(The following statement was released by the rating agency)
Oct 02 - Fitch Ratings has received new information on London & Regional Debt Securitisation 1 (LoRDS 1). The borrower, London and Regional (L&R), with its advisors recently published the information on the transaction. It includes updated collateral valuations as well as new information regarding a long-dated swap, the presence of which was not (to Fitch's knowledge) previously publicly disclosed. This updated information suggests noteholders are exposed to greater risk than previously identified.
Including the mark-to-market of the swap, the securitised loan-to-value ratio (LTV) now stands at 98%, considerably in excess of Fitch's previous estimate. This implies renewed downwards pressure on the ratings of both classes of notes, the Outlooks on which are already Negative in light of refinancing risk. The loan is due this month, and with the whole loan LTV (including the swap) now at c. 129%, Fitch is concerned about the prospects of repayment by bond maturity in October 2014.
The proposed note extension (and margin uplift) suggests Fitch's concerns are shared by L&R. However, despite lacking equity, L&R appears to be committed to honouring its creditors. To the extent this statement translates into concrete actions of the kind outlined, it may help to alleviate some of the risks in a way that is satisfactory to rated bond investors.
The published business plan provides a credible platform for a staged reduction in leverage to a more moderate level through actions such as the sale of assets, key new lettings, a partial write-down of the B Loan, restructuring of the swap, and injection of equity towards capital expenditure - all subject to noteholder consent.
The advanced nature of negotiations for both the sale of King William Street and a new letting at Trinity Bridge House should allow for deleveraging over the short term. Meanwhile, a GBP30m refurbishment of St Georges Court, of which c. GBP6m is being provided by the sponsor up to January 2013 (with the rest to be injected thereafter), provides a promising avenue to increase collateral value, albeit at the cost of bearing completion risk.
The generally high quality of the collateral allows for a longer term view being taken by L&R, whose proactive stance is a welcome signal for LoRDS 1. However, the positive steps the borrower intends to take are held in check by an unhealthy level of leverage. Fitch will monitor developments over the following months in its review of this transaction, with the Negative Outlook indicating the continued vulnerability of noteholders both to operational and property market risk.