TEXT-Fitch affirms Epic Opera (Arlington) Limited
April 19 - Fitch Ratings has affirmed Epic Opera (Arlington) Limited's commercial mortgage-backed notes due July 2016, as follows: GBP215.0m class A (XS0311217284): affirmed at 'AAAsf'; Outlook Stable GBP53.1m class B (XS0311217441): affirmed to 'AAsf'; Outlook Stable GBP1.3m class C (XS0311217870): affirmed at 'AAsf'; Outlook Stable The affirmation reflects the decreased loan balance and leverage following the disposal of the Reading Business Park, as well as stable loan performance. Although the most recent valuation, procured in December 2010, is approximately 30% down from the valuation at closing in August 2007, a combination of equity injections in 2007 and 2008 (which fully prepaid the class D to F notes and partially repaid the class C notes), swept cash and asset sales has resulted in an improvement in the loan-to-value ratio (LTV) to 60.9% from 74.0% at closing. Fitch estimates the LTV to be around the 65% mark. The loan pay-down has also contributed to an improvement in the interest coverage ratio (ICR) to 2.04x from 1.21x at closing. The collateral portfolio continues to perform soundly, as evidenced by the current occupancy rate of 96.7% across the eight remaining business parks. In Fitch's opinion, the remaining collateral is characterised by two clusters of quality: two strong business parks in Oxford and Uxbridge; and the rest, which are more affected by the weak economic environment, as witnessed by a number of exercised break options and non-renewals of original leases. Overall, the tenancy profile remains above average, with the weighted-average unexpired lease term to first break of 5.4 years helping to mitigate balloon risk. The loan will be extended from its original maturity date (July 2012) for a further two years as per an extension option envisaged under the original facility agreement. Further asset disposals (to reduce the loan balance below GBP200m by October 2013) and cash sweeping provisions (should the disposals not be sufficient to reduce the balance) have been put in place as part of the extension process. Following a loan restructuring approved in October 2009, sponsor-led asset disposals (and resultant pro rata principal pay) are no longer constrained by the original release pricing mechanism. Instead, there is a general requirement to remain compliant with LTV (70%) and ICR (1.15x) covenants. Although asset disposal could increase loan leverage and worsen collateral quality, this would be limited by the available headroom in LTV (reported 60.9% versus 70% limit), and in any event would be in lieu of the more extreme market value declines assumed in Fitch's rating stresses. Moreover, there is no reason to believe the sponsor would have an interest in selling assets at distressed prices, since this would erode its own substantial equity stake in the portfolio, which is the main pillar of sound credit quality reflected by the high ratings. Fitch will continue to monitor the performance of the transaction. A performance report will shortly be published on www.fitchratings.com. Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. The information used to assess these ratings was sourced from the servicer and payment report. Applicable criteria, "EMEA CMBS Rating Criteria", dated 4 April 2012 and "Global Structured Finance Rating Criteria", dated 4 August 2011, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Structured Finance Rating Criteria EMEA CMBS Rating Criteria
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