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The following is a press release from Moody's Investors Service: GBP 1,435 million of CMBS affected Frankfurt, June 11, 2010 -- Moody's Investors Service has commented today on the restructuring proposal as of 10 June 2010 for the The Mall Funding plc (the "Issuer") transaction. The proposal contains several changes on the loan and transaction level, including an extension of the legal final maturity of the notes. Floating Rate Notes due April 2014, currently rated Baa3; previously on July 7, 2009 Downgraded to Baa3 1) Transaction Overview The Mall Funding plc initially closed in May 2005 ("Initial Closing") and was subsequently tapped in September 2006 (the "Tap Closing"). The notes issued on the Initial Closing date and on the Tap Closing date are consolidated, forming a single series (the "Notes"). As at the Tap Closing Date, the transaction represented the securitisation of a GBP 1,435 million commercial mortgage loan (the "Loan") made to The Mall Limited Partnership (the "Borrower") secured by first ranking legal mortgages over then 23 retail properties located throughout the UK. The Loan's ultimate sponsors are Capital & Regional plc and Aviva Investors Global Services Ltd. Following the disposal of six properties from October 2008 until the April 2010 IPD, the Loan and the Notes have been partially prepaid. The outstanding balance of the Loan and the Notes is currently GBP 1,077 million. On the Tap Closing date, the Loan had a loan-to-value ratio ("LTV", defined as the outstanding loan balance over total portfolio value) of 48.2% based on the then underwriter's ("U/W") market value of GBP 2,988 million for the then 23 properties. The Loan is interest-only and initially consisted of two tranches, one (GBP 1,260 million) bearing a fixed rate of interest and one (GBP 175 million) bearing a floating rate of interest. Following some property disposals, the floating rate tranche has been fully repaid. The latest U/W LTV is 75.7% based on the U/W market value of GBP 1,202 million as of April 2010, also taking into account other assets held by the partnership. The latest reported forward looking ICR was 1.58x as of April 2010. Given the 17 properties directly and indirectly held by the fund as per April 2010, Moody's LTV is 93% based on Moody's value of GBP 1,155.0 million. Moody's downgraded the Notes on 7 July 2009. The downgrade was prompted by a number of factors, including (i) the refinancing exposure with the Loan maturing in April 2012; (ii) the value decline the property portfolio has experienced since the Tap Closing coupled with Moody's expectation that the property value would decline further until 2010 and not recover significantly until the maturity date of the Loan; (iii) the expectation of rental cash flow declines due to falling market rents, increasing vacancy rates and increasing tenant defaults; and (iv) the high leverage of the Loan following realised and expected property value declines, increasing both the risk of non payment at Loan maturity in April 2012 and the potential loss upon default. 2) The Restructuring Proposal The Issuer is convening a noteholder meeting to ask for noteholder approval to certain changes to the transaction documents (the "Proposal"). Some of the structural aspects of the Proposal include: - The extension of the Loan maturity from April 2012 to April 2015 and of the Note maturity from April 2014 to April 2017; - A margin increase on the Notes starting from April 2011 and a respective increase of the Loan interest rate; - GBP 155 million of retained cash from the Partnership Account being contributed to the transaction, partly through repayment of Loan and Notes and partly through the funding of reserves within the transaction structure; - Introduction of new LTV covenants and net debt covenants to incentivise property disposals until the extended Loan maturity; - A cash sweep being implemented as long as the quarterly tested LTV ratio is above 60% (including the full application of property disposal proceeds) and net debt above GPB 600 million. Once the LTV drops below 60% and the net debt below GBP 600 million, a release price mechanism is re-introduced upon sale of further properties and the cash sweep no longer applies; - Due to the cash sweep implementation, various items in the Loan level waterfall will be changed to include reserves for capex, leasing and general liquidity purposes. These reserves will be partially topped up through cash that is available in the transaction on each IPD or through proceeds from property sales; and - The liquidity facility will be extended to reflect the extended maturity of the Notes. The hedging arrangements will also be amended to match the extended Loan term through a combination of forward swaps and caps that reflect the Borrower's business plan to dispose certain assets in line with the loan covenants. 