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Rating Action:

Moody's affirms Class A1 and downgrades the Class A2 CMBS Notes issued by DECO 9 - Pan Europe 3 p.l.c.

30 Nov 2009

EUR 312 million of EMEA CMBS downgraded

Frankfurt, November 30, 2009 -- Moody's Investors Service has today downgraded the following class of Notes issued by DECO 9 - Pan Europe 3 p.l.c. (amount reflects initial outstandings):

EUR312M A2 Commercial Mortgage Backed Floating Rate Notes, Downgraded to A2; previously on Nov 13, 2009 Aaa Placed On Review for Possible Downgrade

At the same time Moody's has affirmed the Aaa rating of the Class A1 Notes. Moody's does not rate the Class B, C, D, E, F, G, H, J and X Notes issued by DECO 9 - Pan Europe 3 p.l.c. Today's rating action concludes the review for possible downgrade that was initiated for the Class A2 Notes on 13 November 2009. Today's rating action takes Moody's updated central scenarios into account, as described in Moody's Special Report "Moody's Updates on Its Surveillance Approach for EMEA CMBS".

1) Transaction and Portfolio Overview

DECO 9 - Pan Europe 3 p.l.c. represents the securitisation of initially eleven commercial mortgage loans originated by Deutsche Bank AG, London Branch that were secured by mainly first ranking mortgages on 500 retail, office, commercial and multi-family properties located in Germany (90.8%) and Switzerland (9.2%).

Since closing of the transaction, three loans (11% of the initial pool balance), prepaid in full and the Dresdner Office Loan and the Treveria I Loan were partially prepaid. Those prepayment proceeds were, according to the defined loan buckets, allocated to the Notes partly sequentially, partly 50% sequentially and 50% pro-rata and partly reverse sequentially.

The remaining loans are not equally contributing to the portfolio: the largest loan (the Treveria I Loan) represents 31.8% of the current portfolio balance, while the smallest loan (the Lincoln Portfolio Loan) represents 2.8%. The current loan Herfindahl index is 4.4 compared to 4.7 at closing. Following the prepayments, the remaining eight loans are secured by 387 properties, which are mainly retail (42%), office (32%), mixed-use (21%) and residential (5%) assets located in Germany (91.8%) and Switzerland (8.2%).

As of the last interest payment date ("IPD") in October 2009, all loans were current but the the Treveria I Loan was on the servicer's watchlist due to covenant breaches. To date, the sequential payment triggers in the transaction have not been breached.

2) Rating Rationale

Today's rating actions follow a detailed re-assessment of the loan and property portfolio's credit risk. Hereby, Moody's main focus was on property value declines, term default risk, refinancing risk and the anticipated work-out timing for potentially defaulting loans. In its review, Moody's especially concentrated on the largest loans in the portfolio, the Treveria I, the Dresdner Office and the PGREI Loans, representing 72% of the current portfolio balance.

As outlined in more detail below, today's rating action is mainly driven by:

(i) The most recent performance of the European commercial property markets;

(ii) Moody's opinion about future property market performance; and

(iii) The increased refinancing risk of the securitised loans.

Driven by a higher default risk assessment at the loan maturity dates, Moody's now anticipates that a large portion of the portfolio will default over the course of the transaction term. Coupled with the negative impact of significantly reduced property values, Moody's expects a substantial amount of losses on the securitised portfolio. Those expected losses will, given the back-loaded default risk profile and the anticipated work-out strategy for defaulted loans, crystallise only towards the mid to end of the transaction term.

The current subordination levels for Moody's rated classes are 57.7% and 20.3% for the Class A1 and A2 Notes, respectively. While the subordination provides protection against losses, also the likelihood of higher than expected losses on the portfolio has increased substantially, which results in today's rating action regarding the Class A2 Notes. In addition,the Class A2 Notes are subordinated in the transaction's capital structure to the Class A1 Notes. Due to this additional leverage, the higher portfolio risk assessment has a relatively bigger impact on the expected loss of the more junior Notes than on the expected loss of the senior Notes.

Since closing, three loans amounting to 11% of the original portfolio balance prepaid in full and the Dresdner Office Loan and the Treveria I Loan were partially prepaid. The prepayment proceeds of the loans were only partly allocated to the Notes on a sequential basis. At the same time, the loan portfolio provides for limited scheduled principal repayment over time. As a result, the Classes A1 and A2 Notes benefited only to a limited extent from an increase in subordination levels since closing.

