June 24 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded European Property Capital 3 plc's (EPC 3) notes due 2015, as follows:
EUR40.4 class A (XS0236878525) downgraded to 'BBBsf' from 'Asf'; Outlook Negative
EUR17.8m class B (XS0236879929) downgraded to 'Bsf' from 'BBsf'; Outlook Negative
EUR17.9m class C (XS0236880851) downgraded to 'CCCsf' from 'Bsf'; RE50%
EUR17.5m class D (XS0236881313) downgraded to 'CCsf' from 'CCCsf'; RE0%
The downgrades are based on heightened concerns of a timely work out of the last remaining loan, the EUR93.6m Randstaadt loan, prior to the bonds final legal maturity in May 2015, given the slow sales progress over the past 12 months. The Randstaadt loan is secured by a portfolio of 16 commercial assets (14 offices and two industrial units) located in the Netherlands, which was re-valued in July 2012 at EUR88m. This represents a securitised and whole loan-to-value (LTV) ratio of 110% and 128%, respectively. The portfolio value reduced significantly from the previous December 2011 valuation of EUR127m, representing a market value decline of approximately 30%.
The weighted average lease term increased to 4.2 years from 3.5 years at the last review. At the same time, there has been a fall in operating income. However, this is largely due to a reduction in the portfolio's over-rentedness through new and extended leases at market rates.
Given the high leverage, a sale of all assets at market rate would result in losses on the class D notes. However, with less than two years until bond maturity, Fitch expects significant discounts to be applied to a piecemeal or portfolio sale, to attract investors and liquidate the portfolio in a timely fashion. This makes a full redemption of the class C notes doubtful by July 2015. Although all surplus income is trapped (EUR5m over the past 12 months) to improve asset quality or redeem the loan, the effectiveness of this cash trap/sweep will reduce if assets are sold more frequently and new leases continue to result in rent reductions.
The special servicer removed the managing director of the borrower group (via an enforcement of issuer held security in the form exercising of voting rights at the senior borrower level) in April 2013, which should provide much needed impetus to the disposal plan. As a result of this action a further property has been sold on a consensual basis. However it remains to be seen whether historical inter-creditor conflicts are fully resolved to allow this plan to be carried out in a timely manner.
A lack of sales progress over the next six to 12 months, or continuous sales prices below Fitch's expectations would likely result in further downgrades of the notes.
Fitch will continue to monitor the performance of the transaction.