OREANDA-NEWS. January 19, 2016. This commentary replaces the publication dated 30 December 2015 and represents a shorter version of the original release following the publication of the new issue report and includes an updated Due Diligence Usage section.

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

GBP122.8m Class A (ISIN XS1336778953) due January 2023: 'A-sf'; Outlook Stable
GBP16.6m Class B (ISIN XS1337093717) due January 2023: 'BBBsf'; Outlook Stable
GBP28m Class C (ISIN XS1337094285) due January 2023: 'BB+sf'; Outlook Stable
GBP17.2m Class D (ISIN XS1337094525) due January 2023: 'BB-sf'; Outlook Stable

The transaction is a securitisation of a GBP185m senior 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 secondary retail and office assets located throughout the UK.

KEY RATING DRIVERS

The collateral consists 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. Although largely well-located within town centres, this segment continues to be hindered by structural changes in the UK retail market. Investor demand has recovered from recent lows, but the consolidation of national retailers away from town centres is likely to limit growth from rental income.

The LTV at closing was a fairly high 70%; this, combined with the absence of scheduled amortisation, signals higher refinancing risk. This is reflected in the speculative-grade ratings on the lower two tranches. Granularity helps spread idiosyncratic property risk, while the robust interest coverage ratio (ICR) and LTV cash trap/default covenants (supported by annual revaluations and sequential cash sweep) help check performance deterioration, particularly for senior investors.

The sponsor's business plan envisages asset liquidation with quarterly amortisation targets. Failure to meet these targets would result in full cash trap and would also prevent the one-year extension option from being exercised (at year three). Fitch has tested a range of disposal scenarios, including no disposals and early default. In summary, granularity and the narrow range of property quality limit the scope of adverse selection. Moreover, its effects are contained by robust release pricing, even if debt is repaid pro-rata.

The predominantly pro-rata principal pay limits how much senior tranches would de-leverage, should the portfolio become more concentrated as a result of asset disposals. While property quality is not greatly bar-belled, a highly concentrated exposure to secondary quality UK (mainly retail) property presents idiosyncratic risks not commensurate with a rating above the 'Asf' category, particularly given the absence of a liquidity facility.

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

Fitch was provided with third-party due diligence information from Deloitte LLP. The third-party due diligence information was provided on Form ABS Due Diligence-15E and focused on a comparison of certain characteristics with respect to the properties in the portfolio. Fitch reviewed this information which indicated no adverse findings material to the rating analysis.

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 15 January 2016 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.