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Telereal Securitisation PLC U.K. CMBS Ratings Affirmed Following Review


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Telereal Securitisation PLC U.K. CMBS Ratings Affirmed Following Review


  • Following our review of Telereal Securitisation PLC as part of our ongoing surveillance, we affirmed our ratings on all classes of notes.
  • Telereal Securitisation is a 2001 vintage secured loan transaction, initially backed by a pool of 5,665 commercial properties operated by British Telecommunications PLC (BT). It is now backed by 5,339 commercial properties.

LONDON (S&P Global Ratings) Jan. 30, 2023--S&P Global Ratings today affirmed its 'AA (sf)' credit rating on Telereal Securitisation PLC's class A notes, and its 'BBB (sf)' ratings on the class B and C notes.

Rating rationale

Today's rating actions follow our review of the transaction's five key rating factors (the securitized assets' credit quality, legal and regulatory risks, operational and administrative risks, counterparty risks, and payment structure and cash flow mechanisms).

Our ratings on this transaction address the timely payment of interest, payable quarterly, and the payment of principal no later than the legal final maturity dates in 2033 and 2036.

The affirmation of the class A notes reflects an increased debt service coverage ratio (DSCR) and net rental income, as well as a very low vacancy rate, indicate a stable performance.

The rating on the class A notes is constrained by the long-term issuer credit rating (ICR) on the issuer bank account provider, as its documented replacement framework is not in line with our counterparty criteria for 'AAA' ratings. However, even without this constraint, our rating would be the same based on our analysis of the underlying credit risk. We therefore affirmed our 'AA (sf)' rating on these notes.

The ratings on the class B and C notes are linked to the long-term ICR on BT, which is also unchanged. We therefore affirmed these ratings.

Telereal Securitisation is a CMBS transaction of fully amortizing loans secured by a portfolio of 5,339 telephone exchanges and other commercial properties occupied by BT (BBB/Stable/A-2). The ratings on the class B and C notes are credit-linked to BT. The rating on the class A notes is not linked to that on BT but relies on an alternative operator analysis of the use of BT's exchanges if it defaults.

The current loan balance is £2.35 billion, compared to £2.00 billion at our last review. The transaction was restructured via a redemption, amendment, and re-issue. Changes to the transaction included increased class A-3 and A-4 note balances and an extension to the notes' legal final maturity date. These changes did not affect the notes' ratings (see "Telereal Securitisation PLC U.K. CMBS Ratings Unchanged Following Consent Solicitation Termination," published on March 2, 2022).

Transaction overview

Telereal Securitisation is a U.K. secured-loan transaction that closed in 2001, when BT sold a 131-year leasehold interest on a portion of its property portfolio--mostly telephone exchanges housing BT's U.K. fixed-line network--to Telereal Securitisation on a sale and leaseback arrangement. Telereal Securitisation financed the purchase of the portfolio by issuing long-term fully amortizing bonds. Two further tap issuances occurred in 2004 and 2006, at which point Telereal Securitisation refinanced and redeemed some of the original liabilities. The transaction was also restructured in March 2021 and January 2022. Noteholders have a first-ranking mortgage over the 131-year leasehold and are assigned rent payable by BT under the subleases. The rent is indexed at a fixed rate of 3% per year and funds interest and principal payments on the notes.

The securitized loan is now secured against 5,339 telephone exchanges, radio stations, and other specialized properties used by BT (down from 5,665 properties at closing). The assets are spread across the U.K. but are concentrated in London and the home counties (44% and 26% by vacant possession value, respectively).

While the sale and leaseback transaction was structured with full repairing and insuring lease agreements ending in November 2036, BT may elect to terminate the transaction in December 2031. The loan was structured to fully amortize from BT rental payments by December 2031. At closing the rental income for the property portfolio was £151 million; it is now £274 million per annum and is expected to reach approximately £365 million per annum by 2031.

Under the terms of the loan agreement, every five years the borrower must procure a new valuation for a portion of the portfolio and a matrix valuation for the remainder. Due to the size of the property portfolio two valuers undertook valuations in November 2020 and March 2021. Valuations are prepared on the special assumption that the properties are vacant of any occupation, allowing redevelopment subject to achieving planning permission.

Since our previous full review in January 2022, the vacant possession value of the remaining properties is unchanged at £4.65 billion. Based on this information, the notes exhibit a reported securitized note-to-vacant-possession value (NTVPV) of 50.58% (for the A, B, and C notes). The DSCR has increased to 1.44x (from 1.18x in September 2021).

As the properties are so specialized, we assumed the rental income would be akin to industrial properties and therefore for our analysis we reviewed rental rates for this asset type. Rental income has increased by 3% since our previous review. At the same time, the estimated market rental value increased and the property portfolio is significantly under-rented.

In our analysis of the class A notes, for the rating scenarios not supported by the current long-term ICR, we assumed BT would only perform part of its obligation before defaulting. In line with our credit stability criteria, our analysis assumed BT would default in four years. Therefore, we have taken the rental income that would be payable in four years' time to calculate our S&P Global Ratings net cash flow (NCF), as this is below the current market rental value for industrial properties.

We then took 5% vacancies, as this is the higher of in place and market vacancies for industrial properties. We made a further 5% adjustment for non-recoverable expenses, in line with our criteria.

We based our capitalization rate on the anchor cap rate for warehouse logistics and added 200 basis points (bps) to capture the nature of the specialised assets. Therefore, we adopted a capitalization rate of 11%, which is unchanged from our previous review.

We applied our 11% capitalization rate against the S&P Global Ratings NCF and deducted 5% of the purchase costs to arrive at our S&P Global Ratings value.

Table 1

Loan And Collateral Summary
Review as of January 2023 Review as of January 2022
Data as of December 2022 September 2021
Senior loan balance (bil. £)* 2.4 2
Senior loan-to-value ratio (%) 50.6 48.1
Trailing 12 months net rental income per year (mil. £) 273.6 265.8
Vacancy rate (%) 0 0
Vacant possession value (bil. £) 4.6 (as of November 2020 and March 2021) 4.6 (as of November 2020 and March 2021)
*The class A-3 and class A-4 notes' balances have increased since our last review.

Table 2

S&P Global Ratings' Key Assumptions
Review as of January 2023 Review as at January 2022
S&P Global Ratings gross rent (mil. £) 307.9 300.0
S&P Global Ratings vacancy (%) 5.0 5.0
S&P Global Ratings expenses (%) 5.0 5.0
S&P Global Ratings net cash flow (mil. £) 277.9 270.0
S&P Global Ratings value (bil. £) 2.4 2.3
S&P Global Ratings cap rate (%) 11.0 11.0
Haircut-to-vacant possession value (%) 48.4 49.9
S&P Global Ratings loan-to-value ratio (before recovery rate adjustments; %)* 98.0 95.9
*Transaction restructured and class A-3 and class A-4 note balance increased.
Other analytical considerations

We also analyzed the transaction's payment structure and cash flow mechanics. We assessed whether the cash flow from the securitized assets would be sufficient at the applicable ratings to make timely payments of interest and ultimate repayment of principal by the legal maturity date for each class of notes, after considering available credit enhancement and allowing for transaction expenses and liquidity support. Our assessment of the payment structure and cash flow mechanics does not constrain our ratings on this transaction.

Our analysis also included a full review of the legal and regulatory risks, operational and administrative risks, and counterparty risks. Our assessment of these risks remains unchanged since our previous review and is commensurate with the ratings assigned.

Related Criteria

Related Research

Primary Credit Analyst:Carla N Powell, London + 44 20 7176 3982;

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