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Fitch Downgrades DECO 6's CMBS Notes
March 7, 2013 / 9:28 AM / 5 years ago

Fitch Downgrades DECO 6's CMBS Notes

March 7 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings has downgraded DECO 6 - UK Large Loan 2 plc’s notes, as follows: GBP174.3m class A2 due July 2017 (XS0235683223) downgraded to ‘CCsf’; Recovery Estimate (RE) 60% from ‘CCCsf’; RE 70% GBP34.4m class B due July 2017 (XS0235683736) downgraded to ‘Csf’ from ‘CCsf’; RE 0% GBP39.3m class C due July 2017 (XS0235684114) downgraded to ‘Csf’ from ‘CCsf’; RE 0% GBP24.1m class D due July 2017 (XS0235684544) affirmed at ‘Csf’; RE 0% KEY RATING DRIVERS The downgrades are driven by continued declines in the performance of the commercial property assets securing the two remaining loans, both currently in default and special servicing. This weakening has further reduced the likelihood of the class A2 notes being repaid in full, as reflected in the ‘CCsf’ rating and reduced RE (60%). Fitch does not expect the class B, C or D notes to receive any principal recoveries from the loans, which corresponds with the ‘Csf’ ratings and 0% REs. The Mapeley loan (62.8% of the pool) is secured by 20 secondary/tertiary regional office properties. These offices have declined in reported value by between 7% and 89% since closing in March 2006, and overall by 66%. This has been driven by an extremely weak income profile. The weighted average lease length to expiry is 5.56 years, while three-quarters of in-place income will expire prior to loan maturity in July 2015, pushing vacancy higher than the current 32.7%. With a reported LTV of 242%, the loan will suffer a substantial loss. The loan defaulted in October 2011 following a breach of the 1.15x interest coverage ratio (ICR) covenant. This test currently reports (forward-looking) ICR at 0.63x, which is representative of the degree to which the portfolio has weakened while in Mapeley’s custody. Interest shortfalls are met by drawing on a reserve account established by the servicer in July 2009, and initially funded by setting aside 50% of surplus income (after interest payments and property expenses). This account now has a balance of GBP11.6m, which should ensure swap payments continue to be made for a couple of years. The issuer’s security interests in the loan have been enforced by the special servicer, Hatfield Philips, which appointed Jones Lang LaSalle and Deloitte to act as administrative receivers. The process of liquidating the portfolio is likely to be a drawn-out affair. However, demand for regional office stock is unlikely to recover in the medium term, over which time several of the properties may be practically obsolescent. With so much of the remaining value tied up in the existing leases, postponing sales in a bid to minimise senior-ranking swap breakage costs - swap value was last reported at GBP12.2m - may expose noteholders to considerably higher losses. The Brunel loan (37.2%) defaulted in April 2012. It is secured by the 490,113 sq ft Brunel shopping centre in Swindon town centre. This asset was last revalued in October 2011, revealing a fall in value of 33% from closing. While there was evidence of re-letting in October 2012 (three leases have recently been signed on a short-let basis and another under a 10-year lease), the centre has struggled to reduce vacancy, now standing at 8% and much of which concentrated in the Brunel Arcade extension completed in 2009. This has not been helped by three retailers in the centre failing since the last rating action. Fitch believes that a lack of occupational demand across secondary retail locations will constrain income generation, and that the centre is therefore unlikely to see a significant upturn in value. However, bond maturity is in July 2017, and there is less pressure to resolve this loan than the Mapeley one. At its loan maturity in April 2012, Brunel switched to a floating rate of interest, which caused the ICR to increase to 2.91x from 0.85x. While rates stay low, this allows for some loan amortisation to occur from rental cash sweep. RATING SENSITIVITIES The distressed characteristics of the Mapeley loan in particular already severely constrain the ratings of all classes of notes, which are accordingly highly insensitive to foreseeable changes in performance. Fitch will continue to monitor the performance of the transaction. A performance update report will shortly be available at www.fitchratings.com.

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