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Rating Action:

Moody's confirmed the Aaa rating of the Class A-1 CMBS Notes issued by German Ground Lease Finance II S.A.

Global Credit Research - 20 Jul 2010

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 Possible Downgrade.

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 Vivacon AG.

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; and

(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 driven by:

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 portfolio.

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, if necessary.

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 2010.

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
Magdalena Umsonst-Suminska
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.
No Related Data.
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