OREANDA-NEWS. Fitch Ratings has assigned Magni Finance Designated Activity Company's notes ratings as follows:

GBP122.8m Class A due January 2023: 'A-sf'; Outlook Stable
GBP16.6m Class B due January 2023: 'BBBsf'; Outlook Stable
GBP28m Class C due January 2023: 'BB+sf'; Outlook Stable
GBP17.2m Class D due January 2023: 'BB-sf'; Outlook Stable

The transaction is a securitisation of a GBP185m commercial mortgage loan to six cross-collateralised and cross-defaulted borrowers, ultimately owned by Varde Partners Inc. (Varde, the sponsor), to acquire a portfolio of 172 predominantly retail and office assets located throughout the UK.

KEY RATING DRIVERS
The collateral constitutes a portfolio of mainly secondary and tertiary properties purchased (mainly out of receivership) by Varde. A significant portion of the portfolio comprises secondary high street retail properties, which although are largely well-located within town centres, continue to be affected by the structural changes of the retail market in the UK. While investor demand has recovered from historical lows, national retailers continue to relocate away from town centres, somehow limiting the potential occupational uplift.

The sponsor's business plan envisages asset liquidation with quarterly amortisation targets. Failure to comply with these targets will result in full cash trap and inability to exercise the one-year loan extension option after the initial three-year loan term expires. In its analysis, Fitch has considered adverse disposal scenarios, including no disposals, and early default, to test debt repayment.

With the exception of cash sweep amounts applied to the notes sequentially, prior to loan default principal is repaid on a pro rata basis. As a result, the senior notes may be exposed to adverse selection risk, if the best performing assets are sold first and the average collateral quality deteriorates. The loan LTV at closing was fairly high at 70%. Although it does not benefit from any scheduled amortisation, disposal targets, annual revaluations, robust interest coverage ratio (ICR) and LTV cash trap/default covenants should enable performance deterioration to be monitored well before loan default.

The pro-rata pay-down, the absence of a liquidity facility and the secondary quality of the portfolio, each contribute to a rating cap at 'Asf'.

Background
Varde acquired through Eurynome LLC, a wholly owned subsidiary, two portfolios (Titan and Pecan) comprising retail, office and industrial commercial real estate assets in the UK, which together form the "Magni portfolio".

The Titan portfolio acquisition, from Aviva Commercial Finance, was completed in January 2015. The portfolio was acquired for approximately GBP250m, through a competitive receivership sale process; since then, the sponsor has sold 22 assets. The Pecan acquisition was completed in November 2015 as a private sale of 14 high street retail assets.

Collateral Highlights
At the cut-off date (30 September 2015), the Magni portfolio consisted of 172 freehold and leasehold properties, valued at GBP263.7m and let to approximately 453 tenants. As highlighted, the portfolio is secondary in nature; however, the majority of the high street retail units are in favourable locations (generally in peripheral UK towns). The portfolio also benefits from a weighted average (WA) lease length to break of four years and a sound WA occupancy level of 88.2%, although this varies widely with 11 properties being entirely vacant.

Fitch property grading reflects the collateral quality, with the majority of assets scored 4 or below. The portfolio has been split into two categories: Tier 1 and Tier 2. Even though Tier 1 and 2 properties contribute evenly to the portfolio market value, Tier 1 assets have been distinguished from the rest due to longer WA lease terms, higher occupancy and better location. This distinction in quality is illustrated by the allocated loan amount (ALA) mechanics, whereby the Tier 1 properties are subject to higher ALA's (75% as a percentage of an assets market value, versus 65% of Tier 2) as well as higher release premiums (120% versus 115%).

The portfolio has good geographic diversity with the largest aggregate exposures being in the East Midlands (18%) and Yorkshire & Humberside (14%) with no other single location providing more than 8% of the portfolio (all by market value (MV)).

The top 20 assets account for around 44% of the portfolio (by MV); the portfolio is also granular compared with a typical CMBS with the average property valued at GBP1.5m. Ninety seven of the 172 assets are below GBP1m and only two above GBP10m.

Sponsor and Borrower Structure
Varde, a global alternative investment firm, acts through Eurynome LLC and is the sole shareholder of Cronos Investments Limited (the Company), which is in turn the sole shareholder of each borrower. Eurynome LLC is a limited liability company incorporated under the laws of the State of Delaware, while the company is a private limited liability company incorporated under the laws of Jersey.

The borrowing special purpose vehicles (SPVs) are 100% direct subsidiaries of the company. All the borrowers are incorporated in Jersey. Each of the borrowers holds one or more properties.

