DBRS Publishes Surveillance Report for Windermere XII FCT

DBRS has today published a surveillance report for Windermere XII FCT (Windermere) that provides further details on the recent confirmation of its ratings as follows:

– Class A at BBB (sf) with a Negative trend
– Class X at AAA (sf) with a Stable trend.

The transaction is secured by an office property known as Coeur Défense, which is located in the La Défense submarket of Paris, France.

A little more than one year following the loan’s closing, the loan sponsors, affiliates of Lehman Brothers Holdings Inc., filed for safeguard protection. Since that time, the asset and its cash flows have been protected under a procédure de sauvegarde (safeguard proceedings). In February 2010, the safeguard proceeding ruling was successfully appealed; however, in March 2011, a Cour de cassation (the highest French court) ruling deemed it uncertain whether the local appeal court’s decision was unchallengeable in law. As a result, the case related to the safeguard proceedings has been sent to the appeal court of Versailles and is expected to be heard before the end of Q4 2011. As of this date, it is uncertain what the court decision will be and the resulting plan for the future of the loan, which is the basis for the Negative trend on the Class A Notes.

As of the March 2011 rent roll, the property was 62% occupied, which is an improvement over the 56% occupancy rate reported with the June 2010 rent roll. There is, however, concern with lease breaks and lease expiries at the subject between now and the rated final maturity of the notes in 2017. Between now and 2014, 21.4% of the leases have an expiry or break, and between 2015 and 2017, an additional 75% of the leases have an expiry or break.

Despite the improvement in occupancy at the property, the cash flow generated has been insufficient to pay noteholders their due interest and, as a result, draws have been made from the transaction’s liquidity facility to make up the shortfalls. The information provided to DBRS as of this date states that there are sufficient funds in the liquidity facility to pay interest on the notes through the rated final maturity date in 2017. The transaction liquidity facility provider is Lloyds TS Bank plc.

The most recent appraisal revealed a vacant possession value for the property of approximately EUR 972 million. The vacant possession value is believed to be sufficient to repay a full draw on the liquidity facility, the estimated fees associated with a liquidation and the EUR 776 million Class A Notes in full. Although a liquidation today is not expected because of the safeguard proceedings and the structural features of the transaction that can keep interest current to the noteholders over the coming years, the supply and demand dynamics for office space from tenants with large floorplate needs (as offered at the subject property) are not expected to be in the favour of the asset in the near term.

DBRS has kept the Class A notes on Negative trend as a result of the fact that it is possible that the continued court involvement in the administration of the loan will have negative implications for the notes. Additionally, there is significant lease rollover prior to the final rated maturity date of the notes in 2017. DBRS has confirmed the Class X Notes based on the definition within the transaction documents that allows them to receive the greater of zero or any excess interest in pari passu priority with the Class A Notes.

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