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Rating Action:

Moody's affirms and downgrades several classes of CMBS Notes issued by Titan Europe 2006-1 plc

16 Oct 2009

EUR249.41 Million of CMBS affected

London, 16 October 2009 -- Moody's Investors Service has today downgraded the following classes of Notes issued by Titan Europe 2006-1 plc (amounts reflect initial outstandings):

EUR112.05M B, Downgraded to Baa1; previously on Jun 18, 2009 Aaa Placed Under Review for Possible Downgrade

EUR39.76M C, Downgraded to B1; previously on Jun 18, 2009 A1 Placed Under Review for Possible Downgrade

EUR46.99M D, Downgraded to Caa2; previously on Jun 18, 2009 Baa2 Placed Under Review for Possible Downgrade

EUR50.61M E, Downgraded to Ca; previously on Jun 18, 2009 Ba3 Placed Under Review for Possible Downgrade

At the same time Moody's has affirmed the Aaa ratings of the Class A and the Class X Notes. Moody's does not rate the Class F, Class G, and Class H Notes issued by Titan Europe 2006-1 plc. Today's rating action concludes the review for possible downgrade that was initiated for the Class B, C, D, and E Notes on 18 June 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

Titan Europe 2006-1 plc closed in March 2006 and represents the securitisation of initially ten commercial mortgage loans originated by Credit Suisse International. The loans were secured by first-ranking legal mortgages over 56 commercial properties located in Germany. The properties were predominantly mixed-use (45% of the original portfolio by underwriter market value) followed by office (28%), industrial warehouse (15%), hotel (8%) and retail (4%).

Since closing of the transaction, five loans (47% of the initial portfolio balance), prepaid in full. In addition, there was one property disposal from the portfolio securing the Mangusta Loan. The prepayment proceeds were allocated 50% sequential and 50% pro-rata to the Notes. The remaining loans are not equally contributing to the portfolio: the largest loan (the Mangusta Loan) represents 34.1% of the current portfolio balance, while the smallest loan (the Nuremberg Retail Distribution Centre Loan, "Nuremberg Loan") represents 5.9%. The current loan Herfindahl index is 4.1 compared to 7.5 at closing, indicating a higher loan concentration after the prepayments. Following the property disposal and prepayments, the remaining five loans are secured by 26 properties. The property type composition of the portfolio has changed compared with closing with industrial warehouse currently contributing 31%, office 24%, mixed-use 21%, hotel 17% and retail 6%.

As of the last interest payment date ("IPD") in July 2009, out of the five loans, one loan (the Mangusta Loan) was subject to an event of default. The loan was transferred into special servicing in June 2008 due to insufficient reporting by the borrower and suffered payment shortfalls on the April and July 2009 IPDs. Furthermore, another loan, the KQ Warehouse Loan (23.0% of the current portfolio balance) appeared on the servicer's watchlist due to the insolvency of the tenants, Karstadt Quelle AG and Karstadt Vermietungsgesellschaft mbH, which generate 100% of the property cash flows for the loan.

Following the default of the Mangusta Loan, the sequential payment trigger in the transaction has been breached; therefore, further proceeds from prepayments and balloon payments will be allocated sequentially to the Notes.

In January 2009, Moody's downgraded the Class C Notes from Aa2 to A1, the Class D Notes from A2 to Baa2 and the Class E Notes from Baa3 to Ba3. The downgrade was driven by the adverse performance of the Mangusta Loan, namely by (i) the updated valuation for the property pool securing the loan; (ii) the worse than initially expected performance of the loan in terms of coverage and property cash-flows and (iii) the uncertainty created by reporting issues on the loan, given that no sufficient reporting had been provided by the borrower since Q3 2007 at that time. In June 2009, following the payment default on the Mangusta Loan coupled with continuing insufficient reporting and cooperation by the borrower; and the insolvency filing of the tenants for the KQ Warehouse Loan, Moody's placed the ratings on the Class B, C, D and Class E Notes on review for possible downgrade.

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 defaulted and potentially defaulting loans. In its review, Moody's has undertaken a detailed analysis of all loans in the pool.

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

(i) the adverse performance of the Mangusta Loan and the uncertainty surrounding the future performance of the KQ Warehouse Loan which together comprise approximately 57% of the current portfolio;

(ii) the transaction's refinancing profile;

(iii) the most recent performance of the German commercial property markets; and

(iv) Moody's opinion about future property market performance.

Driven by (i) the existing default of the Mangusta Loan, (ii) the very high default probability of the KQ Warehouse Loan during its term, and (iii) a higher default risk assessment for the remaining loans on the loan maturity dates, Moody's now anticipates that a very 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 very high amount of losses on the securitised portfolio. Those expected losses will, given the anticipated work-out strategy for defaulted loans, crystallise only towards the mid to end of the transaction term.

Since closing, five loans amounting to 47% of the original portfolio balance prepaid in full. The prepayment proceeds of the loans were allocated to the Notes on a 50% sequential and 50% pro-rata basis. The prepayment proceeds together with scheduled amortisation payments have resulted in increased credit enhancement levels available to each of the classes rated by Moody's. The current subordination levels for the Class B, the Class C, the Class D, and the Class E are 38.3%, 29.9%, 20.0%, and 9.2% respectively. While the subordination provides protection against losses for the more senior Notes, also the likelihood of higher than expected losses on the portfolio has increased substantially, which results in today's rating action.

Moody's affirmed the rating of the Class A Notes as this class is sufficiently protected against the increased expected portfolio losses with a subordination level of 62.1%. Moreover, the Class A Notes can benefit from further increases of the credit enhancement level as future potential loan prepayments, recoveries and balloon repayments from the portfolio will be applied fully sequentially to the Notes in line with the transaction waterfall. The Class B, Class C, Class D, and Class E Notes are subordinated in the transaction's capital structure. 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.

