OREANDA-NEWS. Fitch Ratings has affirmed Quirinus (European Loan Conduit No. 23) Plc as follows:

EUR72.8m Class A (XS0259561925) affirmed at 'BBsf'; Outlook Negative
EUR4.7m Class B (XS0259562576) affirmed at 'BB-sf'; Outlook Negative
EUR5.7m Class C (XS0259562907) affirmed at 'Bsf'; Outlook Negative
EUR7.7m Class D (XS0259563202) affirmed at 'CCCsf'; Recovery Estimate (RE) revised to 60% from 25%
EUR8.8m Class E (XS0259563624) affirmed at 'CCsf'; RE revised to 45% from 35%
EUR6.5m Class F (XS0259564192 affirmed at 'Dsf'; RE revised to 50% from 5%

Quirinus is a securitisation originally of 10 commercial mortgage loans made by Morgan Stanley for EUR700.8m. Eight have been resolved since the deal closed in 2005, with all but one repaying in full. The Fairacre Retail Loan incurred a final loss represented by a write-down (a non-accruing interest amount) of EUR338,000 on the class F notes. Despite this reflecting an actual economic loss for the class F notes, it was not deemed a principal loss for the purposes of the sequential pay test.

KEY RATING DRIVERS
The affirmation reflects the stable performance of the German retail collateral securing the two remaining loans. However, while there are signs of increased investor appetite in the sector, and some improvement in occupancy in the portfolios, the Negative Outlook continues to reflect the downside risk associated with resolving the loans. Neither is believed to have sustainable loan-to-value ratios (LTV) below 100%, despite reasonably favourable conditions in place at present. Fitch has not received updated valuations.

Prior to a pool level sequential test breach, the chosen interpretation of the principal pay rules (in relation to voluntary repayments) limits the scope for de-risking of the senior notes. Junior notes stand to receive a share of principal receipts from amortisation, cash sweep, prepayment or full repayment. Loan recovery funds will be allocated in a "capped sequential" way, with proceeds flowing sequentially to note classes up to their defined allocated amount for the respective loan.

The EUR83.2m Eurocastle loan is secured by a diverse portfolio of 41 retail warehouses located throughout Germany, with several sites housing dominant grocers in remote areas. Vacancy has remained relatively stable (5%) throughout the year while lease renewals led to a slight decrease of the weighted average lease term from 4.07 to 3.61 years. Fitch estimates the sustainable LTV to be approximately 125%.

The EUR23.2m H&B3 portfolio, comprising five German retail warehouse assets, was marketed for sale following the loan's transfer to special servicing upon defaulting at maturity in October 2012. As no meaningful bids were received, the special servicer instructed its agent, Knight Frank, to focus on lease renewals and readying the portfolio for sale. Vacancy remains low (2%), while several lease extensions have improved the weighted average lease term from 4.2 to 4.36 years. Despite this, the loan remains distressed, with Fitch estimating a sustainable LTV of 120%. In ordinary conditions, Fitch would expect losses of around EUR4m.

The more positive sentiment for German CRE portfolios, as reflected by falls in prime yields also for retail warehouses, raises the possibility of decent amounts of principal being returned to investors. Fitch sees some scope for the performing Eurocastle loan to repay by its maturity (February 2016). The prospects for H&B3 generating material proceeds in the same period are weaker, in Fitch's view, as the sponsor is not engaged and the loan has been in special servicing for some time. If Eurocastle repays in full without further developments on H&B3 - more likely now than at the last rating action - 8% of proceeds are expected to be allocated to the class F notes, 5.5% to the class D notes and 1% to the class E notes. This would be sufficient to lead to an almost full recovery of the class F notes, as reflected in the increase in its RE.

However, there is uncertainty around not only the timing but also the status of the loans when they come to repay: should Eurocastle default (triggering a change in principal allocation) and Fitch's sustainable values begin to move more firmly into view, zero recoveries would be expected for the class D, E and F notes. Accounting for this uncertainty explains the unusual pattern of REs for the class D, E and F notes, while also warranting the Negative Outlooks on the senior classes.

RATING SENSITIVITIES
The different principal pay regimes create considerable uncertainty regarding the potential for recoveries for the most junior tranches. A full repayment of the Eurocastle loan while there was no sequential breach could lead to both the class D and F notes paying in full.

A failure to realise meaningful recoveries from any of the two loans over the next 12 months along with deterioration in operating performance or investment conditions could prompt negative rating action.

Fitch estimates 'Bsf' recoveries to be approximately EUR82m.

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 at end-May 2015
-Transaction reporting provided by servicer at end-May 2015