3) Moody's Opinion: Does the Proposal Constitute a Distressed Exchange? Moody's definition of default is intended to capture events whereby an issuer fails to meet its original debt service obligations which subject its creditors to economic loss. A Distressed Exchange constitutes an event of default under Moody's default definition if 1) an issuer offers creditors a new or restructured debt, or a new package of securities or assets, that amount to a diminished financial obligation relative to the original obligation, and 2) the exchange has the effect of allowing the issuer to avoid a bankruptcy or payment default. For structured finance transactions, which often include different classes of debt, Moody's determines at the respective class level whether a Distressed Exchange has occurred or not. As per April 2010 IPD, the Loan and hence the transaction benefited from a healthy forward looking interest coverage of 1.58x, and a Liquidity Facility of GBP 74.5 million provided by Barclays Bank PLC (Aa3, P-1). However, the transaction is highly leveraged, since the portfolio of the Borrower shows a high leverage of 75.7% (taking into account also other assets of the partnership), while Moody's LTV based on the 17 directly and indirectly held properties per April 2010 was 93%. In Moody's view, the Proposal is not aimed at avoidance of a default of the Notes. Not taking into account the Proposal, the Loan's default risk at maturity is in Moody's view substantial. However, even in case of default at Loan maturity, the Note-to-Value ("NTV") ratio of the Notes is expected to be well below 100%, which implies a high chance of full repayment of the note principal at its current legal final maturity in July 2014, which is also expressed by the investment grade rating of the Notes. Given the above, Moody's is of the opinion that the Proposal submitted to the noteholders, including the extension of the legal final maturity date of the Notes, does not constitute a Distressed Exchange within Moody's definition of default events for the Notes since it does not have the effect to avoid a payment default under the Notes. 4) Moody's Preliminary Review of the Proposal Moody's has not yet concluded its analysis of the Proposal. In case the Proposal is agreed to by investors, Moody's analysis will focus on both the economic implications of the restructuring as well as the changed structural features. Based on its preliminary review of the Proposal, Moody's regards the following aspects as credit positive: - Cash contribution will reduce the Loan's and transaction's leverage and give the Borrower additional funds in the form of reserves to improve the property portfolio. Moreover, the cash injections also indicate further Sponsor support if need be, even though not contractually committed; - Even though increased margin, costs and the new waterfall items have decreased the amount of excess rental cash-flows that can be expected from the property portfolio, excess rental income can further delever the Loan via the cash sweep mechanism; - Given Moody's expectation that lending markets will further recover going forward, the Loan's maturity extension from April 2012 to April 2015 is credit positive. However, since the property disposal success is uncertain, the amount to be refinanced could still face a challenge to the lending markets in 2015, but potentially less so than in 2012; and - The Borrower has started to sell and intends to sell further properties of the portfolio. In case property sales happen as expected by the borrower, the cash sweep mechanism will further reduce the leverage of the Loan and the transaction. Moody's will continuously monitor the sales success of the Borrower. Based on its preliminary review of the Proposal, Moody's regards the following aspects as credit negative: - The refunding of the reserves in the waterfall and the overall increased transaction costs would reduce the excess cash that would be available in case of a Loan event of default to reduce the outstanding Loan amount. Moody's will assess the overall new interest and cost burden for the Borrower in more detail, which might overall affect the assessed term default risk of the Loan; - Given the proposed new LTV and Loan amount covenants, the Borrower must sell a certain proportion of its assets in line with its business plan in order to not default the Loan during the term. This would add execution risk into the structure, even though Moody's believes the main default risk of the Loan remains on its maturity date, which is potentially reduced by the Proposal; - In case the Borrower is unsuccessful to sell down assets in line with the gross debt covenants, the proposed hedging structure with decreasing (MORE TO FOLLOW) Dow Jones Newswires June 11, 2010 11:27 ET (15:27 GMT)