TEXT-Fitch affirms Titan Europe 2006-2 plc
Dec 13 - Fitch Ratings has affirmed Titan Europe 2006-2 plc's floating rate notes due 2016 as follows: EUR373.5m Class A (XS0254356990) affirmed at 'BBB-sf'; Outlook Negative EUR61.7m Class B (XS0254357378) affirmed at 'Bsf'; Outlook Negative EUR44.1m Class C (XS0254357881) affirmed at 'CCCsf'; Recovery Estimate (RE) RE20% EUR23.1m Class D (XS0254357964) affirmed at 'CCCsf'; RE0% EUR57.5m Class E (XS0254358004) affirmed at 'CCsf'; RE0% EUR37.4m Class F (XS0254358699) affirmed at 'CCsf'; RE0% EUR29.3m Class G (XS0254648263) affirmed at 'CCsf'; RE0% EUR28.2m Class H (XS0254647612) affirmed at 'CCsf'; RE0% EUR11.5m Class J (XS0254653180) affirmed at 'CCsf'; RE0% The affirmation reflects falling vacancy rates and rising gross rents over the past 12 months on the three largest loans (EUR267.2m Margaux, EUR208m Petrus and EUR134.6m Velvet) as well as the Margaux default at its maturity in July 2012. All four remaining loans are secured on German multifamily housing portfolios. As certain conditions were not met, the Margaux loan failed to get an extension at its maturity in July 2012. The Petrus loan, cross-defaulted with Margaux, also defaulted in spite of meeting all covenants and being the best-performing loan in the transaction. The current cost ratios on all loans remain above market standard, in order to improve asset quality and pay off operating expenses (opex). However, the Velvet, Margaux and Petrus Portfolios are still experiencing high rental arrears. Three loans are subject to default interest, and forthcoming workout-related expenses may reduce recoveries as all loans are highly leveraged. A revaluation of the Velvet collateral in September 2011 resulted in a reported loan-to-value ratio of 106% (119% including the not securitised B-note), down from 154% (172% on the whole loan) previously reported, based on an October 2010 valuation. At this time, the special servicer rejected a discounted payoff (DPO) offer by the borrower who proposed to repurchase the securitised loan for EUR129.4m, EUR5.2m below the valuation. The current exit strategy is to attempt to sell the portfolio prior to loan maturity in January 2013, for a price more reflective of the improved loan performance than the borrower's offer. The improvements were predominantly the result of large investments in capital expenditure (capex) and opex, using equity and diverting the majority of rental income, while loan interest payments were accrued but not paid until loan maturity. In Margaux, approximately 90% of the quarterly rent received in October 2012 was spent on capex and opex. At the same time default interest remained unpaid. The vacancy rate remains high at 18%, albeit improved from the peak (28%) in January 2009. Although the reported LTV (102%) would suggest only minor losses, Fitch believes that a sizable risk premium would be demanded by a potential buyer, due to capex/opex requirements, rental arrears and asset location (predominantly in the former East Germany). The Labrador borrower and special servicer both filed for insolvency proceedings over the borrower's assets in November 2012. Both proceedings are expected to be combined to simplify the process. However, Fitch expects a prolonged resolution for this loan, which has been in special servicing since June 2008 (except for a brief period in 2010 when performance temporarily improved). Unlike its larger peers, Labrador did not experience any significant rental increases over the last year, with vacancy actually declining to 21% from 18% over the same period. Fitch continues to expect lower recoveries than the reported LTV (91%) may imply. All principal received by the issuer, whether from sales, DPOs or refinancing, will be applied on a sequential basis as all loans are defaulted. Additional information is available on 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 sources of information used to assess these ratings were the issuer, servicer, and periodic payment reports. Applicable criteria, 'Global Structured Finance Rating Criteria', dated 6 June 2012; 'EMEA CMBS Rating Criteria' dated 4 April 2012; 'Counterparty Criteria for Structured Finance Transactions', dated 30 May 2012 and 'Counterparty Criteria for Structured Finance Transactions: Derivative Addendum', dated 30 May 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Structured Finance Rating Criteria EMEA CMBS Rating Criteria Counterparty Criteria for Structured Finance Transactions Counterparty Criteria for Structured Finance Transactions: Derivative Addendum
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