Feb 21 (The following statement was released by the rating agency)
Fitch Ratings has downgraded Titan Europe 2007-1 (NHP) Limited's class B and C notes to 'CC' from 'CCC' and affirmed the class D and E notes at 'CC'. A full list of rating actions is at the end of this release.
KEY RATING DRIVERS
The 'CC' rating on the junior class B, C, D and E notes reflects the high loan-to-value ratios (LTVs) of the notes, at materially above 100%, particularly in light of the increased likelihood of a sale of the securitised care homes. Fitch believes that a default of some kind appears probable for all junior notes.
The sales process was initiated last year by the special servicer, Capita Asset Services (UK) Limited (Capita, advised by Deutsche Bank ) with a conclusive first round of bids from interested parties completed in January 2014. As a result, the data-room has been opened to selected parties to undertake further due diligence. Upon completion, interested parties may submit formal bids which will then be considered by the special servicer and the borrower (NHP), in conjunction with Deutsche Bank. Fitch understands that the decision to validate the final sale ultimately lies with the special servicer, which would be under no obligation to accept an offer. This route (of a possible sale of the borrower group) has been pursued by the special servicer as a consequence of the review undertaken by its financial adviser Ernst and Young (EY), which recommended amongst a number of exit strategies that a potential sale be explored.
The notes' LTVs are based on Jones Lang LaSalle's recent December 2013 valuation of the estate at GBP528.9m (GBP467.4m for HC-One and GBP61.5m for third party rents), which is in line with Fitch's own valuation - the underlying core assumptions consisting of an EBITDAR rent cover of around 1.8x and a yield of 8.0%. The valuation is broadly unchanged from last year, having grown by 0.3%. This valuation is on the back of the improving performance of the core operator HC-One (albeit coming from a very low base). FY13 (financial year ending September 2013) EBITDAR was ahead of plan by over 15% reaching around GBP48m, mainly as a result of an improved occupancy of 87% (up from 83% in FY11). The improvement was aided by relatively large amounts of 'catch-up' capex to date (funded through retained cash) amounting to GBP45m in FY12 and GBP25m in FY11. These amounts compare favourably with the GBP16m of normalised maintenance capex typically expected per annum for the estate (corresponding to around GBP1,100 spent per bed per annum for a portfolio of 14,313 beds).
The junior notes' LTVs are currently around 128%, 136%, 148% and 160% for the class B, C, D and E notes, respectively. These high LTVs take into account the senior ranking GBP408m class A notes, in addition to other senior ranking liabilities, namely GBP124.2m of swap mark-to-market, GBB73.8m of forward swap deferrals and GBP14.7m of servicer advances. Finally, an additional GBP7.7m of junior notes' interest deferrals has also been factored in.
Fitch understands that the controlling party (consisting of the class E noteholders) has directed the note trustee to replace the special servicer Capita with Mount Street Loan Solutions LLP (Mount Street) subject to appointment conditions. As explained in the notice published by the note trustee on 6 February 2014, the latter has been advised "that in light of the dispute between the parties and the threat of legal action against it, it is appropriate for the note trustee to apply for directions from the English courts as to matters of contractual interpretation relating to the applicability and satisfaction of the appointment conditions". Fitch will monitor the outcome.
Moving closer to legal final maturity of the notes without any prospects of an appropriate refinancing solution or property disposal generating sufficient funds to repay the rated notes could lead to further downgrades. Upgrades could be possible if material performance improvements combined with an increasing valuation result in making a successful repayment of the Fitch-rated notes by legal final maturity more likely.
SUMMARY OF CREDIT
Titan Europe 2007-1 (NHP) is a securitisation of 282 nursing homes owned by NHP, which are let on long leases to third-party operators active in the UK healthcare sector (in particular HC-One, a subsidiary of the borrower group, which accounts for around 85% of the estate).
The rating actions are as follows:
GBP42.15m class B secured floating-rate notes due 2017: downgraded to 'CC' from 'CCC'
GBP42m class C secured floating-rate notes due 2017: downgraded to 'CC' from 'CCC'
GBP58m class D secured floating-rate notes due 2017: affirmed at 'CC'
GBP60m class E secured floating-rate notes due 2017: affirmed at 'CC'