DBRS Downgrades One Class and Upgrades One Class of INDUS (ECLIPSE 2007-1) plc

DBRS, Inc. (DBRS) has today downgraded the ratings of INDUS (ECLIPSE 2007-1) plc (Indus or the Trust) as follows:

-- Class C to D (sf) from C (sf)

DBRS has also today upgraded one class as follows:

-- Class A to AA (sf) from A (sf)

Additionally, DBRS has confirmed the ratings on the remaining classes in the transaction, as follows:

-- Class B at BB (sf)
-- Class X at AAA (sf)

The trends on all Classes A, B and X are Stable. The rating of Class C does not carry a trend.

The rating downgrade to Class C reflects the most recent realized losses to the trust, the result of the liquidation of the Workspace Portfolio. The loan was originally secured by an eight-property portfolio throughout England consisting of office and industrial properties. The loan initially transferred to special servicing in October 20111 for an Interest Coverage Ratio covenant breach and subsequent payment default. Since that time, individual properties have been sold, with the last four properties sold in October 2014 as a portfolio sale, according to the servicer. With the January 2015 remittance, final sales proceeds and realized losses were passed through to the trust, resulting in a loss of GBP 17.5 million and a loss severity of 68.0%. While the realized loss has negatively affected the credit enhancement to the outstanding bonds, DBRS had projected the ultimate resolution of the Workspace Portfolio with a greater loss severity.

The rating upgrade to Class A reflects the continued stable performance of the outstanding loans in the transaction, increases in loan repayments and the better-than-expected outcome of the Workspace Portfolio loan. Of the original 19 loans in the transaction, only four loans remain as a result of successful loan refinancing and loan liquidation. According to the January 2015 Remittance, this has resulted in total collateral reduction of 77.7% since issuance. Three of the four remaining loans continue to exhibit stable performance, including the largest loan in the pool, Criterion, discussed in detail below.

As of the January 2015 Deal Summary Report, there is one loan in special servicing, representing 2.4% of the current pool balance. This loan is highlighted below.

The Amsterdam Place loan is secured by an office property in Norwich, England, near the Norwich International Airport. The loan transferred to special servicing in October 2014 after the borrower was unable to secure refinancing capital at loan maturity. A noteholders’ meeting took place in February 2015 to decide a strategy for the special servicer regarding the property; however, no decision was reached. Concurrently, the single tenant agreed to waive its lease break option in August 2015 for a temporary rent reduction to GBP 380,000 per annum from August 2015 to May 2016. Beginning May 2016, annual rental payments will increase back to the current amount of GBP 430,000 through lease expiration in July 2020. The property also received an updated appraised value of GBP 2.9 million in March 2015, below the outstanding loan balance of GBP 4.7 million. The special servicer and borrower continue to discuss potential loan resolution strategies, with no ultimate resolution date available at this time.

The largest loan in the transaction is the Criterion loan, representing 60.7% of the current pool balance. The loan, which consists of a GBP 120.9 million trust note and a subordinate GBP 19.0 million B-note, is secured by a Class A office building in London’s West End neighborhood, located directly above the Piccadilly Circus tube station. As of January 2015, the property remains 100% occupied, with McKinsey and Co. occupying 63% of the net rentable area through September 2018. Other large space users include HSBC and Lillywhites. No current tenants’ leases expire prior to loan maturity in July 2015. The property continues to report stable quarterly cash flow of approximately GBP 2.76 million and received an updated appraised value of GBP 260.0 million in November 2014, indicative of a whole-loan LTV of 53.8%. The loan is accompanied by a long-dated interest rate swap expiring in 2022; however, given the subject’s stable cash flow and prime real estate location, DBRS does not view an associated swap breakage fee as an inherent risk.

Notes:
All figures are in U.K. pounds sterling unless otherwise noted.

The applicable methodologies are European CMBS Rating Methodology, European CMBS Surveillance, Legal Criteria for European Structured Finance Transactions and Unified Interest Rate Model for European Securitisations, all of which can be found on our website.

The sources of information used for this rating include INDUS (Eclipse 2007-1) plc and Capita Asset Services (London) Ltd. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

A decrease of 10% and 20% in the DBRS NCF, derived by looking at comparable properties, market rents, market occupancies in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to a downgrade in the transaction, as noted below for each class respectively:

Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A to AA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A to AA (sf)

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B to BB (sf)
-- 20% decline in DBRS NCF, expected rating of Class B to BB (sf)