PRESS RELEASE: S&P Takes Rtg Action On The Mall Funding After Restructuring

23rd Jul 2010 15:48

The following is a press release from Standard & Poor's: OVERVIEW -- The Mall Funding mortgage-backed transaction has been restructured following a noteholders' vote on July 15, 2010. -- Key changes under the new structure include the extension of the notes' legal maturity date to 2017, the establishment of a cash sweep mechanism and amortization that aims to deleverage the loan over time, the establishment of an LTV ratio covenant, and the extension of the liquidity facility to ensure timely payment of interest to the class A notes during the extended period. -- Given that the obligation we originally rated to will not be met, we have consequently lowered our rating on the class A notes to 'D'. We have subsequently raised the rating to 'BBB-' to reflect our opinion of the issuer's ability to meet its principal and interest obligations under the new terms. -- The Mall Funding is a single-borrower secured-loan securitization secured on 17 shopping centers (as at the April 2010 interest payment date) located throughout the U.K. LONDON (Standard & Poor's) July 23, 2010--Standard & Poor's Ratings Services today lowered to 'D' from 'BBB-' its credit rating on The Mall Funding PLC's class A notes, given that the obligation originally rated will not be met. We then raised the rating to 'BBB-' to reflect our opinion of the issuer's ability to meet its principal obligations by the new final maturity date, 2017, and its interest obligations on a timely basis until maturity. The Mall Funding has continued to see a decline in the reported market values of the underlying retail portfolio over the past year. Total portfolio values are now reported at GBP1.13 billion, down 13.7% from the April 2009 value of GBP1.31 billion (on a "same-store" basis). The portfolio had already experienced a market value decline of 42.1% between April 2008 and April 2009. In our view, the cash flow performance of the assets has remained reasonably consistent, with reported forward-looking interest coverage ratios above 1.50x for the previous quarters. The June 2010 quarterly investor report indicates that the loan-to-value (LTV) ratio, as of the April 22, 2010 interest payment date (IPD), was 75.74%. The investor report LTV ratio calculation includes assets of the borrower outside the securitization and is used for covenant-testing purposes. Using the values cited in the investor report, we calculated the LTV ratio for the securitized assets alone as 90%. In June 2010, the issuer approached the noteholders with a restructuring proposal with a view, we understand, to secure financing for the next five years. The noteholders agreed to the proposal on July 15, 2010. The restructuring arrangements include the following changes: -- The loan term has been extended for three years from April 2012 to April 2015. -- From April 2011, the margin payable on the loan will be increased to 68 basis points (bps) from 18 bps. -- The legal maturity of the notes has also been extended for three years until April 2017. The tail period remains unchanged at two years. -- From April 2011, in line with the loan margin, the margin payable on the notes will increase to 68 bps from 18 bps. -- An initial voluntary prepayment (totaling GBP50 million) and an ongoing cash sweep mechanism will amortize the loan. -- An LTV ratio covenant has been added to the financial covenants and will be tested annually, from December 2011, against the following thresholds: 83% in December 2011, 77% in December 2012, 71% in December 2013, and 65% in December 2014. -- Amortization targets will be introduced from 2012 so that debt will be less than or equal to GBP800 million in December 2012 and less than or equal to GBP600 million in December 2014. -- The hedging arrangements have been extended until the new loan maturity date in April 2015, while the liquidity facility has been extended with the existing provider until the updated legal maturity date of the notes in April 2017. This restructuring has occurred at a time when the retail sector continues, in our view, to be exposed to potential volatility. Even with a relatively robust reported forward-looking interest coverage ratio of 1.58x, we still believe that retail tenants will continue to face a challenging environment that could lead to continued deterioration in rental income. Therefore, although the dramatic value decline in the past two years has resulted mostly from yield shift, we expect that market rent pressures and cash flow decline could become apparent in the near term. Nonetheless, we believe that possible additional market value declines are mitigated by the amortization payments made to the loan and the improved credit characteristics that will result from the new structure. Even under stressed scenarios, we believe that the borrower can reasonably expect to repay the loan by the loan maturity date (in 2015) by way of a refinance or a sale of the properties. Accordingly, we have lowered our rating on the notes to 'D' from 'BBB-', given that the obligation we originally rated will not be met. We have subsequently raised the rating to 'BBB-' to reflect our opinion of the issuer's ability to meet its principal and interest obligations under the new terms. Our rating on this transaction addresses timely payments of interest under the notes, until the legal final maturity in 2017, and ultimate payment of principal no later than the notes' legal final maturity. The transaction originally closed in April 2005. The loan backing this transaction financed a portfolio of 20 shopping centers in the U.K. In October 2006, following a tap issuance, three additional assets were added to the portfolio. On the April 2010 IPD, the loan was secured on 17 assets following the sale of six assets since closing. The Mall Funding is one of the largest in-town shopping center investment vehicles in the U.K., and is sponsored by Aviva Investors and Capital & Regional PLC. RELATED CRITERIA AND RESEARCH -- Rating Lowered On Class A Notes In The Mall Funding PLC's U.K. CMBS Transaction, June 30, 2009 -- Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009 -- Principles-Based Rating Methodology For Global Structured Finance Securities, May 29, 2007 -- Framework For Credit Analysis In European CMBS Transactions, May 21, 2007 -- New Issue: Mall Funding PLC (The), Oct. 25, 2006 Related articles are available on RatingsDirect. Criteria, presales, servicer evaluations, and ratings information can also be found on Standard & Poor's Web site at www.standardandpoors.com. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011. Surveillance Credit Analysts: Robert Leach, London (44) 20-7176-3652; [email protected] Soniya Patel, London (44) 20-7176-3545; [email protected] Primary Credit Analyst: Anne Horlait, London (44) 20-7176-3920; [email protected] Additional Contact: Structured Finance Europe; [email protected] No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shall not be used for any unlawful or unauthorized purposes. 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S&P's opinions and analyses do not address the (MORE TO FOLLOW) Dow Jones Newswires July 23, 2010 10:48 ET (14:48 GMT)