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Rating Action:

Moody's upgrades Class A EMEA CMBS Notes issued by Epic (Culzean) plc

23 Jan 2012

GBP 355 million of CMBS affected

Frankfurt am Main, January 23, 2012 -- Moody's Investors Service has today upgraded the Class A Notes issued by Epic (Culzean) plc (amount reflects initial outstanding):

Issuer: Epic (Culzean) p.l.c.

....GBP355M Class A Notes, Upgraded to Aaa (sf); previously on Jul 3, 2009 Downgraded to A1 (sf)

Moody's does not rate the Class B, Class C, Class D, Class E, Class F and Class X Notes.

RATINGS RATIONALE

Today's upgrade action reflects the substantial increase in credit enhancement for the Class A Notes subsequent to the re-payment of the largest of originally four reference obligations (Metro, 62% of the pool per July 2011) at its scheduled maturity date in October 2011. The proceeds will be allocated fully sequentially at the January 2012 Note IPD, which will lead to a credit enhancement level of about 93% for the Class A Notes compared to 35% at closing of the transaction. Given the Note balance is below 50% of the principal amount outstanding at closing, all proceeds will be allocated fully sequentially going forward, further strengthening the level of credit enhancement for the Class A Notes. This level of credit enhancement provides a buffer to absorb our loss expectations for the Prime A (43% of the current pool of three reference obligations), Friends First (37%) and Prime B (20%) reference obligations.

The Friends First reference obligation has not been repaid at its original maturity date in April 2011. The servicer has extended the maturity date three times by one quarter to allow time for the negotiations currently ongoing. Moody's is modelling a default of the reference obligation in its quantitative analysis and is also taking into account the significant lease rollover risk in its market value assumption. The Prime A and Prime B reference obligations are both subject to maturity in October 2016. The Final Maturity Date of the Notes is in October 2019.

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.

The Prime A and Prime B reference obligations are both subject to an A/B split. Based on a reassessment of the property values, the weighted average (WA) Moody's loan-to-value (LTV) ratio on the securitised pool is 91% and on the whole loan is 104%. This compares with the underwriter's ("U/W") current WA LTV of 81% on the securitised pool and with Moody's W/A LTV of 102% on the securitised pool per Moody's last rating action on this transaction in July 2009. Moody's notes that the Moody's LTV ratios are at or above 90% on a whole loan basis for all three reference obligations, translating into medium probability of default at maturity (10%-25%) for the Prime A and Prime B reference obligations.

All three reference obligations are current. The Friends First reference obligation is on the servicer's watchlist due to the approaching extended maturity in January 2012 and the breach of the LTV covenant set at 75%. Moody's expects significant losses (25%-50%) on this reference obligation.

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.

As noted in Moody's comment 'Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns' (28 November 2011), the risk of sovereign defaults or the exit of countries from the Euro area is rising. As a result, Moody's could lower the maximum achievable rating for structured finance transactions in some countries, which could result in rating downgrades.

MOODY'S PORTFOLIO ANALYSIS

Epic (Culzean) plc closed in February 2007 and represents the synthetic securitisation of initially four reference obligations originated by Royal Bank of Scotland plc and secured by first-ranking legal mortgages over initially 17 commercial properties located across the UK. The properties were predominantly shopping centres (75% by underwriter's market value), retail (12%) and office (13%). 93% of the properties were located in London & Surrey with the remainder located in Birmingham.

As of the October 2011 Note IPD, the transaction's total pool balance was GBP 102.5 million, down by 81% since closing due to repayments and prepayments. Following the repayment of the Metro reference obligation and the disposal of two properties of the Prime A reference obligation, the total number of properties has decreased to ten. Based on the U/W market value as of October 2011, the pool of the remaining three reference obligations exhibits an above average concentration in terms of geographic location (100% UK) and property type (24% office, 23% retail, 53% mixed office and retail). Moody's uses a variation of Herf to measure diversity of loan size, where a high 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 2.8, higher than at Moody's prior review.

None of the three reference obligations is in special servicing. The Friends First reference obligation is on the servicer's watchlist due to the approaching extended maturity in January 2012 and the breach of the LTV covenant set at 75%. Moody's expects significant losses (25%-50%) on this reference obligation.

Prime A is the largest reference obligation (43%). It is secured by a portfolio of three retail properties in prime retail locations in and around London (two properties in New Bond Street) and one office property in Westminster. All properties are fully let. About 60% of rental income is from UK government department Home Office (lease maturity in September 2027 with no breaks). The portfolio benefits from a beneficial lease expiry profile. Moody's expects a medium risk of default (10%-25%) at maturity in October 2016 based on 90% Moody's whole loan LTV at maturity in October 2016.

The second largest reference obligation Friends First contributes to 37% of the current pool and is secured by a single office property in fringe CBD location in Birmingham. The grade II listed chateau has been redeveloped in the late 1980s. The law firm DLA Piper contributes to 45% of the current rental income and has significant lease breaks options in 2013. The property is 10% vacant. The original maturity in April 2011 has been extended three times by a quarter to January 2012. Negotiations with the borrower are ongoing. Moody's is modelling a default for this reference obligation and assumes an LTV of 126%.

Prime B is the smallest of the three reference obligations (20%). It is secured by five retail properties in prime retail locations in Kensington, Notting Hill and Covent Garden. All properties are fully let and subject to five tenants and subject to a favourable lease expiry profile. Moody's expects a medium risk of default (10%-25%) at maturity in October 2016 based on 94% Moody's whole loan LTV at maturity in October 2016.

Portfolio Loss Exposure: Moody's expects a significant amount of losses on the securitised portfolio, stemming mainly from the Friends First reference obligation. Moody's expects losses for Friends First to be realised in the medium term. Given the default risk profile and the anticipated work-out strategy for potentially defaulting loans, the expected losses for Prime A and Prime B are likely to crystallise only towards the end of the transaction term.

RATING METHODOLOGY

The methodologies used in this rating were Moody's Approach to Real Estate Analysis for CMBS in EMEA: Portfolio Analysis (MoRE Portfolio) published in April 2006, and Update on Moody's Real Estate Analysis for CMBS Transactions in EMEA published in June 2005. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Other factors used in this rating are described in EMEA CMBS: 2011 Central Scenarios published in February 2011.

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 3 July 2009. The last Performance Overview for this transaction was published on 15 September 2011.

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, and public 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.

Stephan Ebe
Associate Analyst
Structured Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Christophe de Noaillat
Associate Managing Director
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades Class A EMEA CMBS Notes issued by Epic (Culzean) plc
No Related Data.
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