Today’s rating actions follow our review of the underlying loans’ credit quality. We consider that the refinancing risks associated with these loans have increased, and that these factors may result in principal losses.
The A1 and A2 loans are interest-only and pay at a fixed margin over Euro Interbank Offered Rate (EURIBOR) until August 2014, which is the first optional redemption date. At this point, the loan margins step up, and there is a full cash sweep of any surplus cash flow to pay outstanding interest and principal on the A1 loan facility. Any reduction in loan principal leads to a corresponding sequential redemption of the notes.
The reported interest coverage ratios (ICRs), as of February 2012, remain in line with the ratios at closing. The current A1 loan forward-looking ICR is 1.50x, and the A1 loan backward-looking ICR is 1.53x--compared with a closing forward-looking ICR of 1.47x and a closing backward-looking ICR of 1.47x.
As of February 2012, the A1 loan-to-value (LTV) ratio was 69.8%, down from 72.9% at closing. The current LTV ratio is based on a December 2011 valuation.
The A1 loan facility includes a cash-trap trigger at 1.30x for both the forward and backward-looking ICR, and an 85% A1 LTV ratio to amortize the loan. The A1 loan forward and backward-looking ICR default covenant is 1.10x, and the A1 LTV ratio default covenant is 90%.
The collateral securing both the A1 and A2 loans currently consists of 71 freehold and long-leasehold retail and department store properties and three multistorey car parks, all located in the Netherlands. Of these, 22 properties are located in the major centers of Amsterdam, Rotterdam, The Hague, and Utrecht, and account for approximately 50% of the rental income. The remaining properties are located in towns and cities throughout the rest of the country. The weighted-average remaining lease term of the portfolio is approximately 14 years.
Except for a property representing 0.3% of the total portfolio value, all of the properties are occupied by HEMA, Bijenkorf, or Vroom & Dreesmann (V&D). On Day 1, all were part of the Maxeda group, the largest Dutch nonfood retail group. These stores have since been acquired by new owners.
HEMA is the largest tenant, a Dutch department store contributing 43.3% of the total portfolio rent. It is a budget retailer selling own-brand baby clothes, general apparel, hardware, and bakery items. The stores typically trade from two-storey premises in or close to prime locations. The company was acquired by Lion Capital in 2007.
De Bijenkorf is the second-largest tenant, contributing 35.3% of the total portfolio rent. It is a high-end department store and one of only a few of its kind in the Netherlands. In 2010, De Bijenkorf was sold to the Selfridges Group.
V&D is the smallest tenant, contributing 21.1% of the total portfolio rent. It is a mid-market department store that trades throughout the country and was founded in 1887. The stores are generally well located, in our view; however, some of the retail accommodation is not at street level. V&D became a subsidiary of Sun Capital Partners in 2010.
Since the closing of the transaction, one small property (0.3% of the total portfolio value) has been added to the portfolio. It was acquired using the disposal proceeds from the sale of a separate part of one of the De Bijenkorf properties.
The servicer reported a net annual rent of EUR72.6 million in February 2012--up from EUR62.4 million at closing, due to rents being indexed to the Consumer Price Index (CPI) on an upward basis only.
Although the transaction has shown stable performance since closing, we consider that the risk of principal losses has increased in light of the significant loan sizes, as well as difficult commercial real estate market and lending conditions, which could further depress property values and make refinancing difficult. As a consequence, although we do not see the risk as imminent, we consider that the notes’ creditworthiness has deteriorated.
We have therefore lowered our ratings on all classes of notes in LEO-MESDAG. We now rate the class D and E notes at ‘B- (sf)', to reflect our view that they could suffer principal losses.
We have also removed from CreditWatch negative our ratings on the class A and X notes. On Jan. 31, 2012 (see “S&P’s CreditWatch Placements On 122 European CMBS Tranches At Jan. 31, 2012”), we placed on CreditWatch negative our ratings on the class A and X notes, following the rating actions we took on banks on Nov. 29, 2011, after the application of our revised bank criteria.
Furthermore, we have subsequently withdrawn our rating on the class X notes, to reflect our criteria “Global Methodology For Rating Interest-Only Securities,” published on April 15, 2010. Under these criteria, in the case of ratings on interest-only securities that were outstanding on April 15, 2010, we maintain those ratings until they are retired or drop below ‘AA-', at which point we withdraw them. As we have lowered the rating on the class X notes to ‘A (sf)', we have therefore withdrawn the rating.
Our ratings in this transaction are based on our criteria for rating European CMBS. However, these criteria are under review (see “Advance Notice of Proposed Criteria Change: Methodology And Assumptions For Rating European Commercial Mortgage-Backed Securities,” published on Nov. 8, 2011).
As highlighted in the Nov. 8 Advance Notice Of Proposed Criteria Change, we expect to publish a request for comment (RFC) outlining our proposed criteria changes for rating European CMBS transactions. Subsequently, we will consider market feedback before publishing our updated criteria. Our review may result in changes to the methodology and assumptions we use when rating European CMBS, and consequently, it may affect both new and outstanding ratings on European CMBS transactions.
Until such time that we adopt new criteria for rating European CMBS, we will continue to rate and surveil these transactions using our existing criteria (see “Related Criteria And Research”).
STANDARD & POOR‘S 17G-7 DISCLOSURE REPORT
SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The Rule applies to in-scope securities initially rated (including preliminary ratings) on or after Sept. 26, 2011.
If applicable, the Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available here.
-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, March 14, 2012
-- S&P’s CreditWatch Placements On 122 European CMBS Tranches At Jan. 31, 2012, Jan. 31, 2012
-- Advance Notice of Proposed Criteria Change: Methodology And Assumptions For Rating European Commercial Mortgage-Backed Securities, Nov. 8, 2011
-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Counterparty And Supporting Obligations Update, Jan. 13, 2011
-- Counterparty And Supporting Obligations Methodology And Assumptions, Dec. 6, 2010
-- Methodology: Credit Stability Criteria, May 3, 2010
-- Global Methodology For Rating Interest-Only Securities, April 15, 2010
-- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008
-- Framework For Credit Analysis In European CMBS Transactions, May 21, 2007
-- European CMBS Loan Level Guidelines, Sept. 1, 2004
-- European CMBS Monthly Bulletin, published monthly
EUR1.05 Billion Commercial Mortgage-Backed Floating-Rate Notes
Rating Lowered And Removed from CreditWatch Negative
A A (sf) AA/Watch Neg (sf)
B BBB+ (sf) AA- (sf)
C BB (sf) BBB (sf)
D B- (sf) BB (sf)
E B- (sf) BB- (sf)
Rating Lowered, Removed From CreditWatch Negative, And Withdrawn
X A (sf) AA/Watch Neg (sf)
NR A (sf)