OREANDA-NEWS. Fitch Ratings has affirmed BL Superstores Finance PLC's class A2, B1, B2 and C1 notes and revised the Outlook on the class A2 notes to Negative from Stable as follows:

GBP218.9m class A2 (XS0244999016), due 2030, affirmed at 'AAAsf'; Outlook revised to Negative from Stable
GBP203m class B2 (XS0245002331), due 2030, affirmed at 'Asf'; Outlook Stable
GBP49m class B3 (XS0245004972), due 2030, affirmed at 'Asf'; Outlook Stable
GBP0.3m class C1 (XS0244893375), due 2030, affirmed at 'BBBsf'; Outlook Stable

The transaction is the securitisation of a single loan secured on 28 UK retail superstores let to J Sainsbury Plc.

KEY RATING DRIVERS

Operating Model under Pressure
The operating model of UK retail superstores is being challenged by evolving consumer habits favouring smaller retail outlets and online formats (Fitch understands from the sponsor that many of the stores in the portfolio do cater to online shopping). While it does not show up in transaction performance, as there is a single tenant on long term lease arrangements, this trend could lead to a reduction in estimated rental values (ERVs) for the mortgaged properties. If this is perceived as a structural shift, this could lead to declines in vacant possession value, which is a key rating driver. This risk is reflected by the revision of the Outlook to Negative on the class A2 notes.

Since closing in 2006, rental income has increased on most of the superstores following periodic open market reviews, which provides some market support to current levels of passing rent (and interest cover of 2.3x as of end-March 2015). Fitch cross-checked ERVs on some stores against recent lettings in similar properties available in third-party research, and found no obvious outliers. While the supermarket sector poses downside risk - particularly given the medium-to-long term exposure to the stores for classes A and B - this is from a position of cumulative rental growth. Combined with considerable amortisation in the coming years, this performance supports today's affirmations.

The Sainsbury leases will start to roll off in 2024, with approximately 54% of the leases - by reported rent - set to expire by loan maturity in 2025. The overall weighted average unexpired lease term is around 16 years, providing for considerable scheduled amortisation over the term of the financing unless the tenant defaults under the lease.

In case of tenant default, not only would amortisation be at risk, but rental income on the properties could fall given the prominence of Sainsbury's in the market and the wider competitive pressures. For stores in the portfolio that remain in their current use, especially those in dense urban areas, rental income should hold up. But among the more peripheral stores or those that are trading weakly, there may be little interest from competitors. While planning permission is valuable, alternative formats for the larger stores are limited (and would require capital expenditure). Potential retail warehouse operators could demand significant rent reductions.

Managed Refinancing Risk
The class A2 notes are expected to amortise to about 53% of today's balance between October 2016 and loan maturity in 2025. Principal payments on the class B2 notes (which are fully amortising) commenced in October 2013. The GBP49m of the class B3 notes will be due as a bullet payment on the loan maturity date. The class C1 notes are expected to be repaid in full on the next interest payment date in October 2015.

Fitch expects the loan to be paid in full due to a low exit loan-to-value (LTV; some 16% based on reported market value). Reported LTV is at 46%, some 2pp down from July 2014. Fitch estimates a 'Bsf' property value of some GBP 656m.

Potential Commingling Risk
The account bank, National Westminster Bank Plc (BBB+/Stable/F2), has not been replaced after its downgrade on 19 May 2015. Fitch's counterparty criteria foresee direct support counterparties such as account banks being rated no lower than 'A'/'F1' to support structured finance ratings equal or higher than 'AA-sf'. Where this support is not provided, Fitch gives no credit to the counterparty in its higher rating stresses. In this case Fitch has assumed commingling of rental income - and hence note amortisation - receipts over one quarter.

Fitch understands from discussions with the bond trustee, Capita Asset Services, that remedial options are currently being reviewed. As the transaction features ample undrawn liquidity - amounting to GBP115m - held at a bank rated above 'A'/'F1', payment interruption risk is mitigated. Should the liquidity facility provider cease to be eligible, the standby drawing would be deposited with the account bank, which highlights the importance of a remedial action.

RATING SENSITIVITIES
Further deterioration in market conditions for UK supermarkets and/or in Sainsbury's credit standing would put downward pressure on the notes' ratings.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY

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:
-Reporting provided by cash manager as at July 2015
-Annual update report provided by the sponsors as at March 2015