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Rating Action:

Moody's downgrades Class A2 EMEA CMBS Notes issued by Deco 9 -- Pan Europe 3 p.l.c.

18 Jun 2013

EUR 312 million of CMBS affected

Frankfurt am Main, June 18, 2013 -- 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 outstanding):

....EUR312M A2 Notes, Downgraded to Baa1 (sf); previously on Nov 30, 2009 Downgraded to A2 (sf)

Moody's does not rate Class B, Class C, Class D, Class E, Class F, Class G, Class H, Class J and Class X Notes.

RATING RATIONALE

Today's downgrade action reflects Moody's increased loss expectations for the pool due to lower property value assessments and overall increased default probability assumptions. Moody's has increased its loss estimation for:

(i) Treveria I Loan (45.7% of the pool), which is in default and currently worked out by the special servicer. The overall quality of the underlying portfolio is deteriorating as the best assets have been sold in the liquidation process;

(ii) PGREI Portfolio Loan (24.4% of the pool) secured by retail properties. Moody's has lowered its property value estimate due to the weak occupational and investment markets for secondary retail assets and increased its refinancing default probability due to limited refinancing prospects for highly leveraged loans.

Moody's has determined that the increased credit enhancement of the Class A2 Notes, which after repayment of the Class A1 Notes benefits from sequential proceeds allocation, does not sufficiently mitigate the increased loss expectation for the pool.

The Baa1 (sf) rating of the Class A2 Notes reflects its 36% credit enhancement and Moody's note-to-value of 70%, showing some sensitivity to further value deterioration of the Treveria I portfolio.

The key parameters in Moody's analysis are the default probability of the securitised loan (both during the term and at maturity) as well as Moody's value assessment for the property securing the loan. Moody's derives from those parameters a loss expectation for the securitised pool.

In general, Moody's analysis reflects a forward-looking view of the likely range of commercial real estate collateral performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside an acceptable range of the key parameters such as property value or loan refinancing probability for instance, may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated when the related securities ratings were issued. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions . There may be mitigating or offsetting factors to an improvement or decline in collateral performance, such as increased subordination levels due to amortisation and loan re- prepayments or a decline in subordination due to realised losses.

Primary sources of assumption uncertainty are the current stressed macro-economic environment and continued weakness in the occupational and lending markets. Moody's anticipates (i) lending will remain constrained over the next years, while subject to strict underwriting criteria and heavily dependent on the underlying property quality, (ii) strong differentiation between prime and secondary properties, with further value declines expected for non-prime properties, and (iii) occupational markets will remain under pressure in the short term and will only slowly recover in the medium term in line with anticipated economic recovery. Overall, Moody's central global macroeconomic scenario for the world's largest economies is for only a gradual strengthening in growth over the coming two years. Fiscal consolidation and volatility in financial markets will continue to weigh on business and consumer confidence, while heightened uncertainty hampers spending, hiring and investment decisions. In 2013, Moody's expects no growth in the Euro area and only slow growth in the UK.

MOODY'S PORTFOLIO ANALYSIS

Deco 9 -- Pan Europe 3 p.l.c. closed in August 2006 and represents the securitisation of currently three loans (11 at closing) secured by mainly office (42.8% of the pool) and retail properties (40.3% of the pool) located across Germany. The loan pool is very concentrated with the two largest loans accounting for more than 75% of the outstanding loan amounts.

The aggregated loan balance for the three loans was EUR 470m million as per the April 2013 reporting, down by 59% since closing. To date, no loan has realized a loss. The largest loan (Treveria I, 45.7% of the pool) is in default and in special servicing. Further two loans (54.3% of the pool) mature over the next thirteen months. The legal final maturity of the transaction is in July 2017. The additional default risk in the transaction is mainly driven by the refinancing risk of the PGREI Portfolio Loan. Moody's anticipates that the third loan, Dresdner Office Portfolio may potentially be further extended subject to full cash sweep based on its healthy coverage and moderate leverage.

Moody's current weighted average (WA) A-loan and whole loan loan-to-value (LTV) ratio is 109% and 113%, respectively. In comparison, the underwriter (UW) WA A-loan LTV is 97.97% and the whole loan LTV 103.9%. Based on Moody's revised analysis of the loan's default probability and values of the underlying property portfolios, the loss expectation for the remaining pool is large. Moody's has a 50%-75% loss expectation for the Treveria I Loan and less than 25% loss expectation for both the Dresdner Office Portfolio and the PGREI Portfolio loans.

The largest loan in the transaction is the Treveria I Loan (45.7% of the current pool), which is a 50% syndication of a EUR429.5 million outstanding senior loan. It is secured by a portfolio of 43 primarily retail properties located across Germany in medium sized towns and suburban locations of major cities. The vacancy rate in the portfolio increased to 14.2% from 4.4% at closing. There is a high rollover risk with a WA remaining lease term (WALT) of around 3.6 years and above 60% of the leases are due to expire until 2017. The loan was transferred to special servicing in July 2010 due to the opening of insolvency and enforcement proceedings and matured in January 2011. The loan is currently paying floating interest rate with interest coverage ratio ("ICR") of 4.27x on the A-loan as of the last investor report.