3) Moody's Portfolio Analysis

Property Values. Property values across the Continental European markets have declined, in some markets significantly, until mid 2009 and are expected to continue to decline at least until 2010. Moody's estimates that compared to the underwriter's ("U/W") values at closing, the values of the properties securing this transaction have declined by on aggregate 27% until mid 2009 (ranging from no decrease for the Coop Fishman Loan to a 37% decline for the Treveria I Loan). Looking ahead, Moody's anticipates further declines until 2010, resulting in on aggregate 33% value decline for the portfolio compared to the U/W value at closing (ranging from no decline for the Coop Fishman Loan to a 41% decline for the Treveria I Loan).

Based on this property value assessment, Moody's estimates that the transaction's mid-2009 weighted average ("WA") securitised loan-to-value ("LTV") ratio was 88% compared to the reported U/W LTV of 68%. Due to the further envisaged declines, the WA LTV will increase in Moody's opinion to 95% in 2010 and will only gradually recover thereafter. Based on Moody's anticipated trough values, the LTVs for the securitised loans range between 126% (Treveria I Loan) and 61% (Dresdner Office Loan). As the Treveria I Loan has additional debt in the form of a B-loan (amounting to EUR 20.4 million), based on estimated trough values, the overall whole loan leverage is on average 96%. Moody's has taken the anticipated property value development, including a gradual recovery from 2011 onwards, into account when analysing the default risk at loan maturity and the loss given default for each securitised loan.

Refinancing Risk. The transaction does not have exposure to loans maturing in the short-term (2009 and 2010). However, 38% of the current portfolio matures in 2011, 10% in 2012, 38% in 2013 and the remaining 15% in 2014. As Moody's expects property values in the Continental European markets to only slowly recover from 2011 onwards, most of the loans will be still highly leveraged at their respective maturity dates. Consequently, in Moody's view, for all of the loans, the default risk at maturity has increased substantially compared to the closing analysis.

Term Default Risk. The occupational markets in Continental Europe are currently characterised by falling rents, increasing vacancy rates and higher than average tenant default rates. Taking into account the lease profile of the respective loans, the Treveria I Loan could be in Moody's view especially exposed to weakening occupational markets. Based on the current lease profile, Moody's has incorporated into its analysis an allowance for deterioration in coverage ratios and weakening tenant qualities on a majority of the loans, in turn increasing the term default risk assumption for the respective loans.

Overall Default Risk. Based on its revised term and maturity default risk assessment for the securitised loans, Moody's anticipates that a large portion of the portfolio will default over the course of the transaction term. The default risk of all loans is predominantly driven by refinancing risk. In Moody's view, the Treveria I Loan has currently the highest default risk, while the Terranias Portfolio Loan (7.5% of the current portfolio) has the lowest risk of defaulting.

Concentration Risk. The portfolio securitised in DECO 9 - Pan Europe 3 p.l.c. exhibits an average concentration in terms of property types and property location.

Work-Out Strategy. In scenarios where a loan defaults, Moody's current expectation is that the servicer will most likely not pursue an immediate sale of the property in today's depressed market conditions. Therefore, Moody's has assumed that in most cases, upon default, a sale of the mortgaged properties and ultimate work-out of the loan will occur at a later point in time.

Increased Portfolio Loss Exposure. Taking into account the increased default risk of the loans, the most recent performance of the commercial property markets in Continental Europe, Moody's opinion about future property value performance and the most likely work-out strategies for defaulted loans, Moody's anticipates a substantial amount of losses on the securitised portfolio, which will, given the backloaded default risk profile and the anticipated work-out strategy for defaulted loans, crystallise only towards the mid to end of the transaction term.

4) Rating Methodology

The principal methodologies used in rating and monitoring the transaction are "Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA" June 2005 and "Moody's Updates on its Surveillance Approach for EMEA CMBS" March 2009, which are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website. The last Performance Overview for this transaction was published on 02 November 2009.

Further information on Moody's analysis of this transaction is available on www.moodys.com. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

For updated monitoring information, please contact monitor.cmbs@moodys.com. To obtain a copy of Moody's New Issue Report on this transaction, please visit Moody's website at www.moodys.com or contact our Client Service Desk in London (+44-20-7772 5454).

London
Christian Aufsatz
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Oliver Moldenhauer
Asst Vice President - Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Class A1 and downgrades the Class A2 CMBS Notes issued by DECO 9 - Pan Europe 3 p.l.c.
No Related Data.
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