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Rating Action:

Moody's downgrades CMBS Class A and Class D Notes issued by Immeo Residential Finance No. 2 Limited

27 Nov 2009

EUR 1,127.3 million of CMBS affected

Frankfurt, November 27, 2009 -- Moody's Investors Service has today downgraded the following classes of Notes issued by Immeo Residential Finance No. 2 Limited (amounts reflecting the initial outstanding amounts):

EUR975M Class A Secured Floating Rate Notes due 2016, Downgraded to Aa3; previously on Nov 6, 2009 Aaa Placed Under Review for Possible Downgrade

EUR152.3M Class D Secured Floating Rate Notes due 2016, Downgraded to Ba1; previously on Nov 6, 2009 A3 Placed Under Review for Possible Downgrade

This rating action concludes the rating review initiated by Moody's on 6 November 2009. Moody's does not rate the Class B and Class C Notes issued by Immeo Residential Finance No. 2 Limited. The 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 Overview

The transaction closed in June 2007 and involves a single loan maturing in December 2013. The loan is secured by, inter alia, first and second ranking security over a portfolio of more than 37,000 residential units, 152 commercial units, more than 7,000 parking spaces and garages as well as some undeveloped land. The properties are predominately located in the Rhine Ruhr Area of Germany in the Federal State of North Rhine Westfalia, with concentrations is Essen and Duisburg. The loan, which benefits from an increasing amortisation schedule over time was originated by BNP Paribas, Citibank International plc, Morgan Stanley Principal Funding, Inc. and Societe Generale with a balance of EUR 1.41 billion. Due to a combination of scheduled amortisation and prepayments via property sales, the loan has amortised to EUR 1.33 billion as per the September 2009 IPD. The property portfolio is also encumbered by some prior ranking subsidised debt in an amount of EUR 60.5 million.

2) Rating Rationale

Today's downgrade was prompted by (i) the property value decline that Moody's anticipates for large multi-family portfolios since the peak of the market in 2007; (ii) an increased refinancing risk for the loan given the transaction's size and leverage, and also taking into account the maturity date of the loan in December 2013; and (iii) compared to Moody's initial expectations a moderate underperformance of disposal proceeds as well as net cash flows which can be partially explained by higher than anticipated CAPEX.

In Moody's view, the default risk of the loan has increased compared to closing. Together with decreased property values and an expected future adverse value development, Moody's expected loss on the loan has increased, but it is still low.

The downgrade of the Class D Notes is mainly driven by the junior position in the capital structure and an increased loan default risk. The Class A Notes are protected by available subordination against any expected loss, but the variability around the expected loss has increased, resulting in today's downgrade.

On an aggregated portfolio basis, the current Moody's Note-to-Value (NTV) of 60.4% for the Class A Notes, and 85.1% for the Class D Notes provides some property value cushion, but this value cushion is however lower then at closing, and Moody's expects a further decline until 2011. In addition, due to the pro-rata allocation of scheduled amortisation and allocated loan amounts from unit sales, the subordination available to Class A has not changed materially since closing.

3) Transaction Performance History

Coverage and cash flows. The loan ICR that is based on net operating income has increased since closing. Current ICR is reported at 1.64x per September 2009 IPD compared to 1.37x at closing. This has been driven by some low rental income growth, a reduced vacancy rate and reduced operating expenses compared to closing. To the extent visible from provided reporting, net cash flows have slightly decreased compared to 2007, also taking into account CAPEX. Moody's effective debt service coverage also includes the amortisation not covered by the ICR ratio.

Vacancy rates. The operating performance of the portfolio is solid, also attributed to a low vacancy rate. The portfolio vacancy rate has ranged between 5.9% (at closing) and 4.2% and currently stands at 4.3% per September 2009 IPD.

Values. The underwriter's ("U/W") value of the portfolio was EUR 2.093 billion at closing of the transaction. The transaction features an annual revaluation of the portfolio. The latest value per June 2009 is EUR 2.04 billion, compared to an entry value of 2.029 billion adjusted for property sales. The value per square meter of residential space is virtually unchanged at approximately EUR 800 psm.

Property sales. Since closing, properties and land with an approximate value of EUR 60 million have been sold. The sales, combined with scheduled amortisation on the loan, reduced the outstanding balance of the loan from EUR 1.414 billion to EUR 1.328 billion. The initial Sponsors' strategy included property sales of about 13 to 17% of total stock over the term of the loan (approximately EUR 450 million). While the borrowers continue to dispose units, the amount is lower than initially anticipated. Given the low release premium of 5% to be used to delever the loan in case of property disposal, lower sales do not materially impact the leverage of the loan, but affect excess cash from sales available to potentially mitigate lower net rental cash flows from the properties.

4) Moody's Portfolio Analysis

Property Portfolio Income and Debt Service capability. The rental income derived from the property portfolio has been stable since closing adjusting for unit sales. The rental income per sqm residential space is around EUR 4.67. Moody's expects the loan to continue to perform well above the ICR covenant of 1.1x supported by both stable rental income and operating expenses. In its base case Moody's sees limited risk that effective net cash flows after non-operating expenses will be insufficient to meet both interest and principal payments. The loan is scheduled to amortise by another EUR 75 million until loan maturity.

Property Values. The number of transactions involving larger multi-family portfolios in Germany has decreased significantly since the peak of the market in 2006 and 2007. Moody's assumes that since closing, the aggregated value of the portfolio has decreased by 20% to EUR 1.67 billion (or EUR 686 psm based on residential space only), and may drop further to a trough value of EUR 1.57 billion (or EUR 648 psm based on residential space only) in 2010 / 2011. The Moody's values reflect both the reduced interest in acquiring larger multi-family portfolios in Germany and the restricted availability of financing of portfolios of this size. In deriving these value assessments, Moody's assumed a current annual net cash flow of EUR 87 million, taking into account necessary CAPEX to keep the properties at market standards.

Based on Moody's value assumption, the transactions' current total LTV is 85.1%, increasing to roughly 89% based on trough values. The LTV takes into account existing subsidised debt that ranks senior to the loan, as well as some assumed prior ranks due to the operating history of the borrower. Due to amortisation of the loan and the subsidised debt as well as a moderate value recovery, Moody's LTV is expected to decrease to around 78% at the maturity of the loan.

Default Risk. Compared to Moody's closing analysis, the term default risk of the loans has not changed significantly. The operating performance of the property portfolio is stable, and the debt service capability is sound. However, in Moody's view, the default risk at the maturity of the loan has increased, driven by the leverage of the loan, its absolute size and the current difficult lending market. In mitigation, Moody's has taken into account the remaining loan term of more than 4 years until maturity in December 2013 allowing some time for the market to recover.

5) 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 26 October 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
Daniel Kolter
Managing Director
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's downgrades CMBS Class A and Class D Notes issued by Immeo Residential Finance No. 2 Limited
No Related Data.
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