(The following statement was released by the rating agency)
July 25 - Fitch Ratings has downgraded and withdrawn Epic (Drummond) Limited’s floating rate notes due 2022 as follows:
EUR698.4m class A due January 2022 (XS0303390453) downgraded to ‘BBsf’ from ‘Asf’; Rating Watch Evolving (RWE); withdrawn
EUR49.2m class B due January 2022 (XS0303391188) downgraded to ‘Bsf’ from ‘BBBsf’; RWE; withdrawn
EUR53.9m class C due January 2022 (XS0303391428) downgraded to ‘CCCsf’ from ‘BBB-sf’; withdrawn
EUR53.9m class D due January 2022 (XS0303391857) downgraded to ‘CCCsf’ from ‘B+sf’; withdrawn
EUR55.8m class E due January 2022 (XS0303392236) affirmed at ‘CCCsf’; withdrawn
EUR19.2m class F due January 2022 (XS0303392400) downgraded to ‘CCsf’ from ‘CCCsf’; withdrawn
EUR15.4m class G due January 2022 (XS0303393986) downgraded to ‘CCsf’ from ‘CCCsf’; withdrawn
The sharp downgrades reflect the default and ongoing deterioration of the two largest loans, Countrywide Kaufland and Project DD. In the absence of adequate information, the rating actions reflect conservative assumptions, with the RWE denoting the approximation required in parts of the analysis. Fitch took into account the size of the loans, the empirical evidence available on the relevant real estate markets and the uncertainty over the servicer‘s, Royal Bank of Scotland (RBS; ‘A’/Stable/‘F1’), work-out strategies (in light of its duty of care to the protection buyer rather than the issuer).
The ratings withdrawals reflect the insufficiency of ongoing information, which prevents Fitch from being able to monitor performance appropriately henceforth. At closing, the servicing agreement was entered into by RBS, acting as lender and servicer. Whilst the latter has committed to a minimum level of reporting, the issuer, not being party to the agreement, is not contractually entitled to receive additional information. Following a loan default, commentary on workout strategies, updated collateral appraisals and tenancy profile are essential to perform a rating analysis and the absence of these compromise the rating process.
Countrywide and Project DD represent 35% and 21% of the aggregate pool balance, respectively, and are both subject to credit event notices.
Countrywide continues to breach its LTV and ICR covenants and has failed to make senior interest and swap payments in full for the last two interest payment dates. As per a notice issued on 9 July 2012, these missed payments have caused an early termination of the swap agreement, which resulted in EUR26m of breakage costs. As the servicer is apparently unable to receive updated covenant information since July 2011, Fitch cannot comment on the reason for the debt service shortfalls, but it can only assume that net operating income has continued to decline since the last reported figure of EUR20.8m in April 2011. The likelihood of further deterioration in this portfolio performance is a key driver for the downgrade of the senior classes.
Following the failure to repay on its January 2012 maturity date, the Project DD loan borrower was declared bankrupt. From a notice published on 6 July 2012, Fitch understands that the properties and shares providing security for the loan were sold by the insolvency administrator to Niam (a real estate private equity firm). No further details have been provided. The assets were last re-valued in July 2009, at EUR220.5m, for a resulting loan-to-value ratio (LTV) of 91.1%. Since then, the reported ICR has fallen to 1.28x (as at the last reported figure in January 2012) from 1.62x. As a result of the sale, Fitch expects a loss to be applied to the junior notes.
Of the remaining loans, the Project Magnum loan was extended until January 2014, and is subject to an excess cash trap, while the other loans appear to be performing in line with expectations.