EUR 76.4 million of CMBS affected
Frankfurt, July 20, 2010 -- Moody's Investors Service has today confirmed the rating of the Class
A1 Notes issued by German Ground Lease Finance II S.A. (amount
reflects initial outstanding):
EUR76.4M Class A1 Secured Instruments due 2017, Confirmed
at Aaa; previously on Aug 26, 2009 Aaa Placed On Review for
At the same time, Moody's has affirmed the Aa3 rating of the Class
B-1 Notes issued by German Ground Lease Finance II S.A.
1) Transaction and Portfolio Overview
German Ground Lease Finance II S.A. represents the securitisation
of five real estate funding notes ("REF Notes") that are in turn secured
by the rental income ("groundrents") derived from hereditary building
rights in relation to a portfolio of currently 10,579 apartments
and 201 commercial units located in various German cities. The
hereditary building rights were created by separation of the respective
land from the right to use the building located on this land. In
relation to this transaction, the hereditary building rights have
been sold mainly to institutional property investors.
The transaction structure incorporates a long-dated inflation and
interest swap structure in order to mitigate the refinancing risk at REF
Note maturity. In addition, the Issuer benefits from a liquidity
facility in order to bridge cash flow shortfalls in the event of adverse
REF Note performance. An interest reserve fund serves as cushion
against potential adverse performance of the underlying groundlease portfolio.
The sponsor of German Ground Lease Finance II is Vivacon AG, which
has several roles within the transaction. Vivacon AG is amongst
others the ultimate parent company of the property owning companies ("REF
Note Issuers") that issued the REF Notes and is also the sole property
manager of the groundlease portfolio. In its role as property manager,
Vivacon AG collects the ground rents payable by the hereditary building
rights holders. As of closing of the transaction, less than
50% of the rents payable were collected by direct debit with the
remaining amounts being transferred by the respective hereditary building
rights owners to the property manager.
The REF Note Issuers are limited partnerships (Kommanditgesellschaften)
incorporated in Germany. The general partners of the REF Notes
Issuers are either Vivacon AG or companies affiliated with Vivacon AG.
Under German law, if one partner of a partnership becomes insolvent,
the partnership is dissolved and the remaining partner may have to make
a compensation claim to the insolvent partner. In order to make
this compensation claim, the REF Note Issuer may be forced to sell
its properties. However, the articles and associations of
the REF Notes Issuers include the concept of "solvent liquidation" to
provide for that in case of insolvency of any partner of the REF Notes
Issuers, the partnership is not dissolved, but continued with
such insolvent partner until all claims of creditors of the partnership
are satisfied. While in Moody's view the concept of solvent liquidation
mitigates the risk of a REF Note Issuer insolvency following a potential
insolvency of the sponsor, the concept of solvent liquidation includes
in practice an active involvement of the REF Note Issuers' directors and
other transaction parties.
2) Rating Rationale
Moody's placed the Class A-1 Notes on review for possible
downgrade in August 2009 due to Vivacon's liquidity difficulties
reported since the second quarter of 2009 and Moody's view that
the Aaa rating of the senior class of the transaction may not be commensurate
with the potential legal or operational linkage of the transaction to
Furthermore, a potential default of the sponsor could in Moody's
view also impact the underlying performance of the groundlease payments,
i.e. increase the arrears levels of the groundlease portfolio.
The impact of such a potential increase in arrears would however be mitigated
by the EUR 4 million interest reserve fund (3.6% of the
current note balance) and the EUR 11.5 million liquidity facility
(10.2% of the current note balance) in this transaction.
During the review process, Moody's focused on the transaction
structure's robustness against a potential default of the property manager.
This included an assessment of:
(i) The timing and the process of replacing the property manager upon
a potential default of the property manager;
(ii) The cash flow implications of a potential property manager default;
(iii) Whether transaction parties independent from Vivacon AG are in possession
of updated portfolio data and are prepared to be actively involved,
should Vivacon AG file for bankruptcy.
