January 15, 2013 / 4:47 PM / 5 years ago

TEXT - Fitch cuts Annington Finance No. 4 plc

Jan 15 - Fitch Ratings has downgraded Annington Finance No. 4 plc's
(Annington 4) class A notes, removed them from Rating Watch Negative (RWN) 
and affirmed the other classes as follows:

GBP1,430.4m class A due 2022 (XS0083080043) downgraded to 'AAsf' from 'AAAsf'; 
off RWN; Stable Outlook 

GBP963.1m class B1 due 2023 (XS0083098763) affirmed at 'Asf'; Outlook Stable

GBP 164.1m class B3 due 2023 (XS0198259813) affirmed at 'Asf'; Outlook Stable

GBP260.0m class M due 2023 (XS0198259904) affirmed at 'A-sf'; Outlook Stable

GBP150.0m class C1 due 2023 (XS0143398179) affirmed at 'BBBsf'; Outlook Stable

The downgrade reflects Fitch's concern about the timing of the bond maturities 
in relation to the loan due date. In its EMEA CMBS Criteria, Fitch identifies an
insufficient tail period as one of several possible constraints on ratings. 
Concerns around this are somewhat allayed by the collateral quality, manageable 
level of leverage and generally sound transaction structure. Given these 
attributes, Fitch is comfortable up to its 'AAsf' rating stress that senior bond
default can be averted, which is reflected by the rating action.

Although there is scope for a financial advisor (with whom the sponsor would 
consult regarding refinancing) to be appointed earlier, senior bondholders can 
only appoint an administrative receiver (AR) in the event of loan default. As 
loan maturity is one year prior to legal bond maturity, this leaves little time 
in which to realise the proceeds needed to avert bond default. Fitch understands
that an AR is mandated to maximise recoveries for all noteholders, and it not 
necessarily bound by timing. This is not strong enough for Fitch to rely in its 
highest rating scenario on remedial or enforcement action being concluded within
a year. 

The quality of the collateral, as reflected in strong performance, helps to 
mitigate this risk. The collateral consists of a portfolio of residential 
properties located on or close to military bases across the UK, with a 
concentration around London and the south of England. The majority of assets are
encumbered by a long, fully repairing and insuring lease to the Ministry of 
Defence (MoD, 'AAA'/Negative). The tenant pays 42% of the prevailing reported 
market rent, changes in which are captured in periodic rent reviews. 

Assets that the MoD deems surplus to its requirements are handed back to 
Annington, which is then free to re-let them at market rent or sell them on a 
vacant possession basis. Vacant possession value is believed to be in excess of 
the open market value with the MoD lease owing to the effect of a 58% rental 
discount. Projected steady deleveraging via surplus rent and sales proceeds 
contributes to the Stable Outlooks across the capital structure.

A performance report will be shortly available on www.fitchratings.com.

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