Moody's downgrades Class A EMEA CMBS Notes issued by Infinity 2007-1 "SoPRANo"
....EUR774.4M Class A Notes, Downgraded to Baa3 (sf); previously on Jan 20, 2012 Downgraded to A1 (sf)
Moody's does not rate the Class B, Class C, Class D, Class E, Class F, and the Class G Notes.
Today's downgrade action reflects Moody's increased loss expectation for the pool since its last review. This is primarily due to the performance below expectation of the two German loans, EHE -- Pool 1A and EHE -- Pool 1B (67% of current pool), since last review, in particular the failure to deleverage the loans through disposals and the missed disposal target for the EHE -- Pool 1B Loan in October 2012.
Further drivers of Moody's increased loss expectation for the securitised portfolio are (i) the unexpected repayment of an above average loan from an expected loss perspective on a modified pro-rata basis preventing an increase in credit enhancement for the Class A Notes; and (ii) the downward pressure on property values for the type of retail properties backing the EHE -- Pool 1A and EHE -- Pool 1B Loans due to the decreasing weighted average remaining lease term and the sustained low investor appetite for this type of properties with rather short remaining lease terms.
A major concern for Class A Notes is that the principal payment allocation to the notes is still on a modified pro-rata basis and that disposal proceeds for the German loans will not be allocated sequentially. Due to the loan restructuring the servicer has not declared a default of the German loans and subsequently the sequential pay trigger has not been breached. Thus there is uncertainty around a potential future switch to sequential principal allocation depending on the servicer work-out strategy for the German loans.
The key parameters in Moody's analysis are the default probability of the securitised loans (both during the term and at maturity) as well as Moody's value assessment for the properties securing these loans. Moody's derives from those parameters a loss expectation for the securitised pool.
Based on Moody's revised assessment of these parameters, it expects large losses for the remaining pool driven by the German loans which exhibit an average Underwriter (UW) whole loan LTV of 134%.
Moody's current weighted average A-loan and whole loan LTV is 100% and 115% respectively. In comparison, the UW A-loan LTV is 95% and the whole loan LTV is 109%. Moody's notes that the moderate LTV levels for the remaining loans in France and in Spain have only a limited beneficial effect as they only represent 33% of the total pool and there is no cross collateralisation. For the two German loans the Moody's whole loan LTV ratios are well above 100%, translating into a high probability of default at maturity (>50%).
Due to these high LTV ratios, Moody's expects significant losses for EHE -- Pool 1A and EHE -- Pool 1B Loans of around 30% and 14% respectively.
Due to the high loan concentration and high expected loss for the two German loans, the rating of Class A is highly sensitive to the future evolution of property values for these loans. In Moody's view the values are subject to downward pressure in the future due to the secondary quality of the properties and the likely decreasing average lease term. Furthermore, the most recent valuations for EHE -- Pool 1A and EHE -- Pool 1B are respectively 24 months and 15 months old.
In general, Moody's analysis reflects a forward-looking view of the likely range of commercial real estate collateral performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside an acceptable range of the key parameters such as property value or loan refinancing probability for instance, may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated when the related securities ratings were issued. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions . There may be mitigating or offsetting factors to an improvement or decline in collateral performance, such as increased subordination levels due to amortisation and loan re- prepayments or a decline in subordination due to realised losses.
Primary sources of assumption uncertainty are the current stressed macro-economic environment and continued weakness in the occupational and lending markets. Moody's anticipates (i) delayed recovery in the lending market persisting through 2013, while remaining subject to strict underwriting criteria and heavily dependent on the underlying property quality, (ii) strong differentiation between prime and secondary properties, with further value declines expected for non-prime properties, and (iii) occupational markets will remain under pressure in the short term and will only slowly recover in the medium term in line with anticipated economic recovery. Overall, Moody's central global macroeconomic scenario is for a material slowdown in growth in 2012 for most of the world's largest economies fueled by fiscal consolidation efforts, household and banking sector deleveraging and persistently high unemployment levels. We expect a mild recession in the Euro area.
On 21 August 2012, Moody's released a Request for Comment seeking market feedback on proposed adjustments to its modelling assumptions. These adjustments are designed to account for the impact of rapid and significant country credit deterioration on structured finance transactions. If the adjusted approach is implemented as proposed, the rating of the notes affected by today rating action may be negatively affected. See "Approach to Assessing the Impact of a Rapid Country Credit Deterioration on Structured Finance Transactions", (http://www.moodys.com/research/Approach-to-Assessing-the-Impact-of-a-Rapid-Country-Credit--PBS_SF294880) for further details regarding the implications of the proposed methodology changes on Moody's ratings.
MOODY'S PORTFOLIO ANALYSIS
Infinity 2007-1 "SoPRANo" closed in May 2007 and represents the synthetic securitisation of initially 15 commercial mortgage loans which were either originated and arranged by IXIS CIB or represent a participation of IXIS CIB in loans originated by Capmark Bank Europe plc.
Since closing, four loans representing 34% of the initial portfolio balance have repaid. The Leipzig loan, the second largest loan in the pool, repaid in July 2012 and contributed for most of the repayments. However, due to the modified pro-rata allocation of repayment for the German loans, this did not improve the relative position of Class A in the capital structure. The Credit Enhancement remained stable at 25% since last review as the subordinated Classes continued to benefit from principal repayments. The overall effect of the Leipzig repayment was therefore negative for Class A, as while the Credit Enhancement of Class A remained stable the average quality of the remaining pool has decreased.
