PRESS RELEASE: Moody's Upgrades The Cmbs Notes Issued By The Mall Funding Plc

26th Jul 2010 19:41

The following is a press release from Moody's Investors Service: GBP 1,435 million of CMBS affected Frankfurt, July 26, 2010 -- Moody's Investors Service has today upgraded the single tranche issued by The Mall Funding plc (the "Issuer"), a UK CMBS transaction: GBP1435m Floating Rate Notes due April 2014, Upgraded to Baa1; previously on Jul 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 seven properties from October 2008 until the July 2010 IPD, the Loan and the Notes have been partially prepaid. The outstanding balance of the Loan and the Notes is currently GBP 957.1 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 LTV after the restructuring is not yet available to Moody's. The latest reported forward looking ICR was 1.58x as of April 2010. Taking into account the latest asset sale of the Ilford property, Moody's LTV is 88% based on Moody's value of GBP 1,087 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) Rating Rationale Today's rating action was triggered by the implementation of the restructuring proposal on 20 July 2010. Moody's commented on 11 June 2010 that a preliminary review of the proposal generally resulted in an overall credit positive assessment of the restructuring if implemented. After further analysing the impact of the restructuring, Moody's continues to believe that the credit positive implications of the restructuring outweigh the credit negative aspects, resulting in today's rating action. In Moody's view, the main positive aspects of the proposals include: (i) The reduced leverage of the transaction, resulting in a Moody's LTV of 88% based on Moody's value of GBP 1,087 million after the sale of the Ilford property; (ii) A cash sweep of available cash that will reduce the Loan leverage further as both excess cash from rental income and property sales will effectively amortise the Loan; and (iii) Given the large Loan size, a refinancing of the Loan in 2015 instead of 2012 is credit positive, given Moody's expectation that lending market conditions for larger loan amounts will improve in the mid term In Moody's view, the aspects above reduce the refinancing risk of the Loan, which Moody's considers the main risk in the transaction. Moody's refinancing LTV is expected to be around 75% at the new maturity of the Loan. Moody's notes that as a main negative aspect of the restructuring, the new debt and LTV covenants implemented add execution risk to the transaction, even before the initial maturity date of the Loan. The Borrower might be forced to sell assets to meet the covenants, even in a negative property value environment. This can increase the leverage and reduce the excess cash generation of the property portfolio. 3) Portfolio Analysis Property Values. Moody's LTV of the Loan after the sale of the Ilford property is 88%. The LTV is based on Moody's value of GBP 1,087 million. Moody's assumed net cash flows of GBP 86 million available from the remaining properties, representing an initial yield of about 7.9%. Moody's value compares to the underwriter's ("U/W") value of GBP 1,168 million per June 2010. Refinancing Risk. The new term of the Loan until 2015 decreases the refinancing risk, given Moody's expectation of an improvement in the lending market for large commercial real estate loans. In its analysis, Moody's has incorporated the expectation of some further asset sales, including the sale of four further properties already announced by Capital & Regional. Moody's notes that some uncertainty remains with respect to the effect of Sponsor tax payments made out of the borrower waterfall and the refilling of certain leasing, CAPEX and liquidity reserves in the waterfall, which will both reduce the amount of excess cash available to repay the loan. Moody's has given limited benefit to the cash sweep of excess cash in its expectation of the LTV at the maturity of the Loan in 2015. Moody's also considered the significant size of the Loan in its refinancing risk assessment. Term Default Risk. While Moody's believes the hard amortisation targets should incentivise the Borrower to reduce the leverage of the loan, they also increase the default risk of the Loan during its terms. In a scenario of weakening property values, the fund might be forced to sell assets at reduced prices without achieving a true deleveraging of the Loan. Moody's nevertheless believes that the term default risk of the loan is Low. Overall Default Risk. Moody's considers the total default risk of the Loan to be reduced compared to the situation pre restructuring, given that the increase in term default risk due to disposal plan execution has been overcompensated by reduced refinancing risk. Portfolio Loss Exposure. Taking into account the reduced refinancing risk overcompensation for increased term default risk, the reduced leverage and an expected further reduced leverage towards the maturity of the Loan, Moody's considers the overall loss exposure of the transaction to be low. What would change the ratings - up Moody's has not given full credit to the Sponsors business plan in terms of asset disposal and cash sweep. In case asset disposals or loan repayment triggered by cash sweeps from excess rental income were to reduce Moody's refinancing LTV significantly below 75%, this might reduce Moody's refinancing risk assessment and hence have a positive impact on the rating of the Notes. What could change the ratings -- down As Moody's highlights above, the introduction of hard amortisation targets adds execution risk to the transaction. In case of decreasing property values, the fund would be required to sell assets in a weakening property environment. In Moody's analysis, value has been give to certain property sales at Moody's current property values. In case prices achieved differ significantly from Moody's expectations, this could impact both the credit given to the deleveraging process and the refinancing risk assessment of the remaining portfolio. 4) Rating Methodology The principal methodologies used in rating and monitoring the transaction were "Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA" June 2005 and "Moody's Updates on its Surveillance Approach for EMEA CMBS" March 2009, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website. The last Performance Overview for this transaction was published on 29 June 2010. Further information on Moody's analysis of this transaction is available on www.moodys.com. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck. For updated monitoring information, please contact [email protected]. To obtain a copy of Moody's New Issuer Report on this transaction, please visit Moody's website at www.moodys.com or contact our Client Service Desk in London (+44-20-7772 5454). Copyright 2010 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S ("MIS") CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED (MORE TO FOLLOW) Dow Jones Newswires July 26, 2010 14:41 ET (18:41 GMT)