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Rating Action:

Moody's downgrades Senior CDS and Notes issued by Deutsche Pfandbriefbank AG (Estate UK-3)

01 Sep 2010

GBP 596 Million of CMBS affected

Johannesburg, September 01, 2010 -- Moody's Investors Service has today downgraded the Senior CDS and all classes of Notes issued by Deutsche Pfandbriefbank AG (Estate UK-3) (amounts reflect initial outstandings) as follows:

GBP482.45M Class A1+ (CDS) Floating Rate Amortising Credit-Linked Notes, Downgraded to Aa3 (sf); previously on Jul 14, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

GBP0.4M Class A1+ Floating Rate Amortising Credit-Linked Notes, Downgraded to Aa3 (sf); previously on Jul 14, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

GBP29.8M Class A2 Floating Rate Amortising Credit-Linked Notes, Downgraded to Ba3 (sf); previously on Jul 14, 2010 Baa1 (sf) Placed Under Review for Possible Downgrade

GBP35.76M Class B Floating Rate Amortising Credit-Linked Notes, Downgraded to Caa1 (sf); previously on Jul 14, 2010 Ba2 (sf) Placed Under Review for Possible Downgrade

GBP24.56M Class C Floating Rate Amortising Credit-Linked Notes, Downgraded to Ca (sf); previously on Jul 14, 2010 B2 (sf) Placed Under Review for Possible Downgrade

GBP8.24M Class D Floating Rate Amortising Credit-Linked Notes, Downgraded to Ca (sf); previously on Jul 14, 2010 B3 (sf) Placed Under Review for Possible Downgrade

GBP14.92M Class E Floating Rate Amortising Credit-Linked Notes, Downgraded to Ca (sf); previously on Jul 14, 2010 Caa2 (sf) Placed Under Review for Possible Downgrade

RATINGS RATIONALE

Today's downgrade action has been prompted by a new valuation, dated May 2010, for the property portfolio securing Loan No 3 (39% of the current portfolio). The new value of GBP 156.3 million is 53% below the portfolio value as of May 2007 and is also below the trough value Moody's estimated in its June 2009 review of the transaction.

Loan No 3 is comprised of a GBP 239.42 million whole loan, out of which GBP 175.67 million is securitised with the remaining portion being pari passu in terms of ranking. The loan is secured by three secondary shopping centres and is scheduled to mature in April 2013 with no extension option available. There is no amortisation on the loan.

The downgrades of the Senior CDS and the Notes follow a detailed re-assessment of the loan and property portfolio's credit risk. Hereby, Moody's main focus was on property value declines since its last review in June 2009, term default risk, refinancing risk and the anticipated work-out timing for potentially defaulting loans.

Driven by in most cases a higher default risk assessment at the loan maturity dates, Moody's anticipates that a 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 substantial amount of losses on the securitised portfolio.

The Class A2, Class B, Class C, Class D and Class E are subordinated classes 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 those Notes than on the expected loss of the senior Notes. Also, the expected loss for the portfolio is larger than the size of the Class C, D and E Notes combined and this high expected loss with limited recovery rates expected results in the Ca (sf) rating on these classes.

The Senior CDS and Class A1+ Notes have benefited from the sequentially allocated loan prepayments, which have increased the subordination that is available to them to 25% from 19% at closing. This increased credit enhancement provides protection for these senior Notes against the increased expected loss on the securitised portfolio.

The primary source of assumption uncertainty for the transaction is the future development of commercial real estate capital values in the UK. Moody's central scenarios assume that property values in EMEA will be characterised by a continuing strong differentiation between prime and secondary properties. In the UK prime market, there was evidence that capital values increased since Q3 2009. It is doubtful whether the pace of this increase is sustainable. However, in Moody's view, the UK prime market bottomed out in 2009 and prime values will continue to increase until 2012/2013, albeit at a very moderate pace. Secondary property values remained under pressure in 2009 and Moody's believes they will further decline until they reach their trough in late 2010. Overall, in Moody's view, the UK property market will reach its inflexion point in 2010 and will stabilise and moderately increase until 2012/2013.

