Fitch Revises DECO 12 - UK 4 p.l.c Outlook to Stable
OREANDA-NEWS. Fitch Ratings has revised the Outlook on DECO 12 - UK 4 p.l.c.'s senior floating rate notes due 2020 to Stable from Negative as follows:
GBP174m class A1 (XS0289644121) affirmed at 'BB+sf'; Outlook revised to Stable from Negative
GBP113.6m class A2 (XS0289644477) affirmed at 'BB+sf'; Outlook revised to Stable from Negative
GBP34.6m class B (XS0289644550) affirmed at 'BB+sf'; Outlook revised to Stable from Negative
GBP27.7m class C (XS0289644634) affirmed at 'BBsf'; Outlook Stable
GBP8.6m class D (XS0289644717) affirmed at 'Dsf'; Recovery Estimate (RE) 80%
GBP0m class E (XS0289644808) affirmed at 'Dsf'; RE 0%
GBP0m class F (XS0289644980) affirmed at 'Dsf'; RE 0%
The transaction is a securitisation of originally 10 UK loans originated by Deutsche Bank AG, with a cumulative balance of GBP672.9m secured by 41 properties. Since closing in March 2007, four loans have repaid in full (Merry Hill, Quattro Syndicate, Hiltongrove portfolio, Chesterton Commercial loan) while another four loans have suffered losses (LMM, Industrial Realisation, Group 7 loan and Borehamwood). The transaction is now backed by the Tesco loan and the Regent's Capital loan, with a cumulative balance of GBP358.4m.
KEY RATING DRIVERS
The affirmations and the Outlook revision on the three senior note tranches are driven by a corresponding rating action on Tesco plc on 21 April 2016 (see "Fitch Revises Tesco's Outlook to Stable; Affirms IDR at 'BB+'"). This reflects, among other factors, Fitch's expectation of a progressive recovery in Tesco's core UK market, after a stabilisation in the retailer's operating performance for financial year ended February 2016. The affirmations of the CMBS ratings also reflect stable performance of the Tesco loan collateral and the cash-collateralised Regent's Capital loan.
The GBP347.4m Tesco loan matures in January 2017. It is secured on a portfolio of supermarkets in 16 locations across the UK encumbered by a full repairing and insuring lease until December 2026, with a lease break in December 2016. Should Tesco decide to exercise the break option, as a precondition the borrower (a joint venture involving Tesco) must have repaid the loan in full. In rating scenarios up to Tesco's rating, Fitch makes the conservative assumption that the break is not exercised. However, in these same rating scenarios, Fitch does not assume rental depreciation given Tesco's obligation to return the supermarkets in a condition suitable for re-letting. Fitch estimates a 'Bsf' LTV of approximately 80%.
In testing higher rating scenarios than 'BB+sf', we assume depreciation (in addition to the higher overall market stresses) reduces recovery proceeds enough to cap the current ratings at Tesco's Issuer Default Rating (IDR).
The GBP11m Regent Capital loan has been cash-collateralised since closing (it was originally a construction development and has failed to be let since completion). Escrowed funds are not sufficient to repay the loan in full, and this minor discrepancy is expected to widen until eventual loan exit. Together with subordination of the defaulted (but not written-down) GBP8.6m class D notes, proceeds from a sale of the vacant collateral as well as from the Tesco loan should be sufficient to redeem the class C notes.
A rating action on Tesco's IDR would likely result in a corresponding action on the class A1, A2 and B notes. In a Tesco downgrade scenario, the class C notes could also be negatively affected given the knock-on effect on collateral value, or if the tenant is downgraded below 'BB'.
Fitch estimates 'Bsf' proceeds of GBP358.4m.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
Fitch did not undertake a review of the information provided about the underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.
Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
-Transaction reporting provided by Situs Asset Management as at end-April 2016
-Transaction reporting provided by Deutsche Bank AG as at end-April 2016