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Fitch Ratings-Taipei/Hong Kong-16 October 2009: Fitch Ratings has today affirmed the Class A and downgraded classes B and C beneficiary certificates issued by Taiwan's Cathay Dun Nan Commercial Building Real Estate Asset Trust (REAT), which is entrusted with part of the Dun Nan Commercial Building. The agency has simultaneously placed all classes on Rating Watch Negative (RWN) as follows:
TWD1,233.5m Class A Beneficiary Certificates affirmed at 'AAA(twn)'; placed on RWN;
TWD285m Class B Beneficiary Certificates downgraded to 'A(twn)' from 'A+(twn)'; placed on RWN; and
TWD310m Class C Beneficiary Certificates downgraded to 'BB(twn)' from 'BBB(twn)'; placed on RWN.
Class B and Class C beneficiary certificates were downgraded, reflecting the worsening performance of the entrusted property, which has a persistent low occupancy rate (at 74.9% as of end-September 2009), and lower than expected average rental level resulting from the rental discounts and longer rent-free periods offered to its tenants. Over the period of June 2008 to May 2009, the entrusted property reported a net operating income (NOI) of TWD133.7m, which is lower than Fitch's stabilised assumption. The NOI has continued to decline since May 2009 and is expected to decline further due to the rental discounts expected to be offered to some tenants. Furthermore, six leasing agreements accounting for around 31% of gross monthly rental income (as at September 2009) will expire in 2010. Whether these tenants will renew their leases upon expiry and whether lower rents will be offered to retain them are uncertain, will have a crucial impact on the cash flow generating ability of the entrusted property and debt servicing capabilities of the transaction. All rated classes are therefore placed on RWN to reflect the uncertainties and the increased risk profile of the transaction.
Nonetheless, the rating affirmation on Class A beneficiary certificates is based on the availability of various reserves which will provide liquidity to the transaction in case of any temporary shortfall and that Fitch's stressed debt service coverage ratio (DSCR), defined as Fitch's stressed net cash flow for debt service divided by stressed debt service interest expenses, has remained adequate. Furthermore, the transaction's DSCR (defined as actual cash flow for debt service divided by actual debt service interest expenses) has been above the DSCR trigger of 2x since closing (2.6x at end-May 2009). If the transaction's DSCR falls below 2.0x, the interest due to the subordinated certificate holders will be trapped in the DSCR reserve account and may be released only if the DSCR trigger level is restored.
The ratings address the timely payment of interest and ultimate repayment of principal by the legal maturity date of December 2013. The beneficiary certificates are ultimately backed by cash flows generated by the entrusted property, as well as the land and property value.
Fitch continues to monitor the performance of the transaction and will review the Rating Watch status on all classes within the next six months.
Rating Outlooks have been published for all newly issued Asia Pacific Structured Finance tranches since June 2008, and concurrently with rating actions for tranches issued prior to June 2008. Unlike a Rating Watch which notifies investors that there is a reasonable probability of a rating change in the short term as a result of a specific event, rating outlooks indicate the likely direction of any rating change over a one- to two-year period.
Applicable Criteria available on Fitch's website at www.fitchratings.com: 'Global Structured Finance Rating Criteria', dated 30 September 2009.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable.
Contacts: Tino Jang, Taipei, +886 2 8175 7611; Henry Hung, Taipei, +886 2 8175 7612.
Media Relations: Karen Cho, Hong Kong, Tel: +852 2263 9935,
Email:
karen.cho@fitchratings.com.
Additional information is available at www.fitchratings.com.
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