Key Loan Terms
This transaction is an agency deal with proceeds of the bond issuance used to purchase the loan to be novated to the issuer for the Pecan portfolio and to advance funds to the Titan borrowers, to repay their existing indebtedness. Both the Titan and the Pecan debt have been restated under one common facility.

The three-year loan benefits from a one-year extension (subject to amortisation targets, hedging and "no default" conditions) and pays interest based on three-month LIBOR rate plus the WA margin on the notes and senior costs due at the issuer level.

Surplus funds are trapped in a dedicated account if the forward-looking ICR falls below 2.0x; the LTV is higher than 72.5%; the outstanding loan is greater than its maximum target amount; or a loan event of default has occurred (default covenants include ICR below 1.8x and LTV above 75%).

In order to hedge its fixed assets (rents) with the floating liabilities under the financing, the borrower has bought an interest rate cap and intends to enter into a second one if asset sales lag behind its business plan. The initial interest rate cap will pay any excess over a strike rate subject to increases at various intervals, ranging from 1.25% to 3% by expected maturity. The notional balance of this cap reduces in line with the sponsor's disposal plan. Should this plan not be met, the second cap, with a strike rate of 5%, will hedge the difference between loan amount outstanding and the expected amortisation profile, i.e. the sum of the two caps' notional is 100% of the securitised loan. Given the contingent nature of the second cap, Fitch has tested scenarios where the loan remains partially unhedged and subject to rising interest rates.

KEY PROPERTY ASSUMPTIONS (all by net rent)
'Bsf' weighted average (WA) capitalisation (cap) rate: 7.1%
'Bsf' WA structural vacancy: 28.5%
'Bsf' WA rental value decline: 2%

'BBsf' weighted average (WA) capitalisation (cap) rate: 7.4%
'BBsf' WA structural vacancy: 32.6%
'BBsf' WA rental value decline: 4.1%

'BBBsf' WA cap rate: 7.7%
'BBBsf' WA structural vacancy: 36.8%
'BBBsf' WA rental value decline: 6.4%

'Asf' WA cap rate: 8.1%
'Asf' WA structural vacancy: 40.9%
'Asf' WA rental value decline: 16.4%

RATING SENSITIVITIES
The change in model output that would apply if the capitalisation rate assumption for each property is increased by a relative amount is as follows:

Current rating- class A/ B/ C/ D: 'A-sf'/ 'BBBsf'/ 'BB+ sf'/ 'BB-sf'
Increase capitalisation rates by 10% class A/ B/ C/ D: 'BBB+sf'/ 'BBB-sf'/ 'BBsf'/ 'Bsf'
Increase capitalisation rates by 20% class A/ B/ C/ D: 'BBB+sf'/BB+ sf'/'B+ sf'/'B- sf'

The change in model output that would apply if the rental value decline (RVD) and vacancy assumption for each property is increased by a relative amount is as follows:

Increase RVD and vacancy by 10% class A/ B/ C/ D: 'BBB+sf'/ 'BBB-sf'/ 'BB sf' / 'B+sf'
Increase RVD and vacancy by 20% class A/ B/ C/ D: 'BBBsf'/ 'BBB- sf'/'BB-sf'/ 'Bsf'

The change in model output that would apply if the capitalisation rate, RVD and vacancy assumptions for each property is increased by a relative amount is as follows:

Increase in all factors by 10% class A/ B/ C/ D: 'BBBsf'/ 'BBsf'/ 'B+sf'/ 'B-sf'
Increase in all factors by 20% class A/ B/ C/ D: 'BB+sf'/ 'B+sf'/ 'B-sf'/ 'CCCsf'

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis.

Overall, Fitch's assessment of the asset pool 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.
-Facility agreement provided by the originator as of mid-December 2015
-On-site visit of a sample of properties conducted by the agency's analysts as of mid- September 2015
-Valuation reports provided by Cushman & Wakefield and Strutt & Parker as of 31 August 2015 and 26 October 2015, respectively
-Asset portfolio information provided in the form of a Fitch data template
-Due diligence reports addressing technical, environmental, legal and tax aspects of each property prepared by third-party professionals

REPRESENTATIONS AND WARRANTIES
A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms to those typical for the asset class is available by accessing the appendix that accompanies this rating action commentary (see Magni Finance Designated Activity Company - Appendix, dated 30 December 2015 at www.fitchratings.com). In addition refer to the special report "Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions" dated 12 June 2015 available on the Fitch website.