The Class X Notes are entitled to receive the difference between (i) interest payable on the loans and (ii) interest payable on the Notes and certain costs and rank in relation to their interest payment pro-rata and pari passi to the Class A Notes. The liquidity facility can be used to cover potential interest shortfalls on the Class X Notes. In relation to principal, the net proceeds from the issue of the Class X Notes have been retained by the Issuer in the Class X Account for the purpose of repaying the principal amount of the Class X Notes. Moody's believes that the Class X Notes have a different risk profile in comparison to the other classes in the transaction given their characteristics. The rating of the Class X Notes is therefore not directly affected by the credit risk of the loan portfolio.

Moody's anticipates that, following the application of its updated central scenarios, Titan Europe 2006-1 plc is one of the most negatively affected EMEA CMBS conduit deals secured by Pan-European collateral.

3) Moody's Portfolio Analysis

Property Values. Property values in Germany have declined until mid 2009 and are expected to continue to decline at least until 2010. Moody's estimates that the values of the properties securing this transaction have declined by on aggregate 35% until mid-2009 (ranging from a 11% decrease for the Nuremberg Loan to a 45% decline for the KQ Warehouse Loan) compared to the underwriter's ("U/W") values at closing, and by 30% compared to the most recent U/W values reported for the pool. For the KQ Warehouse Loan, the value assessed by Moody's is based on a vacant possession due to the insolvency of the tenants. This value is approximately 12% lower than the vacant possession value of the U/W at closing and 18% lower than the most recent available U/W vacant possession value. Looking ahead, Moody's anticipates further value declines until 2010, resulting in on aggregate 39% value decline for the portfolio compared to the U/W value at closing (ranging from 16% decline for the Nuremberg Loan to a 45% decline for the KQ Warehouse 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 108% compared to the reported U/W LTV of 76%. Due to the further envisaged declines, the WA LTV will increase in Moody's opinion to 116% in 2010 and will only gradually recover thereafter. Based on Moody's anticipated trough values, the LTVs for the securitised loans range between 125% (Mangusta Loan) and 92% (Nuremberg Loan). As three loans (Mangusta, KQ Warehouse and Tiden Portfolio Loan) have additional debt in the form of B-loans (amounting to GBP45.5 million on aggregate), the whole loan leverage based on estimated trough values will be on average 131%.

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 exposure to loans maturing in the short-term (2009 and 2010) is considerable with 16% of the current portfolio maturing in 2010. 23% of the current portfolio matures in 2011, 40% in 2012 and the remaining 21% matures in 2013. As Moody's expects property values in the Continental European markets to only slowly recover from 2011 onwards, all loans will be still highly leveraged at their respective maturity dates. Consequently, in Moody's view, for all of the currently performing 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. In this portfolio, the performance of the second largest loan, the KQ Warehouse Loan, secured by two logistic assets located in Leipzig and Munich is currently negatively impacted by the insolvency of the sole tenants, Karstadt Quelle AG and Karstadt Vermietungsgesellschaft mbH, both of which have filed for insolvency proceedings in June 2009. Moody's understands that all rental payments have been made by the tenants except for the July 2009 rent for the Leipzig property which remains outstanding. In Moody's opinion, there is significant uncertainty around the future tenancy of the properties, hence the borrower's ability to meet its payment obligations going forward. In Moody's view, the default probability of the loan during its term has significantly increased compared with closing of the transaction as well as compared to Moody's revised expectations per January 2009.

Taking into account the lease profile of the remaining performing loans, the Tiden Portfolio Loan (21.3% of current portfolio) 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 the remaining loans, in turn increasing the term default risk assumption for the respective loans.

Loans in Default and/or Special Servicing. One loan in the portfolio, the Mangusta Loan which accounts for 34.1% of the current outstanding balance is in default and in special servicing.

The Mangusta Loan was initially secured by 14 commercial properties (currently 13) mainly located in small to medium sized properties across Germany. The loan was transferred into special servicing in June 2008 due to insufficient reporting of financial information by the borrower. The borrower has since failed to pay the full amount of debt service due on the whole loan on the April and July 2009 IPDs. Further, Moody's understands that there are outstanding payments to be made by the borrower to cover swap breakage costs associated with the sale of one property. The servicer is unable to calculate a covenant compliance debt service coverage ratio for the loan since Q1 2008 due to lack of borrower reporting, and information on the current tenancy profile is very limited. According to the special servicer, negations between the special servicer, the borrower and a third party investor are ongoing about a potential refinancing of the loan, and the special servicer will pursue an enforcement of the loan.

Overall Default Risk. Based on its revised term and maturity default risk assessment for the securitised loans, Moody's anticipates that a very large portion of the portfolio will default over the course of the transaction term. In Moody's view, excluding the Mangusta Loan which is already in default, the KQ Warehouse Loan currently has the highest default risk, while the Nuremberg Loan has the lowest risk of defaulting. The default risk of the loans is predominantly driven by refinancing risk except for the KQ Warehouse Loan for which Moody's has determined a high default risk during the loan term.

Concentration Risk. The portfolio securitised in Titan Europe 2006-1 plc 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 Germany, Moody's opinion about future property value performance and the most likely work-out strategies for defaulted loans, Moody's anticipates a very high amount of losses on the securitised portfolio, which will, given 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 12 August 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 [email protected] 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

London
Deniz Yegenaga
Associate Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms and downgrades several classes of CMBS Notes issued by Titan Europe 2006-1 plc
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