TEXT-Fitch cuts Draco plc Eclipse 2005-4 note classes B to E
Feb 19 - LONDON Fitch Ratings has downgraded Draco (Eclipse 2005-4) plc's class B to E notes as follows: GBP98.m class A (XS0238139983): affirmed at 'AAAsf'; Outlook Stable GBP12.4m class B (XS0238140569): downgraded to 'AAsf' from 'AA+sf'; Outlook Stable GBP11.4m class C (XS0238140999): downgraded to 'Asf' from 'AA-sf'; Outlook Stable GBP16.6m class D (XS0238141377): downgraded to 'BBsf' from 'A-sf'; Outlook Negative GBP8.8m class E (XS0238141617): downgraded to 'CCCsf' from 'BBB-sf' assigned Recovery Estimate (RE) 50%; The rating actions for the class B and C notes are primarily driven by the risks related to complex pay down rules which, under certain adverse scenarios, expose these noteholders to continued pro-rata payment of principal from the Flinstone borrower. For the classes D and E notes, meanwhile, the severe downgrades are due to the continued deterioration of the Herbert House loan, which Fitch expects to make significant losses. Subject to the sequential pay trigger, the structure allows for significant principal receipts to be allocated on a pro-rata basis (for the GBP144.1m Flinstone, 50%; for the GBP8.5m Herbert House, 100%). Given the weakness with Herbert House, a key concern with the payment rules would be that a large principal payment from Flinstone could reduce the nominal amount of loss-absorbing credit enhancement available to higher-ranking notes. Sequential pay will be breached by a loss being realised or the aggregate loan balance falling below GBP30m, depending on which is earlier. Since, for the purposes of such calculations, the aggregate loan balance is measured on a "calculation date", and this also marks the end of the relevant collection period, Fitch believes that an implicit cap in the amount of further principal that can be paid non-sequentially is established at GBP61.3m. A higher cap of GBP65.6m will apply if the Herbert House borrower repays in full and thus contributes to the gross GBP122.6m capable of being repaid without triggering sequential pay; in this case, GBP8.5m would be treated 100% pro rata in addition to 50% of the GBP114.1m that Flinstone could prepay without triggering sequential pay. Fitch considers the likelihood of Herbert House avoiding loss as very low, reflected by both an estimated 183% Fitch loan-to-value ratio (LTV) and a distressed rating on the class E notes. The most plausible outcome in Fitch's eyes is for the interest-only Flinstone loan to repay in one single payment, most likely at or soon after its October 2015 maturity. Since the aggregate loan balance remaining at the end of the applicable collection period would also have fallen below GBP30m, no further principal could be distributed pro rata at or after the next payment date. Fitch understands that the full GBP144.1m balloon repayment would be paid out in a sequential fashion, and the classes B and C notes would fare better than their ratings now imply. However while plausible, this outcome is by no means certain. Were the Flinstone borrower instead to prepay - but by no more than the c.GBP122.6m cap - then Fitch understands that 50% of this prepaid principal would be distributed on a pro rata basis (with the pro rata shares recalculated after the 50% of principal had first been applied to noteholders sequentially). While it would probably oblige the borrower to make a swap breakage payment, the sponsor is entitled to make a partial prepayment in any amount, which therefore cannot be discounted from Fitch's ratings. One possible scenario leading to this less favourable outcome (for senior-ranking bondholders) would be the borrower choosing to sell its largest property, UK House, a prime mixed-use building located on the east side of London's Oxford Street (accounting for 78% of its portfolio value). For the prepayment to be below the GBP122.6m level qualifying for 50% pro rata treatment, the release price governing the sale would have had to fall from its current 110% to the minimum 105%. For this switch to occur, the LTV reported for Flinstone would have had to fall below 60.0% from its current 60.3%, which in turn hinges on either the sponsor being tempted by a lower release price to make a minor equity injection, or else the collateral being revalued upwards. In either case, pro rata treatment also depends on Herbert House, which matures in January 2014, not already having suffered a loss. Fitch has tested its ratings against both cases - namely the full repayment and the qualifying partial repayment of the Flinstone loan. The ratings are heavily weighted by the worse of the two outcomes, although the range is in the order of magnitude of a single rating category. Any upgrade potential does not warrant a Positive Outlook, especially given the back-dated maturity date of Flinstone. In either case, the class E notes are considered at risk of default, and the Recovery Estimate approximately equal (because pro rata pay returns capital to this class at the same time as reducing loss protectionavailable to it). The class D notes also suffer a severe downgrade and have a Negative Outlook given their highly leveraged exposure to the Herbert House loan should a partial prepayment of Flinstone cause the class E and (non-rated) class F notes to amortise. In terms of underlying performance, Flinstone has improved since the last rating action in March 2011. The collateral valuation increased by 10% to GBP239m, reducing the reported LTV % to 60.3%from 66.3, very close to the agency's estimate of 63%. The portfolio maintains its strong property fundamentals as evidenced by an occupancy rate close to 100%, and a weighted average lease length to break of 9.1 years. Fitch expects the loan to repay at maturity in October 2015. The Herbert House loan is secured by a single-tenanted secondary office property located in Birmingham city centre. The building is fully let to Cable and Wireless Communications with a break in July 2015. The uncertainty around future income is reflected in the 55% decline in market value to GBP5.1m revealed in a July 2012 valuation. Vacant possession value of GBP3.2m may not even be achievable given the condition of the property. The loan is likely to default at maturity and suffer significant losses. Fitch will continue to monitor the performance of the transaction. A performance update report will be published shortly on www.fitchratings.com. Contacts: Lead Surveillance Analyst Mbarek Wadil Analyst +44 20 3530 1162 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Surveillance Analyst Stephen Hughes Associate Director +44 20 3530 1412 Committee Chairperson Euan Gatfield Managing Director +44 20 3530 1157 Media Relations: Mark Morley, London, Tel: +44 203 530 1526, Email: email@example.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: firstname.lastname@example.org.
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