March 20, 2013 / 1:17 PM / in 6 years

RPT-Fitch Affirms Epic (Culzean) Plc; Upgrades Class C Notes

March 20 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings has affirmed Epic (Culzean) plc’s Class B, D, E and F floating-rate notes due 2019 and upgraded the class C notes as follows: GBP24.8m Class B (XS0286456198) affirmed at ‘AA-sf’; Outlook Stable GBP25.8m Class C (XS0286456867) upgraded to ‘Asf’ from ‘A-sf’; Outlook Stable GBP21.8m Class D (XS0286457758) affirmed at ‘BBsf+’; Outlook Stable GBP9.4m Class E (XS0286458723) affirmed at ‘Bsf’; Outlook Stable GBP12m Class F (XS0286459374) affirmed at ‘CCCsf’; Recovery Estimate RE25% KEY RATING DRIVERS The upgrade and affirmations reflect the ongoing stable performance of the Prime A and Prime B loans as well as the improved performance of the restructured Friends First loan. The rating actions further incorporate the significant counterparty exposure to The Royal Bank of Scotland (RBS, ‘A’/Stable/F1) and the long-dated swaps for the Prime loans. Through asset sales and a cash sweep, in place since January 2011, the Prime A loan balance has reduced to GBP35.9m, from GBP65.8m at closing in February 2007. Following the three asset sales between July 2010 and April 2012, the remaining collateral consists of two retail assets located in London’s West End and South East England as well as one office property in Westminster. The top two tenants, accounting for almost 93% of the passing rent, have leases expiring in 2027 and 2030, respectively, with no break options. The interest coverage ratio (ICR) currently stands at 1.54x, allowing circa GBP250,000 per annum of excess cash flow to repay the loan after payments due to the subordinated tranche. The GBP20.9m Prime B loan remains largely unchanged since the last rating action in March 2012. It is secured on five retail assets located in London’s Kensington High Street, Notting Hill and Covent Garden. Each asset is fully let to a single tenant, with lease expiries between 2020 and 2022. Approximately 22% of the income is subject to break options in 2016/2017. The reported ICR of 1.26x has remained unchanged since the last rating action. Both the Prime A and B loans were tranched at origination with the senior A note securitised in this transaction. Although both loans have seen decreases in value since closing, they continue to be moderately leveraged and remain in compliance with their LTV covenants. The A note/whole loan LTVs are reported at 64%/78% for Prime A and 66%/83% for Prime B. Although the loans are hedged for ten years past their maturities in October 2016, any breakage cost after maturity will be subordinated to interest and principal. Given the strong lease profile, Fitch does not expect a term default for either loan. However, refinancing may prove challenging as the added breakage cost increases the leverage on both loans to around 100%. Fitch does not expect losses on the securitised (senior-ranking) loans in a workout scenario. The GBP36.9m Friends First loan failed to repay at its maturity in April 2011 and a subsequent restructuring extended the maturity until January 2014. The leases of the former largest tenant, DLA Properties, were extended by three years until 2022 and all existing break options were removed. In return, the tenant received significant rental concessions. Despite the reduced income, the loan maintains an ICR of 1.6x, primarily due to a reduced swap rate for the new hedging entered into at loan extension date. The loan also benefits from ongoing cash sweep amortisation. As part of the restructuring, the LTV covenant was set at 110%, reducing to 100% in October 2012. However, leverage will only be tested if the lender calls for a new valuation. Fitch estimates that the LTV is currently above 100% and expects the loan to default at its current maturity. A workout would likely result in losses to the class F notes, barring further restructuring. RATING SENSITIVITIES Given the strong reliance on RBS, a downgrade of the counterparty may trigger a rating action on this synthetic transaction given the notes’ issuance proceeds are likely to be invested in an RBS account or instrument. On the collateral side, significant performance deterioration of the Friends First loan, coupled with an unlikely increase in property yields for the Prime loans, could affect the ratings of the class D and E notes.

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