OREANDA-NEWS. Fitch Ratings has downgraded DECO 12 - UK 4 p.l.c.'s (DECO 12) class A1, A2, and B notes due January 2020, as follows:

GBP174.1m class A1 (XS0289644121) downgraded to 'BBB-sf'; from 'A+sf'; Outlook Negative
GBP113.6m class A2 (XS0289644477) downgraded to 'BBB-sf'; from 'BBB+sf'; Outlook Negative
GBP34.6m class B (XS0289644550) downgraded to 'BBB-sf'; from 'BBBsf'; Outlook Negative
GBP27.7m class C (XS0289644634) affirmed at 'Bsf'; Outlook revised to Stable from Negative
GBP13.6m class D (XS0289644717) affirmed at 'Dsf'; Recovery Estimate (RE) 40%
GBP0m class E (XS0289644808) affirmed at 'Dsf'; RE 0%
GBP0m class F (XS0289644980) affirmed at 'Dsf'; RE 0%

The transaction is a securitisation of 10 loans originated in the UK by Deutsche Bank AG, with a cumulative balance of GBP672.9m secured by 41 properties. Since closing in March 2007, four loans were repaid in full (Merry Hill, Quattro Syndicate, Hiltongrove portfolio, Chesterton Commercial loan) and three loans suffered losses (LMM, Industrial Realisation, Group 7 loan). The transaction is now backed by three loans with a cumulative balance of GBP358.5m.

KEY RATING DRIVERS

The downgrade of the class A1, A2, and B notes is driven by Fitch's more conservative view of the Tesco plc loan (94% of the pool balance) and of its underlying asset quality. The Outlook of the Class C notes (rated below Tesco's Long-term Issuer Default Rating of 'BBB-') has been revised to Stable as we now expect the tranche to be repaid in a 'Bsf' stress, following clarity on the loan losses.

The Tesco loan is an interest-only loan secured by a sale and leaseback of 16 Tesco stores across the UK. The portfolio comprises 12 superstores and four 'Extra' format stores, let to Tesco until December 2026 with a break option in December 2016.

Given asset (16 Tesco stores) location and surrounding competition, most of the portfolio value is inherent in the long tenant leases. In the absence of updated estimated rental values (assumed rental values after Tesco's default), Fitch has derived estimated rental values (lower compared with current passing rent) from average rental levels for supermarkets and retail warehouses, resulting in lower expected loan recoveries. Moreover, we have assumed that some assets will be difficult to re-let at lease expiry. This results in lower expected recoveries from the Tesco loan.

Fitch notes that the ability to exercise the break option is conditional on full loan repayment and judges such a scenario to be quite a remote prospect. In October 2014, Fitch downgraded Tesco to 'BBB-' with Negative Outlook. This could indicate future weakness in the credit quality of the Tesco income stream that this loan so heavily relies on. The portfolio has not been re-valued since closing.

As noted in Fitch's report "2015 Outlook: European Food and Non-Food Retail" published on 18 December 2014, food retailers are now reducing their store size and numbers, driven by weakening returns on new space. We expect that up to 20% of total retail space could be lost in the next four to five years, with hypermarket and out-of-town space particularly at risk. Given the loan exposure to superstore type of stores, a rating cap for the most senior tranches was put in place at the level of the company's Long-term IDR to reflect Fitch's conservative view on the food retail industry.

The GBP11.2m Borehamwood Investments loan (3% of the pool) has been repaid with the final property (Ormskirk) being sold and the funds distributed to noteholders in January 2015.

The final GBP11.1m 2006/2007 Regent Capital loan (3% of the pool) is fully cash collateralised with GBP12.3m held in an escrow account. Fitch expects the loan to repay at maturity in January 2017 following stable performance of the underlying asset.

RATING SENSITIVITIES

Fitch estimates 'Bsf' recoveries of EUR361m. A change to Tesco PLC's Long-term IDR is likely to result in further rating actions on the notes

Updated surveillance data can be found at:
https://www.fitchratings.com/creditdesk/sectors/perf_analytics/esf/deal_summ/download_file.cfm?deal_id=87148271