Moody's Investors Service has upgraded its ratings on several tranches of a Hong Kong CMBS deal, due to the transaction's robust performance in difficult economic circumstances. The move is likely to encourage potential issuers of CMBS transactions in Hong Kong and make deals more efficient.

The transaction in question - Harbour City Funding 1 - was issued by property group Wharf Holdings in February 1999 and backed by a portfolio of retail and office properties. It was lead managed by Merrill Lynch and totaled US$575.2 million - at the time, the biggest ever non-Japan Asian ABS deal.

Five series of notes were upgraded: series B1 US$70 million floating rate notes, from Aa2 to Aa1; series B2 HK$319.9 million floating rate notes, from Aa2 to Aa1; series B3 HK$67.5 million fixed rate notes, from Aa2 to Aa1; series C2 HK$260 million floating rate notes, from A2 to A1; and series C3 HK$295.3 million fixed rate notes, from A2 to A1.

Not surprisingly, the triple-A ratings assigned to the senior tranches, A1 through A3, have remained the same. So too has the A3 rating of the C1 series US$54.05 million floating rate notes, which was not fully covered for convertibility and transferability by the swap provided by Merrill Lynch, which allowed the other notes to be rated above Hong Kong's A3 foreign currency sovereign ceiling.

Fitch IBCA also rated the deal, but it is not known whether Fitch has any plans to take a similar move.

Moody's took the action because, while there has been some decline in the rental and occupancy rates in the office sites in the property portfolio, this has been more than compensated for by an increase in occupancy in the retail portions of the portfolio.

Taken together, cashflows have stayed at about the same level as when the deal launched, said Jerome Cheng, an associate analyst in the agency's Hong Kong structured finance team.

Just as importantly, this has happened during a time when the Hong Kong commercial property market has experienced its worst downturn for many years, in the aftermath of the Asian financial crisis. "When the deal was done we were still in the middle of the financial crisis, so the assumption we took was that the commercial property sector would come under severe pressure," explained Michael Ye, the head of Moody's structured finance team in Hong Kong. "But, while there was severe pressure, these particular properties weathered the storm better than we expected."

Issuers considering future CMBS deals and those with deals in the pipeline will welcome the news and the possibility that rating agencies may be able to make less conservative assumptions on future deals thanks to the Harbour City Funding's robust performance in a difficult environment.

Property firm Paliburg, for instance, is closing in on its first CMBS transaction, backed by its Kowloon City Plaza and Paliburg Plaza buildings. The deal, which is being arranged by SG Asia and is expected to be worth between HK$800 million (US$103 million) and HK$1 billion, is scheduled to hit the local market in the next few weeks.

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