The following is a press release from Moody's Investors Service: EUR 871 million of EMEA CMBS affected London, 02 July 2010 -- Moody's Investors Service has downgraded the Class A Notes issued by Epic (Drummond) Limited (amount reflects initial outstandings): EUR871.175M Class A Floating Rate Note due 2022, Downgraded to Aa3; previously on May 4, 2010 Aaa Placed On Review for Possible Downgrade Moody's does not rate the Class B, C, D, E, F and G Notes issued by Epic (Drummond) Limited. The Class X Notes were repaid in July 2009. 1) Transaction Overview and Performance Update The transaction represents the synthetic securitisation of thirteen commercial mortgage loans (reference obligations) originated by The Royal Bank of Scotland plc (RBS), Aa3/P-1. Five reference obligations are the senior portion of a whole loan. The loans were originated by RBS between September 2006 and April 2007 and were secured over commercial properties located in Germany (37% as of closing), Italy (18%), Finland (26%), Spain (9.5%), Greece (3.5%), Portugal (3.5%) and Poland (2.0%). In terms of property types, approximately 80% represented several types of retail properties, the balance were mainly office properties. The legal final maturity date of the Notes is in January 2022. Since closing in June 2007, the underlying loan pool has not changed its composition. The loans are not equally contributing to the portfolio: the largest loan (Countrywide Kaufland) represents 32% of the current portfolio balance, while the smallest loan (Irus Poland) represents 2%. The current loan Herfindahl index is 5.7. Due to amortisation and partial prepayments, the portfolio balance decreased from EUR 1,132 million to EUR 1,047 million as of the last interest payment date in April 2010. Due to the amortisation and partial prepayments, the portfolio's country mix has changed since closing. The contribution of Finnish properties has decreased to 16% while the contribution of Italian properties increased to 25%. Interest and scheduled amortisation is allocated sequentially to the Notes. Prepayments, disposal proceeds and release premia are allocated modified pro-rata between the Class A to G Notes. Upon the occurrence of a credit event and the delivery of a credit event notice in respect of any reference obligation, the available redemption funds will be applied sequentially to the Notes until the calculation date following a cure of the relevant credit event or a removal of the relevant defaulted reference obligation from the reference pool. According to the last investor report as of April 2010, all loans in the portfolio were current. However, the Countrywide Kaufland and Project DD loans (54% of the loan pool) continue being on the servicer's watchlist. The Countrywide Kaufland Loan (32% of the current pool) is on the servicer's watchlist as a result of the breach of its ICR covenant in October 2009. The breach resulted from lower rental cash flows mainly due to the insolvencies of the tenants Karstadt, Quelle and Deutsche Woolworths. The Project DD Loan (22% of the pool) was placed on the servicer's watchlist in October 2009 due to the breach of its LTV covenant. The U/W Market Value based on a new valuation is EUR 250.1 million, a decline of 37% compared to the U/W Market Value of EUR 395.0 million as of closing. In addition, on the last interest payment date in January 2010, the interest coverage ratio (ICR) covenant of this loan was breached. The ICR declined to 1.25x which is below the covenant level of 1.30x. 2) Rating Rationale Today's rating action concludes the review for possible downgrade of the Class A Notes, which Moody's initiated on 4 May 2010. In its loan-by-loan review process Moody's main focus was on property values and the term and refinancing default risk of the underlying loans. In its transaction review Moody's applied a country risk analysis to loans exposed to Greece (Ba1), Portugal (Aa2 on review for possible downgrade) and Poland (A2) which represent 10% of the current loan pool. The transaction also has exposure to Spain (Aaa on review of possible downgrade). Furthermore, Moody's conducted scenario analysis to assess the impact of different work-out strategies on the recovery proceeds of defaulted loans. Moody's downgrade action is mainly driven by the performance of the European commercial property markets to date and Moody's expectation regarding property value performance and lending markets going forward. This applies to a large degree to the three largest loans in the pool. As a result of the increased leverage of the loans and due to still inadequate functioning lending markets, Moody's anticipates higher default rates across the pool compared to its assessment at closing. Especially highly leveraged loans with maturity in the short to medium term and with properties located in Greece and Portugal are in Moody's view most adversely impacted. Compared to closing the subordination of the Class A Notes is almost unchanged since none of the loans has prepaid or repaid. Moody's anticipates a substantial amount of losses on the securitised portfolio. The current subordination level of 24% for Moody's rated Class A Notes provides some protection against expected losses. However, the likelihood of higher than expected losses has increased. This is largely driven by the decline in property values, resulting in an increased note-to-value level for the Class A Notes of currently 68%, based on Moody's value assumptions, compared to 52% at closing. 