DBRS Downgrades Five Classes and Confirms One of INDUS (ECLIPSE 2007-1) plc

DBRS has today downgraded the ratings of INDUS (ECLIPSE 2007-1) plc (Indus) as follows:

-- Class A to BBB (sf) from AAA (sf)
-- Class B to BB (sf) from AA (low) (sf)
-- Class C to CCC (sf) from BBB (low) (sf)
-- Class D to D (sf) from CCC (sf)
-- Class E to D (sf) from C (sf)

In addition, DBRS has confirmed Class X at AAA (sf).

The ratings have been removed from Under Review with Negative Implications, where they were placed on December 3, 2009. The trends on Class A and B are Stable. No trends are assigned to Classes C, D and E.

This transaction originally consisted of 14 fixed-rate loan and five floating-rate loans secured by 366 residential and commercial properties located in England and Scotland. The original securitised balance of the pool was £894,431,744. According to the January 2012 cash management report, the current securitised balance of the pool is £695,343,701. Of the original 20 loans, 15 remain.

The Agora Max loan, originally secured by two anchored retail properties and one mixed-use retail and office property, was liquidated from the trust with the January 2012 cash management report. The loan reached its scheduled maturity date in March 2011 and failed to refinance. A January 2012 RNS notice indicated that after a lengthy marketing and sales process conducted by the special servicer, the remaining collateral was sold, resulting in a crystallised loss to the trust totalling £12.2 million. This loss fully eroded Class E and a portion of Class D. As such, DBRS has downgraded the ratings of both classes to D (sf).

Of the remaining 15 loans, three have reached their maturity dates and failed to refinance. The largest of these loans is Adelphi House.

The Adelphi House loan is secured by an office building located in London’s West End, along the north bank of the River Thames. The property comprises approximately 330,000 square feet (sf) on 13 floors. According to the most recent servicer report, the property is currently 99.6% occupied. The largest tenant in the building is the U.K. government’s Secretary of State, occupying 48.6% of the net rentable area (NRA) with a lease expiring in approximately 18 months.

The Adelphi House loan is the largest in the pool, currently representing 30.6% of the pool balance. The loan reached its scheduled maturity date in October 2011 and failed to refinance. At that time, the borrower was in the process of selling the asset; however, that sale fell through.

Further to the difficulties surrounding the refinance of such a large loan, there is a long-dated interest rate swap associated with the loan. The swap currently has a significant negative mark-to-market value which ranks senior to the lenders in the loan waterfall. With the mark-to-market value of the swap taken into consideration, the DBRS assumed severity of loss in an enforcement or liquidation scenario increases substantially.

In general, the collateral securing the loans in this transaction have been subject to the overall deflation in property values in the greater European commercial real estate market. When taking the market decline into account, the capacity of debt, on a loan-by-loan basis, in the DBRS analysis, has decreased substantially since issuance. As a result, DBRS has downgraded Classes A to E as listed above.

DBRS has confirmed the rating of Class X based on the definition within the transaction documents that allow for it to receive the greater of zero or any excess interest in pari passu priority with Class A.

Note:
All figures are in U.K. pounds sterling unless otherwise noted.

The applicable methodologies are European CMBS Rating Methodology, CMBS European Surveillance Methodology, Legal Criteria for European Structured Finance Transactions, Unified Interest Rate Model, Swap Criteria for European Structured Finance Transactions