(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has downgraded LCP Proudreed Plc's class A and B commercial mortgage-backed floating rate notes due 2016 and affirmed the two junior tranches as follows:
GBP239.3 class A (XS0233008936) downgraded to 'AAsf' from 'AAAsf'; Outlook Negative
GBP32.2m class B (XS0233010163) downgraded to 'Asf' from 'AAsf'; Outlook Negative
GBP36.8m class C (XS0233010676) affirmed at 'BBBsf'; Outlook revised to Negative from Stable
GBP9.2m class D (XS0233011054) affirmed at 'BBsf'; Outlook revised to Negative from Stable
Despite relatively stable collateral performance, Fitch's view of the ongoing weakness in regional/secondary commercial real estate market (assets of which largely secure the loans in this CMBS), as evidenced by widening yield spreads and uncertainty over future refinancing prospects, together with the top-heavy capital structure, forms the basis for the downgrades and Negative Outlooks.
The borrowers are covenanted to maintain a maximum loan-to-value ratio (LTV) of 70% at each loan calculation date starting in November 2012. A covenant breach can be cured either by partial loan (and by extension, note) redemption or by providing additional collateral as security for the bondholders. While current reported LTVs are only slightly above the covenant level, Fitch estimates the leverage to be well in excess of 80%. With new updated valuations due within 12 months, the borrowers' commitment to meeting the LTV covenant is likely to be tested.
In the event of a covenant breach, and in lieu of borrower intervention, excess rental income will be trapped and utilised to reduce borrower indebtedness. Strong income performance (interest cover is 3.84x and 3.57x for LCP and Proudreed, respectively) still provides good potential for the loans to de-lever to a level which will protect the class D notes against losses.
The transaction is a securitisation of two commercial mortgage loans originated in the UK by HSBC Bank plc ('AA'/Negative/'F1+'), which closed in 21 December 2005. The loans are secured against 120 commercial properties located across England, comprising retail (32%), industrial (34%), office (3%), and shopping centre properties (31%).
A performance update report will shortly be available on
(Caryn Trokie, New York Ratings Unit)