OREANDA-NEWS. April 02, 2015. Fitch Ratings has downgraded European Property Capital 3 plc's (EPC 3) notes due May 2015, as follows:

EUR12.8m class C (XS0236880851) downgraded to 'Dsf' from 'CCCsf'; Recovery Estimate (RE) 15%
EUR17.5m class D (XS0236881313) downgraded to 'Dsf' from 'CCsf'; RE0%

EPC 3 is a securitisation originally comprising five commercial mortgage-backed loans originated by JP Morgan Chase Bank, N.A, of which only the EUR30.3m Randstaad loan now remains.

KEY RATING DRIVERS
The downgrades reflect the imminent allocation of principal losses as well as interest shortfalls. All the collateral properties securing the Ranstaad loan have now been sold, with proceeds from one property sale awaiting distribution. The gross sales price of EUR2.1m will be deducted for sales costs, and additional senior costs of the issuer (now that loan interest will no longer be received) may also have to be met. Fitch expects net amounts available for principal distribution to be just below EUR2m, payable at the May 2015 interest payment date, which is also the legal final maturity of the bonds.

Over the past 11 months, 13 properties have been sold for aggregate gross sales proceeds of EUR50.8m, well below the EUR77.3m valuation from July 2012. Some of this fall in value can be attributed to shortening lease terms over an extended work-out period that began in 2010 when the loan was transferred to special servicing. However the loan has benefited from low interest rates during this period, allowing a high level of cash sweep. This has led to total loan principal recoveries since the 2012 valuation of just over EUR80m.

At the time of the last rating action, in May 2014, there was potential for sale proceeds to continue to outperform valuations sufficient to pay the class C notes in full, reflected in the previous 'CCCsf' rating. However, weakness in the secondary/tertiary Dutch office occupational market did not sufficiently support leasing to allow for this outcome, and Fitch estimates losses on this class to be around EUR11m. The class D notes will be fully written off.

RATING SENSITIVITIES
The ratings of the notes are not sensitive to any future outcome as the properties have been sold. The final level of costs will have a direct bearing on the Recovery Estimate for the class C notes.