RPT-Fitch downgrades Titan Europe 2006-5 plc's classes A1 to A3 notes; affirms others
Aug 21 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded Titan Europe 2006-5 plc's classes A1 to A3 and affirmed all others classes; as follows: EUR139.4m Class A1 (XS0277721618) downgraded to 'BBBsf' from 'AAsf'; Outlook Negative
EUR109.0m Class A2 (XS0277725361) downgraded to 'BBsf' from 'Asf'; Outlook Negative
EUR60.1m Class A3 (XS0277726500) downgraded to 'CCsf' from 'Bsf'; Recovery Estimate (RE) 10%
EUR55.1m Class B (XS0277728381) affirmed at 'CCsf'; RE 0%
EUR7.9m Class C (XS0277729439) affirmed at 'Dsf'; RE0%
EUR0.0m Class D (XS0277732144) affirmed at 'Dsf'; RE0%
EUR0.0m Class E (XS0277733548) affirmed at 'Dsf'; RE0%
EUR0.0m Class F (XS0277734199) affirmed at 'Dsf'; RE0%
KEY RATING DRIVERS
The rating action is driven by the prolonged forced administration of the EUR114.8m Quartier 206 loan, a process which began when the loan was transferred to special servicing in April 2010. Loan interest payments have not been made since the October 2011 interest payment date (IPD), leaving the issuer to rely on the transaction's liquidity facility (LF) to pay the borrower's fixed-rate interest obligations to the swap counterparty. Uncertainty remains over when a resolution of the administration process will be achieved, with a forced auction sale being the most likely outcome.
At the current rate the LF could be exhausted towards the end of 2014; therefore, if the work out is not completed by this time, the issuer would not have sufficient funds to meet swap counterparty payments or interest payments due to noteholders. Whilst Fitch expects the resolution to be finalised prior to that date, the downgrade of the class A1 notes to 'BBBsf' reflects the increased uncertainty around timely payment of interest.
Fitch still views the likelihood of full principal recoveries as very high for the A1 class - a view that is unchanged since the agency's previous review. The credit quality of this class is underpinned by the strength of the EUR160m Hotel Adlon loan, which provides the bulk of the anticipated investment grade recoveries. The loan is secured by the five-star Hotel Adlon Kempinski located in Berlin, which was valued at EUR242m in November 2011. The repayment of this loan would itself redeem the entire A1 class, although the A2's would still require substantial recoveries from the four other loans.
Fitch's expectation of recovery for the Quartier loan is lower than the most recent publically available appraisal would suggest (the collateral has been valued at EUR86m in December-2010). Beside a conservative take on the real estate, net recoveries may also be affected by the aforementioned senior ranking liquidity facility claims, and could be further reduced by interest rate swap break costs if the asset is sold prior to the loan's hedging expiry in 2016 (coterminous with the loan's maturity). These expectations are reflected in the now speculative grade rating of the A2 tranche and the distressed rating of the A3 class which are also now deferring interest due to senior ranking fees.
Material losses are also expected on the EUR20.4m Carat Park Shopping Centre loan, which is valued at EUR14.8m as at December 2012. The headline tenant, Edeka, has extended their lease for 10 years, albeit on reduced rent and floor area, which was seen as a positive development given the minimal vacant possession value this asset benefits from. The sponsor, however, has fallen into bankruptcy and it is expected that the borrower will be dragged into these proceedings sometime in 2013, a process that is likely to add uncertainty on final recoveries.
Titan Europe 2006-5 plc closed in December 2006 and was originally the securitisation of eight commercial loans originated by Credit Suisse ('A'/Stable/'F1'). At the first IPD, the EUR40.2m Hotel Balneario Blancafort loan defaulted due to non-payment of debt service and was subsequently repurchased by the originator.
Delays in the Quartier work out beyond summer 2014 would likely see further downgrades to the senior note classes.
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