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Rating Action:

Moody's downgrades two classes of EMEA CMBS Notes issued by European Property Capital 3 plc

19 Jun 2012

London, 19 June 2012 -- Moody's Investors Service has today taken rating action on the following classes of Notes issued by European Property Capital 3 plc (amounts reflect initial outstanding):

....EUR32.1M Class C Notes, Downgraded to Caa3 (sf); previously on Jul 11, 2011 Downgraded to Ba3 (sf)

....EUR31.312M Class D Notes, Downgraded to Ca (sf); previously on Feb 17, 2011 Downgraded to Caa3 (sf)

Moody's does not rate the Class X Notes.

RATINGS RATIONALE

Today's downgrade action reflects Moody's increased loss expectation for the remaining loan in the pool, the Randstad loan. The uptick in loss expectation is primarily due to Moody's lowered valuation of the collateral securing this defaulted loan.

The ratings on the Class A and the Class B Notes are affirmed because the respective credit enhancement levels of 54% and 36% are sufficient to maintain the ratings despite the increase in Moody's pool expected losses. The Class A Notes, which now benefit from sequential payment of principal proceeds were downgraded in July 2011due to exposure to Portugal related risks. Since this last review, the loan with exposure to Portugal repaid and proceeds distributed sequentially. However, despite the increase in Class A credit enhancement, the upgrade potential is limited as the transaction is now in the tail period (please see Moody's methodology report, 'Rating Caps for CMBS in the Tail Period', published October 2011). Additionally, Moody's has limited visibility around the details of the disposal strategy being pursued by the borrower and Special Servicer.

Based on Moody's reassessment of the underlying property values, the pool's weighted-average (WA) securitised loan LTV ratio is 114% and on a whole loan basis is 131%. This compares with the prior review WA LTV of 79% on the securitised pool and 87% on a whole loan basis. However, at Moody's previous review, two loans were outstanding. The other outstanding loan, the Algarve loan which was secured by a Portuguese shopping centre and represented 33% of the pool at the review, had a Moody's loan-to-value (LTV) of 55.4%. Therefore, when comparing Moody's LTV on a like-for-like basis, the loan-to-value (LTV) ratio on the securitised portion of the Randstad loan was 90%, compared to the current 114%. In Moody's view, the value re-assessment is justified by i) the upward yield pressure for secondary properties in the Netherlands, ii) the portfolio's adverse rollover profile, and iii) concerns that the Special Servicer has a limited timeframe in executing its consensual sales process because of the May 2015 final legal maturity. As this loan undergoes work-out, Moody's expects losses on this loan, ranging between 0-25%.

As a result of both the likelihood of higher than expected losses on the pool and the transaction's sequential payment structure, the ratings on the junior classes are more sensitive should loan performance deteriorate beyond expectation. The ratings of the Classes of Notes are sensitive to the Randstad loan's 1) work-out strategy, 2) significant value volatility due to increasingly weak Dutch occupational market trends for non-prime properties and 3) current adverse leasing profile.

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.

As the Euro area crisis continues, the rating of the structured finance notes remain exposed to the uncertainties of credit conditions in the general economy. The deteriorating creditworthiness of euro area sovereigns as well as the weakening credit profile of the global banking sector could negatively impact the ratings of the notes. For more information please refer to the Rating Implementation Guidance published on 13 February 2012 "How Sovereign Credit Quality May Affect Other Ratings". Please also refer to the recent rating actions on banks published on 15 February 2012, (please see "Moody's Reviews Ratings for European Banks" and "Moody's Reviews Ratings for Banks and Securities Firms with Global Capital Markets Operations" for more information).

MOODY'S PORTFOLIO ANALYSIS

European Property Capital 3 plc closed in December 2005 and represents the securitisation of initially five loans originated by JP Morgan Chase Bank, N.A. Four loans have repaid since securitisation, representing a 76% paydown, and the pool has not experienced any realised losses to date. Since last review, one loan, the Algarve loan with a balance of EUR 53.3 million repaid with proceeds applied sequentially to Class A on the February 2012 IPD. The remaining loan is secured by first-ranking legal mortgages on 17 properties (originally 20) that are all located in the Netherlands. One property, comprising two buildings had a partial sale of one building while the remaining building is being marketed. The main property types are office (15 properties representing 82% by UW value) and industrial (2 properties representing 18% by UW value). The portfolio is exposed to relatively older properties, with the majority built between 1980 - early 1990's. Per May 2012 rent roll, the current portfolio vacancy rate is between 16% - 17%. The Dutch office market currently has some of the highest vacancy rates in Europe. The properties are exposed to markets with vacancy rates ranging from 14% - 18% based on CBRE Q1 2012 Dutch Office Market report.

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 1.0, less than the 1.8 at Moody's prior review.

The outstanding balance of Randstad Loan is EUR 113.9 million that is split between a securitised portion of EUR 98.7 million and a B-Note of EUR 15.2 million. The 17 property portfolio has more than 100 outstanding leases and the weighted average remaining lease length to first break is 3.7 years. The latest investor report (as of May 2012) exhibits a strong whole loan interest coverage ratio ("ICR") of 2.45X. Further, the loan payments due to the B lender and all surplus rent are swept to pay down the A loan. The A loan will continue to benefit as long as excess cash is not negatively impacted by rollover exposure on the portfolio.

The loan is in default because it did not repay at its scheduled maturity in August 2010 and was transferred to special servicing in October 2010. According to the Special Servicer, the lenders and the borrower have agreed to work together on a consensual sale process, involving a 3-phase marketing programme where Phase 1 began in September 2011 with the marketing of 11 of the properties. As of the May 2012 IPD, three were fully sold off and one partially (one property contained two buildings, one of which sold while the other is being marketed). In comparing the average sales price achieved for the disposed assets against the 2010 and 2011 appraised values, the sale prices were substantially lower and reflect the progressively deteriorating conditions in the Dutch office market, particularly for secondary properties. TheThe current market conditions have prompted the Special Servicer to review the marketing strategy adopted last year. Moody's portfolio value of EUR 86.8 million considers the (i) secondary quality of the properties, (ii) some potential rental income deterioration caused by the adverse lease profile (nearly 38% of the rental income breaks or expires by the end of 2013), and iii) uncertainty with regard to execution of the planned disposal process. Based on Moody's value, the loan-to-value (LTV) ratio on the securitized portion is 114%. This compares to 81% based on the most recent underwriter's value.

Portfolio Loss Exposure: Moody's expects a significant amount of losses on the securitised portfolio, stemming mainly from the uncertain work-out strategy for the remaining Randstad loan in a difficult and declining Dutch commercial real estate market. The expected losses are likely to crystallise only towards the end of the legal final maturity date.

The principal 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 11 July 2011. The last Performance Overview for this transaction was published on 01 June 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.

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

Andrea Daniels
Senior Vice President
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 two classes of EMEA CMBS Notes issued by European Property Capital 3 plc
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