Moody's estimates that compared to the underwriter's ("U/W") values at closing in 2007, the values of the properties securing this transaction have declined by on aggregate 25% until mid-2010 (ranging from a 4% value increase for the Loan No 13 to a 53% value decline for the Loan No 3). Taking into account the updated valuations since the close of the transaction, Moody's value is only 1% lower than the current aggregate U/W value for the portfolio. The current A-loan U/W LTV for the portfolio is 93.6% while the whole loan U/W LTV is 100.8%. Moody's has taken the anticipated property value development, including a gradual recovery from 2010-2011 onwards, into account when analysing the default risk at loan maturity and the loss given default for each securitised loan.

The transaction's exposure to loans maturing in the short-term (2010 and 2011) is considerable. 12.1% of the current portfolio matures in 2010 and 2011, 48.4% in 2013, 12.2% in 2015 and 27.3% in 2019. As Moody's expects property values in the UK to only slowly recover from 2010-2011 onwards, most of the loans (except for Loan No 5, 9 and 13, which only mature in 2015 and beyond) will be still highly leveraged at their respective maturity dates. Consequently, in Moody's view, for almost all of the loans, the default risk at maturity has increased substantially compared to the closing analysis.

This synthetic transaction closed in February 2007 and represents the securitisation of initially 13 commercial mortgage loans ("reference claims") originated by Hypo Real Estate Bank International AG, now Deutsche Pfandbriefbank AG (A3, P-1). The loans were secured by first ranking legal mortgages on 110 commercial properties located in the United Kingdom. The portfolio comprised 43.9% retail, 28.3% office, 16.6% mixed-use and 11.2% other properties based on securitised loan balance.

Since closing of the transaction, four loans have prepaid in full, which were all above average quality in terms of Moody's assessment at closing of the transaction. Following the four full loan prepayments along with loan amortisation and partial prepayments, 75.6% of the original pool balance remains. The pre- and repayment proceeds were allocated to the Senior CDS.

The remaining loans are not equally contributing to the portfolio: the largest loan (Loan No 3) represents 39.0% of the current portfolio balance, while the smallest loan (Loan No 11) represents 2.1%. The current loan Herfindahl index is 4.6 compared to 7.0 at closing, indicating a higher loan concentration after prepayments. The remaining nine loans are secured by 107 commercial properties, of which 51.2% are retail, 18.6% mixed-use, 16.6% office, and 13.7% other properties in terms of securitised loan balance. They are located throughout the United Kingdom, mainly in Yorkshire & Humberland (21.7%), London (17.2%), South East England (17.8%), Wales (15.0%), West Midlands (6.2%) and UK Other (22.1%).

Loan No 7 which had its maturity date in July 2010, did not repay. Moody's understanding is that the loan is currently being restructured and an extension of the loan term is likely. Also, following the re-valuation of the retail properties securing Loan No 3, the loan breached its LTV covenant and a default notification was sent to the borrower. Neither Loan No 3 nor Loan No 7 are not classified as a "Defaulted Reference Claim" or a "Credit Event" as per transaction documentation.

The principal methodologies used in rating Deutsche Pfanbrief AG (Estate UK-3) were "Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA" published in June 2005 and "Moody's Updates on its Surveillance Approach for EMEA CMBS" published in March 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Moody's Investors Service received and took into account one or more third party due diligence reports on the underlying assets or financial instruments in this transaction and the due diligence reports had a neutral impact on the rating.

Moody's notes that the depth of information at property and tenant level and on sponsors of the loans provided in the investor reports is below average compared to other EMEA CMBS transactions due to confidentiality reasons. Accordingly, there is additional uncertainty regarding the underlying assumptions used in the rating process.

REGULATORY DISCLOSURES

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information and confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

The last Performance Overview for this transaction was published on 25 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

Moody's Investors Service adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from reliable sources; however, Moody's Investors Service does not and cannot in every instance independently verify, audit or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Johannesburg
Viola Karoly
Analyst
Structured Finance Group
Moody's Investors Service South Africa (Pty) Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Marie-Jeanne Kerschkamp
MD - EMEA Structured Fin
Structured Finance Group

Moody's Investors Service South Africa (Pty) Ltd.
The Forum
2 Maude Street
2196 Sandton
Johannesburg
South Africa

Moody's downgrades Senior CDS and Notes issued by Deutsche Pfandbriefbank AG (Estate UK-3)
No Related Data.
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