OREANDA-NEWS. December 08, 2015. Fitch Ratings has upgraded DECO 11 - UK Conduit 3 plc's class A1-B floating rate notes due 2020 and affirmed the other tranches, as follows:

GBP54.7m class A1-A (XS0279810468) affirmed at 'Asf'; Outlook Stable
GBP70.7m class A1-B (XS0279812597) upgraded to 'B-sf' from CCCsf'; Outlook Stable
GBP43.2m class A2 (XS0279814452) affirmed at 'CCsf''; Recovery Estimate (RE) revised to 10% from 0%
GBP26.2m class B (XS0279815426) affirmed at 'Csf'; RE 0%
GBP36.1m class C (XS0279816580) affirmed at 'Csf'; RE0%
GBP28.2m class D (XS0279817398) affirmed at 'Csf'; RE0%

The transaction was originally the securitisation of 17 commercial mortgages originated by Deutsche Bank AG (A/Negative). The loans were secured on 56 properties located across the UK. As of October 2015, four loans remained, all in special servicing (with either Hatfield Philips International (HPI) or Solutus Advisors). All principal proceeds are allocated to the notes sequentially as the loan defaults and loss allocations to the junior (non-rated) notes breached various triggers.

KEY RATING DRIVERS
The upgrade of the class A1-B notes and upwards revision of the RE reflect the improved recovery prospects for the largest loan, GBP216.4m Mapeley Gamma, reflected in its 2015 valuation being significantly higher than in 2012. With swap expiry in January 2017 (by when the current swap liability will amortise to zero), Fitch expects HPI to increase marketing efforts over 2016 in a bid to sell the portfolio soon thereafter, making the current valuation a useful indicator of sale prospects. The rating actions also incorporate the recoveries from the GBP5.7m Regent Capital loan (GBP3.5m), which Fitch had given no credit to at all on the basis of its continual vacancy.

Mapeley Gamma has been in special servicing since October 2012 as a result of an uncured loan-to-value (LTV) covenant breach. No asset sales have occurred to date given the swap liability. As the loan is fixed rate, relatively little surplus rent (GBP1.5m in July 2015) has been swept since breach of covenant. The 24 commercial assets (predominantly offices) are located in regional or provincial UK towns. With an LTV of 159% as of July and 30% vacancy, selling the collateral will realise substantial losses (writing off the class C, D and E notes). However, proceeds should cover the class A1 notes.

The GBP41.6m Wildmoor Northpoint Limited loan defaulted in 2010 and is in special servicing with Solutus Advisors. Occupancy has stabilised around 95%. Unless resolved reasonably promptly, what is already an unusually long workout process (by UK standards) risks exposing the issuer to a switchback in the property investment market cycle. Fitch expects a significant loss on the loan, with a reported senior LTV of 156% (albeit based on a 2012 valuation).

The GBP7.2m CPI Retail Active Management defaulted at maturity in 2011 and is also being specially serviced by Solutus Advisors. The Maltings Shopping Centre located in St. Albans and around 95% let to 10 tenants (Sainsbury's contributes half of the rent) acts as collateral for the loan. Interest coverage has increased to 3.2x in July from 1.3x one year ago as a result of expired rent-free periods and reduced costs. Nevertheless, the same risk around length of work out applies. Fitch expects a moderate loss (the reported LTV is 119.8%).

The smallest remaining loan, the GBP1.5m Investco Estates Limited, defaulted at maturity in October 2013. It is secured on a warehouse (storage and office space) located in Nuneaton and let to a single tenant until 2019. Reported LTV (based on a 2014 valuation) of 117% is consistent with a moderate loss.

RATING SENSITIVITIES
Positive rating action on the class A1-B notes and the A2 RE could ensue from asset sales out of Mapeley Gamma supporting the current valuation metrics.

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.
-Transaction reporting provided by Situs Asset Management as at July 2015
-Transaction reporting provided by Deutsche Bank AG as at October 2015
-Additional reporting provided by Solutus Advisors as at October 2015