher portfolio risk assessment has a relatively bigger impact on
the expected loss of the Class A2 Notes than on the expected loss of the
Class A1 Notes.
3) Moody's Portfolio Analysis
Property Values. Property values across the UK have declined significantly
and are expected to continue to decline at least until 2010. Moody's
estimates that compared to the underwriter's ("U/W") values at closing,
the values of the properties securing this transaction have declined by
on aggregate 19% until the beginning of 2009 (ranging from a 12%
value decrease for the Mapeley Columbus Loan to a 38% decline for
the Yate Loan). Looking ahead, Moody's anticipates further
declines until 2010, resulting in a 25% value decline compared
to the U/W value at closing (ranging from 17% decline for the Mapeley
Columbus Loan to 47% decline for the Yate Loan).
Based on this property value assessment, Moody's estimates that
the transaction's early-2009 weighted average ("WA") securitised
loan-to-value ("LTV") ratio was 69.1% compared
to the reported U/W LTV of 57.4%. Due to the further
envisaged declines, the WA LTV will increase in Moody's opinion
to 75.7% in 2010 and will only gradually recover thereafter.
Based on Moody's anticipated trough values, the LTVs for the
securitised loans range between 66.5% (Mapeley Columbus
Loan) and 109.9% (Yate Loan). As all loans have significant
additional debt in the form of B-loans (amounting to GBP 244.9
million), the overall whole loan leverage is on average 112%,
based on estimated trough values.
Moody's has taken the anticipated property value development, including
a gradual recovery from 2011 onwards, into account when analysing
the default risk at loan maturity and the loss given default for each
Refinancing Risk. The transaction has substantial exposure to loans
maturing in the short-term with 28% of the current portfolio
maturing in 2010. The remaining balance matures in 2012.
As Moody's expects property values in the UK to only slowly recover from
2011 onwards, all loans will be still highly leveraged at their
respective maturity dates, also taking into account the B-loans.
Consequently, in Moody's view, for most of the loans,
the default risk at maturity has increased substantially compared to the
closing analysis. The smallest loan, the Ladysmith Shopping
Centre Loan (6% of current pool) is the first to mature in July
2010 followed by the Columbus Court Loan (14% of current pool)
and Major Belle Loan (8% of current pool) in October 2010.
Based on Moody's anticipated value declines, all loans will
be exposed to high loan-to--value ratios at their respective
refinancing dates. For the Ladysmith Shopping Centre Loan and the
Major Belle Loan, Moody's has assumed a high likelihood of the loans
defaulting at their maturity dates whereas for the Columbus Court Loan,
Moody's has assumed that there is a high likelihood of the loan
being extended until 2012. In Moody's view, the servicer
may favor a loan extension in 2010 as this loan generates stable rental
cash flows through the sole tenant, Credit Suisse (Aa1, P-1),
on a long term lease with an expiry in November 2024.
Term Default Risk. The occupational markets in the UK are currently
characterised by falling rents, increasing vacancy rates and higher
than average tenant default rates. Taking into account the lease
profile of the respective loans, the Yate Loan, the Major
Belle Loan, and the Ladysmith Loan could be in Moody's view especially
exposed to weakening occupational markets. The balance of the portfolio
benefits from long-dated leases to strong credit tenants.
Based on the current lease profile, Moody's has incorporated into
its analysis an allowance for deterioration in coverage ratios on some
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 all loans is predominantly driven by
refinancing risk. In Moody's view, the Yate Loan has currently
the highest default risk, while the largest loan in the portfolio
(Mapeley Columbus) has the lowest risk of defaulting.
Concentration Risk. The portfolio securitised in Perseus (European
Loan Conduit No. 22) plc exhibits above average concentration in
terms of property types (52.6% office) and property location
(100% UK and 41% London and the South East). In Moody's
view, this limits the potential benefits from different markets
performing differently over time.
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.
Increased Portfolio Loss Exposure. Taking into account the increased
default risk of the loans, the most recent performance of the UK
commercial property markets, Moody's opinion about future property
value performance and the most likely work-out stratergy for defaulted
loans, Moody's anticipates a substantial amount of losses on the
securitised portfolio, which will, given the back-loaded
default risk profile and the anticipated work-out strategy for
defaulted loans, crystallise only towards the end of the transaction
4) 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 26 August
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 email@example.com.
To obtain a copy of Moody's New Issue 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).
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades the Class A2 CMBS Notes issued by Perseus (European Loan Conduit No. 22) plc
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454