Frankfurt am Main, September 03, 2012 -- Moody's Investors Service has today downgraded the Class A1 and Class
B1 Notes issued by German Ground Lease Finance II S.A. (amounts
reflect initial outstandings):
....EUR76.4M Class A1 Notes,
Downgraded to Ba3 (sf); previously on Sep 29, 2011 Downgraded
to Baa1 (sf)
....EUR41.1M Class B1 Notes,
Downgraded to Caa3 (sf); previously on Sep 29, 2011 Downgraded
to B2 (sf)
RATINGS RATIONALE
Today's downgrade of the Class A1 and the Class B1 Notes reflects
the increased loss expectation related to this portfolio of hereditary
building rights, interest rate swaps and inflation swaps.
Moody's believes that the limited debt service capability of the total
cash flow received from ground rents and swaps as well as the their combined
value will materially impact the refinancing of the REF Notes in 2017.
Moody's continues to have limited visibility on refinancing options
for the combination of ground lease cash flows, inflation swaps
and interest rate swaps. At the same time the combined value of
the ground rents and the swaps in the transaction has decreased,
mainly due to an increasingly negative mark-to-market ("MtM")
of the interest rate and inflation swaps.
The ratings of the Class A1 and the Class B1 Notes continue to be sensitive
to any evidence of pricing of portfolios of ground rents and Moody's visibility
on the refinancing efforts and options of the sponsor of the transaction.
The key parameters in Moody's analysis are the default probability of
the securitised loans (both during the term and at maturity) as well as
Moody's value assessment for the properties securing these loans.
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) delayed recovery in the lending market persisting
through 2013, while remaining 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 is for a material slowdown in growth in 2012 for most of the
world's largest economies fueled by fiscal consolidation efforts,
household and banking sector deleveraging and persistently high unemployment
levels. We expect a mild recession in the Euro area.
As the Euro area crisis continues, the rating of the structured
finance notes remain exposed to the uncertainties of credit conditions
in the general economy. The deteriorating creditworthiness of euro
area sovereigns as well as the weakening credit profile of the global
banking sector could negatively impact the ratings of the notes.
Furthermore, as discussed in Moody's special report "Rating Euro
Area Governments Through Extraordinary Times -- An Updated
Summary," published in October 2011, Moody's is considering
reintroducing individual country ceilings for some or all euro area members,
which could affect further the maximum structured finance rating achievable
in those countries.
MOODY'S PORTFOLIO ANALYSIS
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 ("ground rents") derived from hereditary building
rights in relation to a portfolio of more than 10,000 apartments
and some 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 REF Notes are scheduled to refinance in February 2014. In the
event of non-refinancing, the Notes will continue to bear
interest at the current margin plus an additional step up margin until
the maturity date of the REF Notes in February 2017. The Notes
mature in 2020. The transaction structure incorporates a long-dated
inflation and interest swap structure. The inverse relationship
of mark-to-market ("MtM") of the swaps to the value of the
ground rents was intended to mitigate the refinancing risk. The
interest rate and inflation swaps mature in 2036.
The key credit parameters are the refinancing likelihood of the transaction
and the combined value of the ground rent portfolio and the inflation
and interest rate swaps.
Moody's continues to have limited visibility on refinancing options
for the combination of ground lease cash flows, inflation swaps
and interest rate swaps. The combined package needs to be refinanced
or restructured to repay the REF Notes in 2017 latest, while a step-up
is payable from 2014 onwards. Based on Moody's expectation
of the development of the spread in the transaction, this step-up
cannot be met from REF Note income. Moody's has increased
its default likelihood of the transaction mainly due to increased refinancing
risk.
Given the development of interest rates and inflation expectations in
the last years, a large mark-to-market ("MtM")
would be payable to the swap counterparty in case of a breakup of the
structure. These amounts ranks pari passu to either interest or
principal of the Class A Notes. The MtM is highly volatile,
and Moody's does take into consideration that the MtM might also
decrease over time on the interest rate swap side.
At least in theory low interest rates and increased inflation expectations
should have a positive impact on the market value of a ground lease portfolio.
Hence the negative effect of the swap MtM against the Issuer could be
offset by value increases of the underlying ground lease portfolio.
Moody's believes that ground rents are an appealing investment in
the current economic and interest rate situation. However,
Moody's does not believe that potential buyers would reduce their
yield expectations fully in line with market interest rates decreases
or inflation expectation increases for longer maturities. Hence
the offsetting effect of increased value of the portfolio of ground leases
against increased MtM of the swaps might not work as anticipated.
This exposes the transaction to potentially higher loss severities.
In addition Moody's notes that there is no active market for ground
rents currently. Therefore the uncertainty related to a price achievable
in case of a default of the REF Notes is higher than in other CMBS transactions,
which opposes the generally positive pricing impact of a generally more
stable cash flow.
Based on various scenarios relating to the development of the valuation
of ground rent portfolio and swaps, Moody's Note-to-Value
("NTV") ratio of the Class A1 Notes has increased to 90-110%.
Moody's NTV of the Class B1 Notes is in a range of 140% to
160%. Moody's has however factored into its analysis
that the MtM of the swaps are volatile and could also reduce over time,
especially on the interest rate swap side.
RATING METHODOLOGY
The principle 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:
2012 Central Scenarios published in February 2012.
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 29 September 2011.
The last Performance Overview for this transaction was published on 21
June 2012.
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
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
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.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
two years preceding the credit rating action. Please see the special
report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure
page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's 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 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.
Oliver Schmitt
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
Christophe de Noaillat
Associate Managing Director
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 all Classes of CMBS notes issued by German Ground Lease Finance II S.A.
