London, 09 November 2012 -- Moody's Investors Service has today downgraded the following classes of notes issued by Quokka Finance p.l.c.:
....EUR400M Class A Notes, Downgraded to Aa3 (sf); previously on Aug 18, 2011 Confirmed at Aa1 (sf)
....EUR78.9M Class B Notes, Downgraded to A3 (sf); previously on Oct 13, 2009 Downgraded to A1 (sf)
....EUR40.1M Class C Notes, Downgraded to Baa3 (sf); previously on Oct 13, 2009 Downgraded to Baa1 (sf)
....EUR58.5M Class D Notes, Downgraded to Ba3 (sf); previously on Oct 13, 2009 Downgraded to Ba1 (sf)
....EUR40M Class E Notes, Downgraded to B3 (sf); previously on Oct 13, 2009 Downgraded to B1 (sf)
Today's downgrade reflects (i) the increased likelihood that 38% of the loans in the pool (the TAG sponsored loans) will be repaid at their maturity date in September 2013 with the principal proceeds being allocated on a pro rata basis to the notes and (ii) the additional weight given to downside risk in our analysis for the remaining BGP sponsored loans.
Further downgrade pressure is likely if (i) there is a value-destroying forced sale scenario for the collateral supporting the BGP sponsored loans or (ii) significant liabilities arise from the material litigation risk attached to the BGP loans from legacy transaction management, tax structuring, broker contracts and tenant deposit issues or (iii) there is significant credit deterioration as a result of the stronger properties securing the BGP loans getting repaid or worked-out sooner without sufficiently de-levering the remaining pool.
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.
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.
MOODY'S PORTFOLIO ANALYSIS
Quokka Finance p.l.c closed in August 2006 and represents the securitisation of loans related to the acquisition of several housing companies and property portfolios located in Germany. The borrower group acquired 18,979 residential units, 4,723 parking lots and garages and 554 small commercial properties. The property portfolio is diversified throughout Germany with concentrations in Lower Saxony, North-Rhine-Westphalia, Berlin and Schleswig-Holstein.
At closing, separate loans were provided to 11 different Borrowers that were cross-collateralised through a guarantee structure, but not cross-defaulted. In case of a cash flow shortfall of any Borrower, the cross-guarantee provides that any other Borrower has to make whole the cash flow shortfall, in which case no Borrower event of default ("EoD") will occur. In case of a Borrower EoD, the Issuer (or the Security Trustee on its behalf) is entitled to enforce the Term Loan Security, including the enforcement of the guarantee of the other Borrowers for the defaulted Borrower's obligations.
Scheduled amortisation is applied sequentially to the notes while prepayments are allocated on a pro-rata basis as long as the WA LTV of the pool is below 75%. The allocation switches to sequential after a Declared Borrower Default or upon enforcement of the Borrower Security. A Declared Borrower Default means a Borrower EoD which results in the Issuer serving notice on the Borrower declaring that a Borrower EoD has occurred.
Initially, all 11 borrowers were owned by BGP Investment S.a.r.l. (a joint venture of Babcock & Brown and GPT Group) (the "Original Sponsors")). In H1 2007, the Original Sponsors sold the majority shares in two of the borrowers (Emersion and Domus) representing 38% of the pool to Colonia Real Estate AG. TAG Immobilien AG, with a market cap of around EUR 875 million as of 6 November 2012, is the major shareholder of Colonia Real Estate AG. As a result of the change of sponsor, the loans of the two disposed borrowers are no longer cross-collateralised with the remaining portfolio following the payment of EUR 7.6 million guarantee release premia.
On 12 August 2009 following a restructuring of BGP Investment S.a.r.l., BGP Holdings PLC became the new parent for the other 9 loans representing 62% of the pool. In addition to the collateral securing this transaction, BGP owns a sizable property portfolio across Europe. BGP's ultimate aim is to liquidate its assets and return proceeds to its 57,000 shareholders. BGP has publicly stated that it may hold in reserve sale proceeds of assets sitting outside this transaction in case additional equity is needed to ensure refinancing of its remaining assets. BGP Holdings held around EUR 1.6 million of cash and cash equivalents according to its Annual Report and Financial Statements dated 31 December 2011. Moody's view is that BGP may struggle to refinance its 9 loans at their maturity in September 2013, leaving a relatively short three year tail period until legal final of the Notes in September 2016.
Moody's understands that the BGP structure remains vulnerable to litigation due to past transactional structuring and potential changes in the tax environment. Moody's was given to understand that the litigation issues have been overcome to a great extent and present a minimal risk. As no further details were provided, it was not possible for Moody's to fully assess the credit implications of this potential risk. As mentioned above, significant liabilities arising from this litigation risk could lead to further rating sensitivity.
The aggregated loan balance has reduced by approximately EUR 58.6 million since closing. Most recently reported underwriter's weighted average LTV is 69.6%, which compares to an LTV of 82% based on Moody's value.
The current Moody's note-to-value (NTV) of 50.4% for the Class A notes, 61.8% for the Class B notes, 67.7% for the Class C notes, 76.2% for the Class D notes and 82% for the Class E notes provides some property value cushion.
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 this methodology.
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 13 October 2009. The last Performance Overview for this transaction was published on 19 October 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.
Moody's ratings are determined by a committee process that considers both quantitative and qualitative factors. Therefore, the rating outcome may differ from the model output.
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Ramzi KattanAsst Vice President - Analyst Structured Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Oliver Moldenhauer Vice President - Senior Analyst Structured Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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