There are eleven loans remaining in the pool with two loans representing 67% of the total pool located in Germany, eight loans representing 22% of the total pool located in France, and one loan representing 11% of the total pool located in Spain.
Moody's uses a variation of the Herfindahl Index to measure diversity of loan size, where a higher number represents greater diversity. Large multi-borrower transactions typically have a Herf of less than 10 with an average of around 5. This pool has a Herf of 2.8, compared to 4.0 at closing. As indicated above, the pool exhibits an above average concentration in terms of geographic location with around two third of the loan pool located in Germany. The portfolio is also concentrated in terms of property types with approximately 88% of exposure to mainly secondary quality properties in the retail sector, 6% of warehouses, 1% of residential properties, 2% of offices and 2% of industrial properties. The aggregate outstanding balance of the securitised loans as of the last interest payment date in November 2012 is EUR658.4 million.
All the loans in the pool have been performing well from a cash flow perspective since the beginning of the transaction, with good coverage ratios and stable, predictable cash flows. The two German loans however suffer from a large decrease in property values which poses refinancing and principal recovery issues.
The largest loan in the pool, EHE -- Pool 1A (57% of the securitised pool), was subject to extensive restructurings in July 2011 which primarily included the extension of the loan maturity to October 2013 with two further one-year extension options, subject to certain conditions which focus on property disposals and LTV targets. The currently reported U/W senior loan LTV is 120% based on a valuation as of November 2010.
The loan is secured by a portfolio of 41 commercial real estate properties located across Germany. Based on U/W market value, approximately 80% of the portfolio are retail and shopping centre properties. The remaining 20% are logistic and other commercial properties. On average the property portfolio is composed of medium sized, secondary quality retail properties, but there are also four larger properties in the pool with values ranging from EUR40 million to EUR70 million UW market value each. Since closing the valuation has significantly decreased by 39%. The valuer's concern was that a significant number of properties are over-rented and the overall secondary, and in some cases tertiary nature of the properties. The WA remaining term to lease break is slightly lower than five years and the current passing rent is approximately EUR28 million.
As of today, more than one year after the restructuring, only one small property valued at around EUR2.5 million has been sold. In Moody's view a further extension of the loan maturity will be difficult but not impossible to achieve in October 2013. The disposal target of EUR60 million and the senior LTV target of 120% in October 2013 may be achieved if some of the biggest, above average quality properties are sold. This poses a risk of adverse selection whereas the portfolio quality will gradually deteriorate. Furthermore, as noted previously, the servicer has the possibility to waive the sales conditions and delay the process, there is therefore low visibility regarding the timing of the final maturity for the loan.
The other German loan, EHE -- Pool 1B (10% of the securitised pool) is secured by a portfolio of seven, mainly retail properties throughout Germany. The loan was subject to extensive restructurings in December 2011. Overall, the key restructuring terms follow the restructuring features of the EHE -- Pool 1A loan. The loan was also extended to October 2013 from its initial maturity date in October 2011, but differently, the disposal target date was in October 2012. The borrowers have missed the disposal target. This has triggered a "Managed Sell Down Period" of six months during which the different parties must agree on a disposal plan. As for EHE -- Pool 1A, there is low visibility as for the final maturity date of the loan and the timing of a possible default given that the servicer can waive the sales conditions and covenant breaches.
The financial covenants set at the senior loan level include an ICR covenant of 2.55x and an LTV covenant of 100% as of November 2012 reducing over time to 75% in October 2013. The currently reported A-Loan LTV is 95%. Moody's whole loan LTV is 111%.
The San Cugat loan (11% of the securitized pool) is secured by a shopping centre located in Sant Cugat del Valles, in the province of Barcelona. As of November 2012, the WA remaining lease term is approximately five years and the property is almost fully occupied (96.6%). Moody's LTV is stable at around 88% since last review. There is a medium probability of default at maturity in July 2016 (10% - 20%).
The other loans (22% of the securitized pool) are located in France and are all characterized by relatively low LTV, good coverage ratios and generally stable and predictable cash flows. Seven out of the eight French loans have Altarea Cogédim as sponsor, which Moody's considers to be a positive aspect. Overall the quality of the remaining loans is considered to be good.
Moody's expects a significant amount of losses on the securitised portfolio, stemming mainly from the high leverage on the two German loans.
The principle methodology used in this rating was Moody's Approach to Real Estate Analysis for CMBS in EMEA: Portfolio Analysis (MoRE Portfolio) published in April 2006. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Other factors used in this rating are described in European CMBS: 2012 Central Scenarios published in February 2012.
The updated assessment is a result of Moody's on-going surveillance of commercial mortgage backed securities (CMBS) transactions. Moody's prior assessment is summarised in a press release dated 22 January 2012. The last Performance Overview for this transaction was published on 4 September 2012.
In rating this transaction, Moody's used both MoRE Portfolio and MoRE Cash Flow to model the cash-flows and determine the loss for each tranche. MoRE Portfolio evaluates a loss distribution by simulating the defaults and recoveries of the underlying portfolio of loans using a Monte Carlo simulation. This portfolio loss distribution, in conjunction with the loss timing calculated in MoRE Portfolio is then used in MoRE Cash Flow, where for each loss scenario on the assets, the corresponding loss for each class of notes is calculated taking into account the structural features of the notes.
As such, Moody's analysis encompasses the assessment of stressed scenarios.
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