Fitch Ratings said that last week's downgrade of UBS AG to AA-' from AA' does not have a negative impact on the ratings of the Broadgate Financing PLC securitization.
According to the rating agency, UBS remains the top tenant in the Broadgate securitization, representing approximately 20% of the annual rental income. The weighted average remaining lease term expires in 14.9 years, or five years to the first break option.
Fitch said UBS' default probability implied by the rating remains low. "This is the second time that UBS has been downgraded, showing a downward migration of the tenant rating, since the Broadgate securitization was restructured in March 2005," Fitch analysts said.
The Broadgate Estate has suffered capital value declines as U.K. commercial property markets have been re-pricing assets. Deutsche Bank's DECO 12 transaction has also felt the impact of falling property valuations. The transaction faced an LTV breach.
According to Societe Generale analysts, the property value had fallen 8% to GBP10.9 million ($21.75 million), breaching the 80% LTV trigger. The borrower has remedied this by providing almost GBP500,000 to reduce the LTV. The additional funds will be held on deposit, netting against the current loan balance.
The LTV trigger in NM Rothschild's REC Plantation Place was very close to a breach at its yearend valuation. It is likely that sponsors will be requested to make a cash deposit ahead of the April 2008 revaluation, which will be made if required, SocGen analysts said.
They believe that many highly leveraged sponsors might find it difficult to make these large cash deposits as values fall. "We expect the coming year will bring forward several loan defaults as LTV triggers are hit and borrowers fail to find the necessary capital to reduce the LTV," analysts said.
A further decline in property valuations could significantly impact LTVs and the number of properties in disposals.
"We are concerned that sectors such as central London offices with high concentrations of securitizations could be negatively impacted by LTV triggers," analysts said. "Once forced sales start pressuring prices, this could trigger LTV breaches for other loans on similar properties. Currently, such a scenario is mitigated by strong interest for buying quality properties at reduced prices; however, this may change if property investor sentiment wanes."
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