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
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
As outlined in more detail below, today's rating action is mainly
(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
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
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
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
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 firstname.lastname@example.org.
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).
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
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.
Asst Vice President - Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454