OREANDA-NEWS. Fitch Ratings has downgraded Leo Mesdag B.V.'s class E notes and affirmed the others, as follows:

EUR435.9m class A (XS0266637171) affirmed at 'Asf'; Outlook Stable
EUR17.4m class B (XS0266638146) affirmed at 'Asf'; Outlook Stable
EUR95.6m class C (XS0266642171) affirmed at 'BBsf'; Outlook Stable
EUR121.1m class D (XS0266642767) affirmed at 'Bsf'; Outlook revised to Negative from Stable
EUR69.7m class E (XS0266644383) downgraded to 'CCCsf' from 'Bsf'; Recovery Estimate 50%

The transaction is a securitisation of a single commercial mortgage loan secured against 53 department stores, predominantly let to let to three major Dutch retailers: Hema, Bijenkorf and V&D, and two car parks located throughout the Netherlands and originated by NIBC Bank N.V.

KEY RATING DRIVERS
The downgrade of the class E notes and revision of the Outlook on the class D notes reflects continued weakness in the Dutch retail occupational markets (outside Amsterdam) as well as uncertain prospects for the V&D properties, whose tenant entered bankruptcy late last year. For the senior notes, these risks are contained by debt repayments from past refinancing and the cash sweep flowing sequentially. This is despite adverse selection risks associated with the borrower's freedom to extract more equity via partial refinancings, whereas for junior notes the disapplication of release premiums increases risk.

With the level of incentives afforded by the loan restructuring, Fitch considers the recent inactivity in refinancing terms in the last 12-18 months as a signal of rising risk that the borrower will fail to repay the EUR740m loan at maturity in August 2016. If this plays out, it would be a negative signal about whether market or lender appetite for properties in the pool can support the reported LTV of 63%. However, it would also imply lower scope for adverse selection. Fitch considers the junior notes at risk from refinancing activity or inactivity between now and loan maturity.

The overall loan amount has fallen by approximately EUR40m since the last rating action. Fitch understands that the sponsor (IEF Capital) is in negotiations to refinance large portions of the debt in the coming months, although this remains subject to uncertainty. It will not be helped by the bankruptcy of V&D, the third-largest tenant, representing 14.6% of rent. Recent media coverage has focused on proposals by Dutch fashion retailer, CoolCat, and Canadian retailer, Hudson's Bay, to take over the V&D business and/or properties.

Pending resolution, non-payment of V&D rent will act as a drag on the interest coverage ratio (ICR). The loss of the full EUR8.9m per year will reduce the ICR to approximately 1.3x, squeezing the level of cash sweep available. Prior to this bankruptcy, the strong lease structure meant that net operating income (EUR53.8m), ICR and vacancy (0.1%) were all stable.

In general, Fitch believes the property portfolio is well-located and fit-for-purpose. There is some differentiation, with "trophy" assets such as the Amsterdam and The Hague De Bijenkorf department stores alongside smaller Hema and V&D stores in second tier locations. The three main retailers are privately held, so little information is available regarding sales performance in the stores. Meanwhile the Dutch retail sector outside Amsterdam continues to suffer declining rental values, which suggests a similar trend for trading performance.

While moderately long leases of over 11 years on a weighted average basis supports refinancing, tenant concentration presents a risk, which will be at the forefront of property investors' minds with the demise of V&D. Fitch estimates an LTV over 100% in its 'Bsf' scenario, since yields are below long-term averages.

RATING SENSITIVITIES
Fitch estimates the 'Bsf' recoveries to be EUR712m (based on sustainable long-term value). Signs of further falls in market rents or adverse selection on the part of the borrower in case of partial refinancings could bring further pressure on the junior notes. The senior notes are less exposed to rating action, also given that upgrades above 'Asf' are not consistent with only having three years until bond maturity in case the loan defaults.

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 NIBC Bank N.V. as at 30 November 2015
- Transaction reporting provided by NIBC Bank N.V. as at 30 November 2015