UK - MEPC, a specialist business park investment company wholly-owned by BT and Royal Mail pension funds, has had its debt financing downgraded by Fitch.
Three tranches of its commercial mortgage-backed security (CMBS) notes have been downgraded by the credit ratings agency on the back of a deterioration in the value of the assets securing the loan.
A £470m (€840m) mortgage loan originated by Eurohypo was securitised in 2005, and backed against four UK business parks, each offering a mix of office and industrial space.
MEPC valued the four assets at £634.3m in December 2009, but this is down 32% on its July 2007 valuation of £935.8m.
To make matters worse, has estimated the value to be considerably less at £490m and therefore converts the companies' loan-to-value ratio at 96% rather than the reported 74.1%.
"There has been a deterioration in the value of the four business parks securing the loan, in spite of signs that conditions for quality real estate in the UK are stabilising," said Fitch analysts Emmanuel Baah and Euan Gatfield in their latest performance update.
"The sheer size of the loan may make refinancing challenging when the loan approaches maturity in 2012, especially if turnover in the property market remains subdued."
The analysts also said the absence of any amortisation placed a great onus on MEPC to maintain strong interest coverage over the medium-term.
The occupancy rate across the four parks (92.4%) is currently at its highest level since the loan was originated, when it stood at 89%, and rental income has remained relatively stable over the past 12 months.
But Fitch warned rental arrears greater than three months have more than doubled over the past year to 2.8% of contracted passing rent.
"Whether this uptick in tenant distress can be contained will determine whether an eventual fall in yields towards their long‐term average would safeguard the borrower's remaining equity," the report said.
MEPC was acquired in 2000 by a joint venture between the BT Pension Scheme and GE Capital, before the former took 100% ownership several years later and the Royal Mail Pension Plan subsequently acquired a substantial holding.
MEPC owns eight UK business parks: Birchwood Park in Warrington, Hillington Park in Glasgow; Chineham Park in Basingstoke; Milton Park in Oxfordshire; Granta Park in Cambridge; Callaghan Square in Cardiff, and Wellington Place in Leeds.
The downgraded CMBS notes were secured against the first four parks.
MEPC has sold individual properties from its portfolio in recent months to UK pension funds. These include Benson House at 33 Wellington Street in Leeds, which MEPC sold to the Lancashire County Pension Fund, and 3-4 Callaghan Square in Cardiff, which it sold to the National Grid's UK pension fund.
