OREANDA-NEWS. Fitch Ratings has affirmed Land Securities Capital Markets Plc's (LSCM/the security group) secured notes at 'AAsf' with a Stable Outlook.

LSCM operates a programme of secured financing of investment property assets within Land Securities Group Plc (LSG).

KEY RATING DRIVERS

The strong overall quality of the property portfolio coupled with a robust covenant regime and low leverage supports high investment grade ratings on the notes. This is despite a likely correction in London prime real estate values, which could steepen following the referendum vote to leave the EU.

Net indebtedness backed by assets in the security (restricted) group has reduced significantly over the last year to GBP2.95bn from GBP3.87bn, which included the repayment of the GBP400m class A8 notes and a reduction in the drawn balance of revolving facilities.

The number of properties held in the security group has fallen slightly since last year, but the remaining collateral has appreciated in value to GBP12.6bn from GBP12.3bn. The value growth and debt reduction have reduced the loan-to-value ratio (LTV) to 23.4% from 31.5% in March 2015. In Fitch's view, a conservative approach to leverage should help protect noteholders from value reductions in prime UK real estate, in which LSG is a significant investor.

The "evergreen" debt programme affords considerable flexibility to LSCM in terms of portfolio composition, debt issuance and leverage. The rating is based on the actual portfolio construction and leverage, drawing on Fitch's view of LSCM's strong underlying corporate credit strength. The portfolio enjoys high occupancy, diverse and good quality tenant base, a weighted average lease length of 8.7 years and near prime overall asset quality. The longevity of the rental income profile and asset base is complemented by a largely fixed rate 9.6 year average debt maturity profile matching its assets and liabilities.

Fitch has analysed refinancing risk using its CMBS analysis, with specific reference to its loan rating methodology, given that the mechanism intended to provision for upcoming maturities only commences 12 months prior to bond maturity. Without a longer tail period, Fitch considers note repayment dependent on sponsor equity remaining in the portfolio, which warrants a downward adjustment to the breakeven debt recovery analysis. In view of the strong covenant package, the high collateral quality and the creditor-friendly jurisdiction, this is limited to one rating category, which supports the 'AAsf' rating.

RATING SENSITIVITIES

A significant increase in leverage or decrease in the quality of assets held in the secured group could lead to negative rating action

Fitch estimates Bsf recoveries of about GBP8bn.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY

Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

Fitch did not undertake a review of the information provided about the underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

SOURCES OF INFORMATION

The information below was used in the analysis.

- Transaction reporting provided by Land Securities as at 31 March 2016