Despite the original strategy of a portfolio sale, the special servicer is now actively pursuing an orderly single asset disposal program. In total, 17 assets have been disposed to date with the total gross sales price on average 3.4% below the UW Market Value according to the re-valuation dated 2011. However, based on the indication provided by the special servicer for the further nine already notarized assets, the achievable prices are significantly below the UW Market value and the Allocated Loan Amounts (-22% and -52%, respectively). The individual properties in the portfolio remain at various stages of the disposal process with further 13 assets in an advanced due diligence stage and remaining 21 properties marketed by the special servicer.

Given the significant rollover risk and the assessment that the best properties have been sold in the sales process of the whole portfolio, Moody's expects that the gap between achievable sales prices and the allocated loan amounts will further increase going forward. Consequently, Moody's has revised its value assessment for the remaining property portfolio. Based on Moody's value, the A-loan LTV ratio is 203%, compared to the UW LTV of 141%.

Moody's gives in its analysis some benefit to the excess cash remaining in the structure due to the full cash sweep. As this loan undergoes a long work-out, Moody's expects losses in the range of 50%-75% for this loan.

The Dresdner Office Portfolio Loan is the second largest loan representing 29.9% of the pool. The loan is syndicated with 50% of the financing included in the Deco 9-- Pan Europe 3 p.l.c. transaction. The borrower is a German open ended real estate fund. The financing is secured against an office portfolio in Germany with highest concentration in Frankfurt and was initially mostly let to Dresdner Bank AG. After the merger of Dresdner Bank AG with Commerzbank AG in May 2009, a significant portion of expiring of leases has not been renewed. As a result the overall vacancy rate in the portfolio increased from 16% by rental area at closing to around 36% as of April 2013 investor report. The borrower continues to dispose properties and prepay the loan from disposal proceeds and equity. Since closing, 67% of the initial loan balance have been repaid and the number of underlying assets reduced from 303 to 152 based on the last investor report. The term of the loan was extended by one year until January 2014 subject to a fixed repayment schedule agreed with the borrower, which aims a full loan repayment by the extended maturity. Failure to meet the repayment target would constitute an event of default under the loan agreement. During the extension period the loan is in full cash sweep mode. The first two loan balance targets scheduled for January and April 2013 IPDs have been met. In order to reach the July 2013 IPD balance target the borrower has to be deleverage the loan by further EUR 80.8m.

Moody's has assumed no eminent changes in the current occupancy level when reassessing its value of the underlying portfolio, which resulted in its estimated A-loan LTV of around 64%. In Moody's view, the servicer may potentially agree to a further loan extension of around 6 months, should the July IPD amortization target not be fully met by the borrower. This assumption is driven by the moderate leverage of the loan, high amount of excess cash generated by the underlying portfolio combined with legal final maturity of the Notes in July 2017.

The third loan in the pool is the PGREI Portfolio Loan (24.4% of the pool). The loan is secured by 55 retail properties located throughout Germany, predominantly in small regional cities. The ICR is stable at 1.55x and vacancy remains low at 0.5% since closing due to long term leases. The lease rollover risk is limited during the loan term with current WALT of approximately 6.6 years. The loan matures in July 2014. No updated valuation has been provided since 2006, therefore, Moody's LTV of 107.7% deviates significantly from the UW LTV of 75.3%, reflecting the weak occupational and investment markets for secondary retail assets. The high loan leverage is the main driver of the loan's high default probability at refinancing, which is partially mitigated by the stable pool performance and moderate lease roll-over risk of the underlying assets with a WALT of around 5.5 years at loan maturity.

Portfolio Loss Exposure: Moody's expects a large amount of losses on the securitised portfolio, stemming mainly from the high leverage of the underlying loans and the refinancing profile of the securitised portfolio. Given the default risk profile and the anticipated work-out strategy for already defaulted Terveria I Loan and potentially defaulting PGREI Portfolio Loan, the expected losses are likely to crystallise only towards the end of the transaction term.

RATING METHODOLOGY

The principal methodology used in this rating was Moody's Approach to Real Estate Analysis for CMBS in EMEA: Portfolio Analysis (MoRE Portfolio) published in April 2006. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Other factors used in this rating are described in European CMBS: 2013 Central Scenarios published in February 2013 .

The updated assessment is a result of Moody's on-going surveillance of commercial mortgage backed securities (CMBS) transactions. Moody's prior assessment is summarised in a press release dated 22 August 2012. The last Performance Overview for this transaction was published on 12 June 2013.

In rating this transaction, Moody's used both MoRE Portfolio and MoRE Cash Flow to model the cash-flows and determine the loss for each tranche. MoRE Portfolio evaluates a loss distribution by simulating the defaults and recoveries of the underlying portfolio of loans using a Monte Carlo simulation. This portfolio loss distribution, in conjunction with the loss timing calculated in MoRE Portfolio is then used in MoRE Cash Flow, where for each loss scenario on the assets, the corresponding loss for each class of notes is calculated taking into account the structural features of the notes. As such, Moody's analysis encompasses the assessment of stressed scenarios.

Moody's ratings are determined by a committee process that considers both quantitative and qualitative factors. Therefore, the rating outcome may differ from the model output.

REGULATORY DISCLOSURES

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

In conducting surveillance of this credit, Moody's considered performance data contained in servicer and remittance reports. Moody's obtains servicer reports on this transaction on a periodic basis, at least annually.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Magdalena Umsonst-Suminska
Vice President - Senior Analyst
Structured Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Oliver Moldenhauer
Vice President - Senior Analyst
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Class A2 EMEA CMBS Notes issued by Deco 9 -- Pan Europe 3 p.l.c.
No Related Data.
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