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TEXT-S&P lowers rtgs in CMBS deal FCC Proudreed Properties 2005
May 30, 2012 / 12:31 PM / 5 years ago

TEXT-S&P lowers rtgs in CMBS deal FCC Proudreed Properties 2005

PARIS PROPERTIES (75% OF THE POOL)

The Paris Properties loan, the larger of the two loans, has an outstanding balance of EUR248.9 million, and matures in August 2014. The loan is a bullet loan (i.e., it has no scheduled amortization payable during its term).

At closing, the issuer entered into arrangements to hedge the loan against interest rate increases.

In May 2012, the servicer reported a 12-month backward-looking interest coverage ratio (ICR) of 4.26x and a three-month forward-looking ICR of 5.07x. These ratios compare with a loan event of default ICR covenant of 1.20x. Although the loan-to-value (LTV) ratio will not be tested before August 2012, the December 2010 market value implies a 63.2% LTV. This ratio compares with a loan event of default LTV covenant of 70%.

The loan is now secured against a portfolio of 74 mixed-use properties spread across France (compared with 99 assets at closing). The remaining portfolio mainly consists of warehouse/distribution facilities (83% by lettable area) with a large concentration in the Ile-de-France region (43% by lettable area). With a reported occupancy rate of 93.3%, occupancy levels have remained resilient since issuance (92.2% at closing). The assets are multi-tenanted with the top 10 tenants contributing approximately 37% of the annual gross rental income. We consider that the income remains exposed to inherent risks associated with lease break options. However lease terms for commercial properties in France are typically short.

PROUDREED FRANCE (25% OF THE POOL)

The Proudreed France loan, the smaller of the two loans, has an outstanding balance of EUR83.4 million, and matures in August 2014. The loan is a bullet loan (i.e., it has no scheduled amortization payable during its term).

At closing, the issuer entered into arrangements to hedge the loan against interest rate increases.

In May 2012, the servicer reported a 12-month backward-looking ICR of 3.69x and a three-month forward-looking ICR of 5.81x. These ratios compare with a loan event of default ICR covenant of 1.20x. Although the LTV ratio will not be tested before August 2012, the December 2010 market value implies a 57.0% LTV. This ratio compares with a loan event of default LTV covenant of 70%.

The loan is now secured against a portfolio of 29 mixed-use properties spread across France (compared with 35 assets at closing). The remaining portfolio consists mainly of warehouse/distribution facilities (71% by lettable area) with the highest concentration in the Ile-de-France region (35% by lettable area). With a reported occupancy rate of 93.9%, occupancy levels have remained resilient since issuance (89.2% at closing). The assets are multi-tenanted but the top 10 tenants contribute approximately 70% of the annual gross rental income, suggesting income concentration, in our view. As stated previously, the income is exposed to lease break risks.

COUNTERPARTY RISK

On Jan. 31, 2012, we placed on CreditWatch negative our credit ratings on the class A, B and C notes following the downgrade of our long-term rating on the issuer’s liquidity facility provider HSBC France to ‘AA-’ from ‘AA’ on Nov. 29, 2011 (see “Ratings On 122 Tranches In 65 European CMBS Transactions Placed On CreditWatch Negative”). The maximum rating achievable for this transaction under our 2010 counterparty criteria cannot be higher than our long-term rating on the issuer’s liquidity facility provider HSBC France (AA-/Stable/A-1+) (see “Counterparty and Supporting Obligations Methodology and Assumptions,” published on Dec. 6, 2010). Therefore we have lowered to ‘AA- (sf)’ from ‘AA (sf)’ and removed from CreditWatch negative our rating on the class A notes. At the same time, we removed from CreditWatch negative our ratings on the class A, B, and C notes.

RATING ACTIONS

Taking into account our review of the loans, we consider that the probability of default of the loans has increased in light of the difficult commercial real estate market and lending conditions, which could further depress property values. As a consequence, and even though we do not see the risk as imminent, we consider that the notes’ creditworthiness has deteriorated. As a result, we have lowered our ratings on the class B, C, D, and E notes to reflect these credit risks. We also lowered our rating on the class A notes for counterparty reasons.

POTENTIAL EFFECTS OF PROPOSED CRITERIA CHANGES

We have taken today’s rating actions based on our criteria for rating European commercial mortgage-backed securities (CMBS). However, these criteria are under review (see “Advance Notice Of Proposed Criteria Change: Methodology And Assumptions For Rating European Commercial Mortgage-Backed Securities,” published on Nov. 8, 2011).

As highlighted in the Nov. 8 Advance Notice of Proposed Criteria Change, we expect to publish a request for comment (RFC) outlining our proposed criteria changes for rating European CMBS transactions. Subsequently, we will consider market feedback before publishing our updated criteria. Our review may result in changes to the methodology and assumptions we use when rating European CMBS, and consequently, it may affect both new and outstanding ratings on European CMBS transactions.

Until such time that we adopt new criteria for rating European CMBS, we will continue to rate and surveil these transactions using our existing criteria (see “Related Criteria And Research”).

STANDARD & POOR‘S 17G-7 DISCLOSURE REPORT

If applicable, the Standard & Poor’s 17g-7 Disclosure Report included in this credit rating report is available at

RELATED CRITERIA AND RESEARCH

-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, March 14, 2012

-- Ratings On 122 Tranches In 65 European CMBS Transactions Placed On CreditWatch Negative, Jan. 31, 2012

-- Request For Comment: Counterparty And Supporting Obligations Methodology And Assumptions--Expanded Framework, Nov. 21, 2011

-- Advance Notice of Proposed Criteria Change: Methodology and Assumptions For Rating European Commercial Mortgage-Backed Securities, Nov. 8, 2011

-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011

-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011

-- Principles Of Credit Ratings, Feb. 16, 2011

-- Counterparty And Supporting Obligations Update, Jan. 13, 2011

-- Counterparty And Supporting Obligations Methodology And Assumptions, Dec. 6, 2010

-- Methodology: Credit Stability Criteria, May 3, 2010

-- Understanding Standard & Poor’s Rating Definitions, June 3, 2009

-- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008

-- Framework For Credit Analysis In European CMBS Transactions, May 21, 2007

-- Technical Challenges In European CMBS Structures, Feb. 16, 2006

-- European CMBS Loan Level Guidelines, Sept. 1, 2004

-- European CMBS Monthly Bulletin, published monthly

RATINGS LIST

Class Rating

To From

FCC Proudreed Properties 2005

EUR397.4 Million Commercial Mortgage-Backed Floating-Rate Notes

Ratings Lowered And Removed From CreditWatch Negative

A AA- (sf) AA (sf)/Watch Neg

B AA- (sf) AA (sf)/Watch Neg

C A (sf) AA (sf)/Watch Neg

Ratings Lowered

D BBB+ (sf) A (sf)

E BB+ (sf) BBB+ (sf)

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