OREANDA-NEWS. Fitch Ratings has downgraded Juno (Eclipse 2007-2) LTD's class A and B notes as follows:

EUR114.3m class A (XS0299976323 and XS0302319370): downgraded to 'Asf' from 'AAsf'; placed on Rating Watch Negative

EUR68.3m class B (XS0299976752 and XS0302320386): to 'Bsf' from 'BBsf'; placed on Rating Watch Negative

The transaction is a fully funded synthetic securitisation of initially 17 commercial mortgage loans originated by Barclays Bank PLC (Barclays; A/Stable/F1), of which five are outstanding. Barclays also acts a protection buyer under a credit default swap (CDS) entered into with the issuer as protection seller. Ninety per cent of the collateral by loan balance is office, with the remainder warehouse or light industrial. The properties are in Germany, Italy and Belgium.

Four loans representing two-thirds of the reference portfolio are defaulted (mainly for failing to repay at maturity), with three (Prins Boudewijn, Le Croissant and Seaford, some 16% of the pool) still in special servicing. The Obelisco loan (one-third of the pool) has so far not been transferred but performance has been deteriorating. Collateral for the Neumarkt loan has been liquidated already (although proceeds have not been released from the insolvency process). Final maturity of the notes is in November 2022.

The downgrade reflects excessive counterparty risk. External support for Barclays is viewed by Fitch as possible but no longer such that it can be relied upon (see Fitch Affirms Barclays at 'A'; Outlook Stable published 19 May 2015 for further detail).

The downgrade and Rating Watch Negative further reflect the tight liquidity of the transaction. This is exacerbated by the stalled CDS settlement for Neumarkt, the deduction of "funding costs" by Barclays for all defaulted loans, and potential rising fees owed to the special servicer - particularly if Obelisco were to enter special servicing. Fitch has placed the ratings on Watch Negative as it monitors over the next six months for any escalation of these risks, most notably progress on Neumarkt and Obelisco.

KEY RATING DRIVERS

Credit-link to Barclays
All of the proceeds from the issuance of the notes provide funding to Barclays. While the bank account with Barclays is subject to replacement rating triggers, a jump-to-default of Barclays would lead to note default. Such an exposure to a single counterparty is viewed as excessive, and Fitch no longer considers the bank as benefiting from implied state support capable of mitigating this linkage. Accordingly Fitch is capping the rating of the class A notes at Barclay's Issuer Default Ratings (IDRs) of 'A'/Stable/'F1'.

Tight Liquidity
Issuer income has fallen as more loans enter default. This is because in spite of the swap counterparty's requirement to forward on any income received from defaulted loans to the issuer, it can deduct any "funding costs" first. Theoretically, these underlying funding costs should refer to the underlying cost of the funds provided by the issuer (ie the rate on the bank account). However, Fitch has been informed by the swap counterparty that the funding costs being deducted do not equal this rate: while linked to 3m Euribor, the reset date appears to have been fixed, loan by loan, at the date of default up to the date of expected completion of the work-out. Moreover we are not aware of any party that is scrutinising this.

Given subsequent declines in 3m Euribor have reduced the interest earned on the bank account (in which the note collateral is held), the issuer has been left short of funds (no CDS income is being received for defaulted loans - quite unlike a true sale CMBS where the issuer owns the debt service). With the risk of administrative costs rising further (special servicing fees are 0.25% of loan balance), the issuer is heavily reliant on liquidity facility drawings to cover interest.

The liquidity facility commitment stands at EUR7.3m, of which EUR4.6m is drawn. This leaves the issuer with an undrawn amount of EUR2.7m (1.1% of the portfolio balance), enough to cover three or four interest payments. The issuer's liquidity position is thus highly sensitive to the timing of recoveries from defaulted loans.

Deteriorating Loan Performance
Neumarkt (EUR122m): No information update has been provided since Fitch's last rating action in June 2014. The collateral, an inner-city shopping centre in Cologne, was liquidated in August 2011, with resultant proceeds implying a EUR16m loss. However, these sale proceeds are being held back by the German insolvency administrator pending clarity on how to allocate certain rental income. This has delayed settlement of the CDS, although Barclays is not making any premium payments under it, which given the loan accounts for half the portfolio is contributing greatly to the liquidity strains. The accumulated rental income could mitigate the loss amount, although this may be thwarted by default penalty interest being charged on the loan.

Obelisco (EUR82.1m): The borrower, an Italian real estate fund whose maturity has been extended by three years, is negotiating for an extension of the loan, which is backed by 10 properties in Milan, Rome and Bari, mainly offices with a small exposure to logistics/industrial assets. The reported interest coverage ratio (ICR) has dropped to 0.78x (although Fitch believes this figure is being recalculated) on account of hefty operating expenses at the fund level (not helped by 20% vacancy) as well as reductions in rent demanded by existing tenants. Reported LTV of 42.5% is overly optimistic based on the implied yields; reports that active marketing efforts have failed to elicit sufficient interest since 2013 support this.

Le Croissant (EUR15.8m): The loan is secured by an office in Brussels, fully let to the European Commission until June 2020. In Fitch's view, property remarketing efforts will be hampered by the short remaining term to lease expiry (no break), making a loss quite likely.

Seaford Portfolio (EUR11m): The loan is secured by six fully-let logistics properties in various locations across Germany. LTV as per the most recent valuation of November 2013 is at some 140%. Marketing efforts post loan default have faced various setbacks, including the geographical dispersion of the properties, the portfolio size and the low weighted average lease term to expiry (no break) of some two years.

Prins Boudewijn (EUR10.7m): The loan is secured by a multi-let office near Antwerp that is 10% vacant. A valuation from November 2014 puts the LTV at 80.8%.

Fitch estimates 'Bsf' recovery proceeds totalling EUR211m.

RATING SENSITIVITIES

A settlement of the stalled resolution of Neumarkt loan would allow issuer collateral to be released for class A note redemption, while preventing further loan default interest charges compounding principal loss. It would also relieve the liquidity strains somewhat. On the other hand, without clarity by the time Fitch reviews the rating watch (no later than six months after this date), the notes face the risk of being further downgraded. If Obelisco also formally defaults, there is a risk the notes will default. Should the servicer agree instead to extend the loan, precedent suggests this would also prolong the related CDS income for this loan; such an outcome should give the issuer more time in which to recover the proceeds from Neumarkt, and thereby ease rating pressure.

The ratings notes would also be negatively impacted by rising issuer costs or further falls in 3M Euribor.

Due to the quality of the properties, the excessive counterparty exposure and the tight liquidity, upgrades are highly unlikely in the near to medium term. Any downgrade in the IDR of Barclays would lead to a corresponding downgrade of the class A notes.

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.
-Loan-by-loan data provided by servicer as at May and February 2015
-Transaction reporting provided by servicer as at May and February 2015
-Cash management reports as provided by the cash manager as at May 2015