Today’s rating actions follow our review of the four loans backing the transaction. We believe the creditworthiness of the loan pool has deteriorated. We understand that one loan is soon to be liquidated at a loss. Also, the single-tenant risks associated with the other three loans is considered against the backdrop of current constrained market lending conditions, and declines in commercial real estate market values.
In view of these factors, we have lowered our ratings on the class A, B, and C notes, and affirmed our rating on the class D notes. At the same time, we lowered our rating on the class X notes. We provide an overview of the four loans below.
The Times Square loan (15.6% of the pool balance) is the second-largest loan in the pool and matures in November 2012. The current whole-loan balance is GBP44.4 million, the senior loan balance being GBP37.1 million.
The loan is currently secured by an enclosed shopping center of approximately 223,000 sq ft of primarily retail accommodation, together with two self-contained retail units, which have a frontage to the High Street but are separate from the shopping center itself. The center is located in Sutton, Surrey.
The loan was transferred into special servicing on March 23, 2009, due to a breach of the 1.05x interest coverage ratio (ICR) covenant and a failure of the borrower to cover the shortfall in service charge costs. The property was marketed for sale in September 2011. On Dec. 21, 2011, the issuer announced that an offer of GBP18 million was accepted. We understand that heads of terms have been agreed and completion has been set for early April 2012, but that contracts have not yet been exchanged.
The property has seen a decline in occupancy since issuance. On Day 1, it was 95% occupied, but this decreased to 88% in 2009-2010. For the quarter ending January 2012, occupancy was at 92%; however, the reported net operating income (NOI) was GBP1.7 million, compared with GBP2.7 million on Day 1. We understand that the property has had difficulty in attracting national retailers.
The securitized loan has a total of GBP2.7 million in unpaid interest, including default interest. After accounting for swap-breakage costs and miscellaneous expenses, we estimate losses to be approximately GBP25 million.
The Mapeley STEPS loan (67.1% of the pool) is the largest loan in the pool. The current loan balance is GBP159.2 million. The loan is currently secured by a portfolio of 112 properties located across the U.K. The properties are predominantly offices, and comprise the operational estate for HM Revenue & Customs (HMRC), which occupied 93% of the area on Day 1. The properties were mostly constructed between 1960 and 1995. The largest concentration of properties is in the north (17.9%), Scotland (16.1%), and the southeast (13.4%), and only 1.8% are in central London.
The sponsor entered into a service contract with the tenant (HMRC) to provide full accommodation and occupational servicing for the portfolio. The contract and loan expire in April 2021.
The servicer-reported debt service coverage ratio (DSCR) for the loan for the six months ending January 2012 is 5.35x. This is higher than the DSCR of 2.89x at issuance, due to the inclusion of a one-time payment in the NOI. This is not expected to occur again. For the previous five reporting periods, the DSCR has ranged between 1.54x and 1.82x.
The portfolio was last valued in June 2011 at GBP509.0 million, which equates to a loan-to-value (LTV) ratio of 31%. We believe the actual leverage would be considerably higher if the assets were valued without the HMRC contract in place.
We do not anticipate losses on this loan. However, in view of recent market value declines for single-tenanted secondary portfolios that are located in tertiary markets, we consider that the creditworthiness of this loan has decreased.
The Iron Mountain loan (12.7% of the pool balance) is the third-largest loan in the pool and matures in July 2014. The current whole-loan balance is GBP35.4 million, the senior loan being GBP30.1 million.
The loan is currently secured by a 349,953 sq ft single distribution unit located in Belvedere, Kent--approximately 12 miles east of central London. The property was constructed partly in 1992, and partly in 2006. The property is let entirely to Iron Mountain under an FRI (full repairing and insuring) lease. The rent is subject to fixed uplifts of 3% per year. The lease term is until December 2031 and is subject to a parent company guarantee from Iron Mountain Inc. (BB-/Negative/--), the world’s largest records-management company.
The servicer-reported DSCR is 1.29x for the whole loan, and 1.52x for the securitized loan.
The property was last valued in December 2010 at GBP40.0 million, which equates to a securitized LTV ratio of 75% and a whole-loan LTV ratio of 88%. The GBP40.0 million value reflects the tenant in occupancy.
In assessing what the recovery prospects of this property would be, we also considered a “vacant possession” scenario, given the risks associated with 100% exposure to a single tenant. This loan matures in 2014 and if current market conditions persist, we believe there is a risk that the loan will not repay at scheduled maturity. Moreover, we consider that the loan could suffer principal losses.
The Dundee loan (4.6% of the pool balance) is the smallest loan in the pool and matures in September 2012. The current whole-loan balance is GBP14.4 million, the senior loan balance being GBP11.0 million.
The loan is secured by a modern, purpose-built office complex located in Dundee, Scotland, fully let to a single tenant. The property was built in 2001 specifically for this tenant, although the configuration and specification of the building is not overly specialized. The building contains 126,235 sq ft of lettable space, and is arranged over four floors with 400 car-parking spaces.
The property is let entirely to NCR Financial Solutions Ltd. under an FRI lease expiring in November 2026, but subject to a break option in November 2016. The lease is subject to a parent company guarantee from NCR Corp. (BB+/Stable/--), a worldwide technology services provider.
The servicer-reported DSCR is 1.14x for the whole loan, and 1.50x for the securitized loan. The servicer-reported LTV ratio is 63.8% for the whole loan, and 48.6% for the securitized loan, based on a 2005 valuation. We believe that the actual leverage could be higher than the reported LTV ratio if the asset were revalued today, given the general yield shift in the market since 2006.
The loan is performing, but is also subject to single-tenant risk. We see some refinance risk, but we currently do not anticipate losses on this loan.
Today’s rating actions reflect our view that the creditworthiness of the loan pool has deteriorated. We believe that losses on the Times Square loan will affect the class C and D notes, and our ‘CCC- (sf)’ ratings on these notes reflect this. We have also lowered our ratings on the class A and B notes, to reflect the decreased credit enhancement available to these classes after losses are applied to the class C and D notes.
We have lowered to ‘A (sf)’ and then withdrawn our rating on the class X notes, in line with our 2010 criteria for rating interest-only securities, pursuant to which we withdraw the ratings on interest-only securities existing at the time the criteria came into effect when their ratings fall below ‘AA- (sf)’ (see “Global Methodology For Rating Interest-Only Securities,” published on April 15, 2010).
Taurus CMBS (U.K.) 2006-2 closed in November 2006 with a total issuance of GBP447.15 million. The legal final maturity is in April 2024. Of the eight loans that originally backed the transaction, four have repaid. The note balance has reduced to GBP237.3 million.
Our ratings in this transaction are based on our criteria for rating European 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
SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The Rule applies to in-scope securities initially rated (including preliminary ratings) on or after Sept. 26, 2011.
If applicable, the Standard & Poor’s 17g-7 Disclosure Report included in this credit rating report is available at
-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, March 14, 2012
-- 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
-- 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
-- Global Methodology For Rating Interest-Only Securities, April 15, 2010
-- 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
Taurus CMBS (U.K.) 2006-2 PLC
GBP447.15 Million Commercial Mortgage-Backed Floating-Rate Notes
A A (sf) AA (sf)
B B (sf) BBB (sf)
C CCC- (sf) CCC (sf)
Rating Lowered And Withdrawn
X A (sf) AA (sf)
X NR A (sf)
D CCC- (sf)