TEXT-Fitch cuts Quirinus (European Loan Conduit No. 23)

(The following statement was released by the rating agency)

Oct 3 - Fitch Ratings has downgraded Quirinus (European Loan Conduit No. 23) plc's commercial mortgage-backed notes, as follows:

EUR82.7m Class A (XS0259561925) downgraded to 'A+sf' from 'AA+sf'; Outlook Stable

EUR5.2m Class B (XS0259562576) downgraded to 'Asf' from 'AAsf'; Outlook Stable

EUR6.3m Class C (XS0259562907) downgraded to 'BBBsf' from 'Asf'; Outlook Stable

EUR8.3m Class D (XS0259563202) downgraded to 'BBsf' from 'BBBsf'; Outlook Stable

EUR9.3m Class E (XS0259563624) downgraded to 'CCCsf' from 'Bsf'; Recovery Estimate (RE) 75%

EUR7m Class F (XS0259564192 downgraded to 'CCsf' from 'CCCsf'; RE0%

The downgrades are driven by the high leverage of the remaining three loans in the transaction, which Fitch believes will struggle to redeem at their respective maturity dates. All the loans are backed by similar collateral: German retail warehouse assets tenanted by high quality German discount retailers on WA lease terms that range from 4.4 to 6.4 years.

Fairacre, the smallest loan in the pool, representing 6.9% of outstanding principal balance, was scheduled to mature in February 2009. It failed to redeem and entered special servicing in January 2011. The borrower subsequently filed for bankruptcy and at present the agency understands that the insolvency administrator and special servicer have marketed the portfolio for sale. Fitch views the loan as a bellwether to the forthcoming maturities of the larger H&B and Eurocastle loans in November 2012 and February 2016, respectively.

Although Fitch estimates that all three loans have loan-to-value ratios approaching or in excess of 100%, all still provide very strong interest coverage, with ratios between 1.8x and 2.2x. A full cash sweep is currently in place for the defaulted Fairacre loan, which has reduced the loans' outstanding balance to EUR8.2m from EUR9.4m at closing. However, the benefit of a strategy of sweeping cash at loan maturity in order to de-lever the loans may be undermined by the weak lease profiles across the remaining loans. For example, the H&B loan portfolio contains a single lease expiring in October 2014 that accounts for one-third of that loan's current rent, exposing the loan to severe income concentration risk.

Fitch expects that the EUR25.4m H&B loan will fail to redeem at loan maturity and will follow Fairacre into entering special servicing. By doing so, the aggregate balance of loans in special servicing would be above 25%, thereby causing a switch in principal paydown to fully sequential and offering stronger credit enhancement to the higher rated tranches.

Since the last rating action in October 2011, Lumiere, the largest loan in the pool, has repaid in full in a modified pro-rata fashion, which along with the minor amortisation receipts has reduced the outstanding note balance by EUR376.8m.

Fitch will continue to monitor the performance of the transaction. A performance report will shortly be available on


(Caryn Trokie, New York Ratings Unit)

((Caryn.Trokie@thomsonreuters.com; 646-223-6318; Reuters Messaging: rm://caryn.trokie.reuters.com@reuters.net))