OREANDA-NEWS. Fitch Ratings has downgraded Ulysses (European Loan Conduit No. 27) Plc's class A notes and placed the class A to C notes on Rating Watch Negative (RWN) as follows:

GBP249m class A (XS0308745107) downgraded to 'BBsf' from 'BBBsf'; placed on RWN

GBP76m class B (XS0308747657) 'Bsf' placed on RWN

GBP48m class C (XS0308748200) 'B-sf' placed on RWN

GBP45m class D (XS0308748622) affirmed at 'CCsf'; Recovery Estimate (RE) RE50%

GBP11m class E (XS0308749356) affirmed at 'CCsf'; RE0%

The transaction is a standalone securitisation of one commercial mortgage loan that was originated by Morgan Stanley Bank International Limited. At closing, the issuer used the proceeds of the note issuance to acquire the mortgage loan, which has a total outstanding balance of GBP429m (GBP535 whole loan) and is secured by a single office tower (known as City Point) located in the city of London. There has been no amortisation to date. There is an issuer level interest rate swap (fixed to floating) that expires in July 2017 (coinciding with note legal maturity). The swap covers the whole loan, and ranks ahead of the notes.

KEY RATING DRIVERS

The negative rating actions reflect the deterioration in market confidence for London City offices following the UK vote to leave the EU. In Fitch's view, this has reduced the likelihood of the defaulted loan being resolved in time for legal final maturity (July 2017). While a sale has not been achieved, asset management activity has focused on extending and renewing the rental profile, with some success.

Nevertheless, falling gross passing rent (to GBP23.5m from GBP28.9m at the time of the last rating action) further contributes to the downgrade of the class A notes, which are no longer investment grade. We identified failure to resolve the loan in our previous rating commentary as likely to trigger a downgrade at this time.

The RWN reflects Fitch's view that uncertainty created by the vote will complicate efforts to resolve the loan in the near term. A valuation from December 2014 reported market value of GBP498.5m. Since then, market conditions initially improved before abruptly deteriorating following the vote. The impact on market conditions will be gauged as more signs emerge from transaction evidence and from wider progress with exit negotiations. Should a property sale be achieved in time for bond maturity, the likelihood of a class of notes being repaid in full depends on its seniority, as reflected in the ratings, with the class A notes still expected to enjoy a meaningful cushion against value declines.

The whole loan (comprising a GBP429m A-note and a GBP106m B-note) is swapped until July 2017 at a rate of 5.385%. To meet the overall finance costs, the servicer advance facility (SAF) is being drawn (swap costs rank senior to the whole loan). Meanwhile interest shortfalls have accumulated on the class D and E notes which are unlikely to be recovered in full, leading to the probable default of these notes.

Fitch understands that while the loan is in default, the junior lender has an unexpired option to purchase the senior loan, and thereby cement its effective control of the property. While exercising the option would be credit positive because it would lead to repayment of the notes (and all senior liabilities such as the swap, a capex facility and the SAF), there can be no guarantee that it will be exercised by bond maturity. Delaying has allowed the junior lender to avail of sub-market funding margins, reduce its overall financing requirement (the swap value will amortise by more than the SAF will be drawn) and postpone making any large financial commitment at a time of mounting uncertainty. However, delaying further exposes the junior lender to the risk of loan margins rising further, which could hinder its eventual returns.

While the option remains unexercised and provided the property value remains within the range of the A-note and the whole loan, potential property purchasers are likely to be discouraged from making a bid, in the knowledge that the junior lender can pre-empt them by making a lower option payment. This curtails the special servicer's power to bring about loan resolution prior to legal final maturity, which applies downward pressure on the ratings as indicated by the RWN.

RATING SENSITIVITIES

Looming legal final maturity puts downward pressure on the ratings. Should the loan fail to be resolved in the next six months, the notes may be further downgraded.

Fitch estimates 'Bsf' recoveries to the notes (after costs/senior liabilities) of between GBP380m and GBP400m.

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 Mount Street LLP as at May 2016

- Transaction reporting provided by Wells Fargo as at May 2016