3) Portfolio Analysis Property Values. Moody's estimates that compared to the underwriter's ("U/W") values at closing the values of the properties have declined on aggregate 28.4% until mid 2010. Based on its property value assessment, Moody's estimates the transaction's current weighted average ("WA") securitised loan-to-value ("LTV") ratio is approximately 94% compared to the reported U/W LTV of 69%. Based on Moody's current value assessment, the LTVs for the securitised loans range between 35% for the Giugliano Loan and 107% for the Project DD Loan. Considering the additional debt in form of B-loans (amounting to EUR 160.4 million on aggregate), the overall Moody's whole loan leverage is on average 107%. Moody's took into consideration an anticipated property value development, including a gradual recovery from 2011 onwards, when analysing the default risk at loan maturity and the loss given default for each securitised loan. Moody's however does not expect a notable value recovery going forward for the properties located in Greece, Spain and Portugal. Refinancing Risk. The refinancing exposure of the loans referenced in this transaction mainly occurs in the medium term between 2012-2014 (71% of the pool balance) and in the long term in 2017 (22% of the current pool balance). Only one loan, the Project Magnum Loan (7% of the pool balance), matures in the near term (2011). Moody's expects the loans still to be highly leveraged on their maturity dates, also taking into account the respective B-loans. Moody's expects only a slow recovery for the Continental European property markets and took conservative assumptions especially regarding the property and lending markets in Greece, Spain and Portugal. Consequently, in Moody's view, for all the loans, the default risk at maturity has increased substantially compared to the closing analysis. Term Default Risk. Most occupational markets in Continental Europe are still characterised by falling rents, increasing vacancy rates and higher than average tenant default rates. This puts particularly pressure on loans secured by properties with a weak tenant structure and/or a high rate of lease expiries throughout the loan term. Most of the loans have benefited since closing from increased rents and the low interest environment (12 loans bear interest at a floating rate based on the three month EURIBOR), evidenced by an increase of the WA senior loan ICR to 1.92x in April 2010 compared with 1.77x as of closing. Based on the respective lease profiles of the properties securing the loans, Moody's has incorporated into its analysis an allowance for deterioration in coverage ratios and weakening tenant qualities on most of the loans, in turn increasing the term default risk assumption for the respective loans. Moody's believes that the Countrywide Kaufland Loan (32% of the current pool balance) is weaker than the pool average from a term default risk perspective. For the Countrywide Kaufland Loan the term risk has increased compared to closing due to the increased voids and the insolvencies of the three tenants Karstadt, Quelle and Woolworths (approximately 5% of the properties rental income) which has subsequently resulted in the breach of the loan's ICR covenant. Overall Default Risk. Based on Moody's revised term and refinancing default risk assessment of the underlying loan pool, Moody's assesses the highest overall default risk for the three largest loans in the pool, the Countrywide Kaufland, Project DD and Project Magnum loans (on aggregate 60% of the current pool balance) and the lowest overall risk for the Irus Poland and Beni Stabili loans (on aggregate 11% of the current pool balance). The default risk of all loans is predominantly driven by refinancing risk. Overall, Moody's expects a very large portion of the portfolio to default over the transaction term. Portfolio Loss Exposure: Taking into account the higher than initially assessed default risk of the loans, the most recent performance of the commercial property markets in Continental Europe, Moody's opinion about future property value performance and the most likely work-out strategies (MORE TO FOLLOW) Dow Jones Newswires July 02, 2010 10:31 ET (14:31 GMT)
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