OREANDA-NEWS. Fitch Ratings has downgraded the class A notes of White Tower 2007-1, due 2015, and affirmed all other classes, as follows:

EUR35.5m class A (XS0300055620): downgraded to 'CCCsf' from 'B'; Recovery Estimate (RE) 90%
EUR19.7m class B (XS0300056198): affirmed at 'CCsf'; RE0%
EUR19.5m class C (XS0300056271): affirmed at 'Csf'; RE0%
EUR19.3m class D (XS0300056354): affirmed at 'Csf'; RE0%
EUR11.7m class E (XS0300056511): affirmed at 'Csf'; RE0%

The transaction is a securitisation of rental income derived from Heron City, a retail and leisure centre located on the outskirts of Barcelona.

KEY RATING DRIVERS
The downgrade reflects expected downward pressure on future sale prices in relation to the collateral supporting the remaining loan, the Spanish Loan (Heron City). As the legal final maturity of the transaction nears in October 2015, the progress that has been made in repositioning the asset risks being negated by an accelerated sale procedure to meet the deadline. Although the borrower has managed to somewhat stabilise the asset's leasing profile, through securing the supermarket operator, Mercadona, the property still exhibits high vacancy and rental arrears from incumbent occupiers.

Heron City, was re-valued in December 2012 at EUR36.9m, resulting in a market value decline of 40% from the December 2011 valuation and 66% from transaction close in 2007. The current reported loan-to-value ratio of 290%, suggests that a loss could possibly be attributable to all note classes, after costs of enforcement. A number of factors have contributed to the fall in value, including lease expiries and no significant new lettings, tenant rent concessions and arrears, and a decline in visitor numbers. Since the valuation reflected the then uncertainty with regard to the supermarket operator lease, it is possible that an updated appraisal may result in some upside; however, Fitch is not aware of an updated valuation being available.

The centre has historically targeted a young demographic, making it particularly exposed to the high levels of youth unemployment in Spain; however, the inclusion of Mercadona has increased the level of occupancy to 84% from 75% over the past 12 months, somewhat stabilising the centre's income.

Fitch has always taken the view that the future performance of the centre is greatly dependent on the outcome of the business plan aimed at repositioning the asset. However, the short time-frame to the notes' legal final maturity puts the special servicer in a challenging position, having to balance the risk of selling the asset prior to legal final maturity without a significant discount to its market value. Fitch now considers any further progress on this management plan to reposition the asset before a sale as unlikely.

The liquidity facility available continues to be drawn due to borrower interest collections being insufficient to meet the note interest and senior costs. Following an agreed loan restructuring in 2012, the 3% default interest that would be payable by the borrower is accruing and will not be due until the earlier of sale or termination of the standstill. As a result, there is EUR9.2m of accrued interest and EUR306,000 of liquidity drawings as at the last interest payment date in January 2015. Shortfalls are expected to continue and while liquidity coverage will be sufficient until legal final - excluding unlikely increases in senior costs - the accruing interest and liquidity drawings will reduce recovery proceeds to the notes.

RATING SENSITIVITIES

Fitch expects significant losses on all classes except the class A notes. The timing of the sale of the asset is paramount in determining the expected recovery proceeds. As the final maturity nears, there is likely to be negative pressure on the sale price given the hard default deadline and it is difficult to see much progress being achieved to further enhance the lease profile of the centre prior to a sale. The recovery prospects for the class A notes remain high, but may be hampered by any future sale discount or cost increases.