DBRS Downgrades Class A and Places It Under Review - Developing; Confirms Class X

DBRS has today downgraded Class A of the Windermere XII FCC (Windermere) transaction to BBB from AAA. The class has also been placed Under Review – Developing Implications. Class X has been confirmed at AAA.

The transaction is secured by an office property, Coeur Défense, located in the La Défense submarket of Paris. The action is a direct result of the property’s declined performance; occupancy is expected to drop to 44% by July 2010 and the appraised value of the asset has fallen below the original DBRS stressed value. Additionally, market conditions have further deteriorated considering the number of concessions (six to nine months of free rent) is increasing and market rents are down. While DBRS does not expect a default of interest payments to the Class A, the leverage on the asset, its updated value and the downward pressure on rents, are more indicative of a BBB rating. Class X, which receives interest-only payments, maintains its AAA rating based on the definition within the documents that allow for it to receive the greater of zero or any excess interest in pari passu priority with Class A.

In the short-term, cash flow in certain quarters may be low due to concession schedule given on newly signed leases to renewing and new tenants; however, the liquidity facility is large enough to keep bondholders current in the event that cash flow from the property and the reserves are insufficient.

The appraisal revealed an as-vacant value under €1 billion, which assumes the asset would be liquidated today. The as-vacant value is believed to be sufficient to repay a full draw on the liquidity facility and estimated fees associated with the liquidation, in addition to the €776 million Class A notes in full. While a liquidation today is not expected because of the structural features within the transaction that will keep interest current to the note holders over the next few years, the supply and demand dynamics for office space from tenants with large floor plate needs is not expected to be in favour of the asset for some time. The imbalance of supply in the market will lead to longer periods of vacancy, greater concessions and continued downward pressure on market rental rates.

DBRS has kept the Class A notes Under Review with Developing Implications as a result of a few unknown 2010 and 2011 lease terms of existing tenants in the property. DBRS will continue to monitor the leasing at the asset and report on it in the Monthly CMBS Surveillance Report.

Note:
All figures are in Euros unless otherwise noted.

The applicable methodologies are CMBS Rating Methodology and CMBS Surveillance, which can be found on our website under Methodologies.

This is a structured finance rating.