OREANDA-NEWS. Fitch Ratings has upgraded London & Regional Debt Securitisation No. 2 (LORDS 2)'s class B and C floating rate notes due 2018 and affirmed the class A notes, as follows:

GBP53.7m class A (XS0262542565) affirmed at 'BBBsf'; Outlook Stable
GBP14.9m class B (XS0262544348) upgraded to 'BBBsf' from 'BBB-sf'; Outlook Stable
GBP46.4m class C (XS0262545402) upgraded to 'BB-sf' from 'Bsf'; Outlook Stable

LORDS 2 is a securitisation of a single commercial mortgage loan secured by a portfolio of originally 27 office, retail and leisure properties located throughout the UK.

KEY RATING DRIVERS
The upgrades reflect the reduced securitised loan-to-value (LTV) ratio and loan balance since the last rating action in January 2015. We have affirmed the senior class of notes rather than upgrading it, despite its low advance rate. This is due to the risk that a failure to refinance could leave the notes outstanding with less than 18 months until their maturity.

The reported securitised LTV has fallen to 53.9% from 68% (based on a 2013 valuation), although the whole loan LTV is 102.9%, only marginally down since the last rating action. Like the original portfolio, the residual 12 asset pool is a mix of high quality central London assets and secondary/ tertiary regional assets.

The loan was restructured in 2013 following a maturity default. Key features of the restructuring included a one-year maturity extension with two additional extension options, the latter subject to meeting repayment targets. The loan margin was increased to cater for the higher note margins demanded at the time, together with senior costs.

A GBP29m capex reserve was funded by the borrower to allow various assets to be improved, with drawdowns yielding 8% repayable ahead of the B-note to provide an incentive. The allocated loan amounts were revised down for each property given the decline in values. However, the A-note has a full cash sweep and the B-note lender's rights have been largely removed. Provisions for the appointment of a special servicer should the cured loan default again were also implemented.

In October 2015, the loan was extended for a final year after the senior balance was further reduced to GBP115m via asset sales, cash sweep and equity injection. Extending financing that costs it a margin of 225bps may be a sign that the borrower has limited prospects of refinancing. However, the repayment does de-risk the notes, with debt yields increasing from 10.8% in October 2014 (on a reversionary basis) to the current 11.7%. The latter is on an actual basis given two previously occupied (and over-rented) properties have since been vacated.

Fitch believes the notes will be repaid in full.

RATING SENSITIVITIES
Future upgrades are unlikely due to structural limitations. Downgrades may occur if the loan fails to be repaid at or soon after maturity.

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 Bank of New York Mellon as of October 2015