As outlined in more detail below, today's rating action is mainly
i) The back-up servicing agreement (the "Back-Up Servicing
Agreement") signed between the REF Note Issuers, Vivacon AG
and Crown Westfalen Credit Services GmbH;
ii) Changes to the ground rent collection processes. Currently
approximately 89% of the ground lease payments are transferred
directly into REF Note Issuers' accounts; and
iii) Moody's conversations with various transaction counterparties,
which provided Moody's with an overview about the understanding
of the transaction mechanics by the respective parties and their preparation
in case of Vivacon's default.
i) Vivacon AG and the REF Note Issuers entered into the Back-Up
Servicing Agreement with Crown Westfalen Credit Services GmbH ("Crown",
the "Back-Up Servicer"). The agreement will
be activated five business days after Crown has been notified that Vivacon
AG filed for insolvency. In case of third party creditors' filing
the application for Vivacon's insolvency proceedings, the
Back-Up Servicing Agreement will be activated if the application
has not been dismissed or withdrawn within three weeks. In this
case, the Back-Up Servicer will take over the servicing duties
within 15 business days after the receipt of such a notification.
The Back-Up Servicer is obliged to notify the groundlease payers
once the agreements comes into force. The contractual obligations
of the Back-Up Servicer include the collection of groundleases
and all related management duties including monitoring of incoming payments,
indexation of groundleases, the calculation of arrears and appeal
processes, the preparation of reports for investors and updates
of encrypted data pools for the Corporate Services Provider on a quarterly
basis; as well as providing advisory services in respect of the refinancing
of the REF Notes at maturity. The agreement will automatically
expiry in March 2017, one month after the scheduled maturity date
of the REF Notes, however before the legal final maturity date of
the rated notes in February 2020.
ii) Over the last few months, Vivacon AG implemented changes to
the collection process within the transaction. As a result,
approximately 89% of the groundlease payments are now transferred
directly into REF Note Issuers' accounts. As of the date
of the review action only less than 50% of the rents were collected
by direct debit with the remaining amounts being transferred by the respective
hereditary building rights owners to the property manager which in turn
transfered the cash into REF Note Issuer accounts.
iii) During the review process, Moody's contacted a few transaction
parties, including the Note Trustee, the Corporate Services
Provider and the Back-up Servicer in order to understand their
preparation to act in case of insolvency or default of the property manager.
Moody's has been informed by the Corporate Servicer Provider that
it is on an ongoing basis provided by the property manager with updated
pool data. Furthermore, the Note Trustee is aware of the
contractual steps that should be taken in case of Vivacon's insolvency.
The general partners of the REF Notes Issuers have one director from the
Vivacon group and one independent director. The independent director
should assume the management of the respective general partner and the
affected REF Note Issuer in case of Vivacon's insolvency or the
insolvency of any of the limited partners of the REF Note Issuers.
The independent director of the REF Note Issuers would be acting in the
interests of the Noteholders in case of Vivacon's insolvency.
Moody's has also been provided with minutes from the meeting between
the team managing the groundleases at Vivacon AG and the Back-Up
Servicer, which took place after the back-up servicing agreement
has been signed. Moody's also talked to the appointed team
at Crown, which is responsible for the implementation of the agreement.
Crown, a former subsidiary of Westfalen Bank AG, provides
management services for performing, sub-performing and non-performing
loans in its role as primary servicer, special servicer and consultant.
The company has 25 employees working in its German office, including
credit analysts, work-out specialists, lawyers and
tax advisors. A project team appointed for the implementation of
the Back-Up Servicing Agreement is composed of five persons representing
accounting, legal and IT departments. The team is currently
mapping Vivacon's reporting into its own IT system as well as reviewing
the relevant documentation. Based on the information provided,
Moody's is of the opinion that Crown has adequate capability to
perform the role as Back-Up Servicer of the underlying groundlease
Overall, during the review process Moody's got comfortable
that transaction parties independent from Vivacon AG are in possession
of crucial information allowing them to be actively involved in the transaction,
In Moody's view the Back-Up Servicing Agreement will allow
for a continuation of collection activities as well as fulfillment of
reporting obligations if the current property manager was to default.
Furthermore, the changes implemented in respect of the collection
processes, will help to mitigate any cash flow implications in case
of the property manager's default. Moody's is however
of the opinion that the term of the Back-Up Servicing Agreement
being shorter than the term of the transaction is a structural weakness.
In combination, the transaction amendments result in the rating
confirmation for the Class A-1 Notes and the rating affirmation
for the Class B-1 Notes.
3) Rating Methodology
The principal methodologies used in rating and monitoring the transaction
were "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 can be found at 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 11 June
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
Asst Vice President - Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's confirmed the Aaa rating of the Class A-1 CMBS Notes issued by German Ground Lease Finance II S.A.