EUR 683.17 million of EMEA CMBS affected
Frankfurt, July 01, 2010 -- Moody's Investors Service has today downgraded the following classes of
notes (the "Notes", amounts reflect initial outstandings) issued
by Titan Europe 2006-1 plc:
EUR433.76M A Commercial Mortgage Backed Floating Rate Notes due
2016, Downgraded to Aa1; previously on Mar 3, 2010 Aaa
Placed On Review for Possible Downgrade
EUR112.05M B Commercial Mortgage Backed Floating Rate Notes due
2016, Downgraded to B2; previously on Mar 3, 2010 Baa1
Placed On Review for Possible Downgrade
EUR39.76M C Commercial Mortgage Backed Floating Rate Notes due
2016, Downgraded to Caa2; previously on Mar 3, 2010 B1
Placed On Review for Possible Downgrade
EUR46.99M D Commercial Mortgage Backed Floating Rate Notes due
2016, Downgraded to Ca; previously on Mar 3, 2010 Caa2
Placed On Review for Possible Downgrade
EUR50.61M E Commercial Mortgage Backed Floating Rate Notes due
2016, Downgraded to C; previously on Mar 3, 2010 Ca Placed
On Review for Possible Downgrade
At the same time, Moody's has affirmed the Aaa rating of the Class
X Notes issued by Titan Europe 2006-1 plc. Moody' has not
assigned ratings to the Class F Notes, the Class G Notes and the
Class H Notes issued by Titan Europe 2006-1 plc. Today's
rating action concludes the review for possible downgrade that was initiated
for the Class A, B, C, D, and E Notes on 3 March
2010.
1) Transaction and Portfolio Overview
Titan Europe 2006-1 plc closed in March 2006 and represents the
securitisation of initially ten commercial mortgage loans originated by
Credit Suisse International. The loans were secured by first-ranking
legal mortgages over 56 commercial properties located in Germany.
The properties were predominantly mixed-use (45% of the
original portfolio by underwriter market value) followed by office (28%),
industrial warehouse (15%), hotel (8%) and retail
(4%).
Since closing of the transaction, five loans (47% of the
initial portfolio balance), prepaid in full. In addition,
there was one property disposal from the portfolio securing the Mangusta
Loan. The prepayment proceeds were allocated 50% sequential
and 50% pro-rata to the Notes. The five remaining
loans are not equally contributing to the portfolio: the largest
loan (Mangusta Loan) represents 34.3% of the current portfolio
balance, while the smallest loan (Nuremberg Retail Distribution
Centre Loan, "Nuremberg Loan") represents 5.8%.
The current loan Herfindahl index is 4.1 compared to 7.5
at closing, indicating a higher loan concentration after the prepayments.
Following the property disposal and prepayments, the remaining five
loans are secured by 26 properties. The property type composition
of the portfolio has changed compared to closing with industrial warehouse
now contributing 32%, office 24%, mixed-use
21%, hotel 16% and retail 7%.
As of the last interest payment date ("IPD") in April 2010, the
Mangusta Loan and the KQ Warehouse Loan were subject to an event of default.
Moreover, the Steigenberger Hotels Loan is on the Servicer's
watchlist due to its maturity date in October 2010.
Following the default of the Mangusta Loan in November 2009, the
sequential payment trigger in the transaction is breached; therefore,
further proceeds from loan prepayments and balloon payments will be allocated
sequentially to the Notes. The liquidity facility has been drawn
to cover payment shortfalls relating to the Mangusta Loan and the KQ Warehouse
Loan in a total amount of EUR 2.5 million.
2) Rating Rationale
Today's rating action concludes the review that was initiated for
all classes of Notes except the Class X Notes on March 3, 2010.
Moody's main focus was on the Mangusta and the KQ Warehouse Loan,
especially in terms of value assessment and likely workout strategy.
As outlined in more detail below, today's rating action is mainly
driven by:
(i) A revised value assessment for the properties securing the Mangusta
Loan, mainly due to neglected property and asset management as well
as uncertainties about the net cash flow generated by the properties;
(ii) The significantly reduced market value of the Leipzig property securing
the KQ Warehouse Loan; and
(iii) A higher likelihood of immediate property sales as work-out
strategy for both the Mangusta and the KQ Warehouse Loan.
Given that the two largest loans representing 57.4% of the
current pool balance have already defaulted, Moody's overall
expects a very large portion of the pool to default. As indicated
by Moody's weighted average A-loan LTV of 164.5%,
Moody's expects a very high amount of losses on the remaining securitised
portfolio, mainly driven by the Mangusta and the KQ Warehouse Loan.
The subordination available to all classes of Moody's rated Notes
has increased considerably due to the modified pro-rata allocation
of the prepayment proceeds of five loans since closing. The credit
enhancement through subordination is currently 62.4% for
Class A, 38.6% for Class B, 30.1%
for Class C, 20.1% for Class D, and 9.3%
for Class E. Nevertheless, the loss expected by Moody's
has increased significantly for this transaction, overcompensating
for the positive impact of increased subordination. In addition,
the likelihood of higher than expected losses on the portfolio has increased
substantially, resulting in a downgrade of the most senior class
of Notes.
The Class X Notes are entitled to receive excess spread, i.e.
the difference between (i) interest payable on the loans and (ii) interest
payable on the Notes and certain costs. The liquidity facility
can be used to cover potential interest shortfalls on the Class X Notes.
In relation to principal, the net proceeds from the issue of the
Class X Notes have been retained by the Issuer in a separate account for
the purpose of repaying the principal amount of the Class X Notes.
Moody's believes that the Class X Notes have a different risk profile
in comparison to the other classes in the transaction given their characteristics.
The rating of the Class X Notes is therefore not to the same extent affected
by the credit risk of the loan portfolio.
3) Moody's Portfolio Analysis
The Mangusta Loan
The defaulted loan is secured by a mixed-use property portfolio
located in several locations in Germany. The properties do not
produce enough cash flows to constantly service the debt. Since
Moody's last rating action on the transaction, a couple of
changes have occurred that are discussed below. In response to
these changes, Moody's has adjusted its value assumptions
for the properties securing the Mangusta Loan to EUR 77.25 million
and now expects a more immediate sale of the assets rather than a mid-term
disposal strategy after stabilisation of the portfolio.
After the former borrowing entities have ceased to exist, an Austrian
company is now borrower under the loan. The loan has been accelerated,
and according to the Servicer a sale of the assets in the portfolio is
one of the likely next steps. Since the borrower is in administration,
an insolvency administrator now takes all decisions on the borrower level.
In Moody's view the asset and property management has been largely
neglected in the last couple of years, which has significantly impacted
the tenancy situation and value any potential investor would be willing
to pay for the properties in the current market environment. Moreover,
Moody's has limited visibility of the true net cash flows generated
by the properties. Moody's also took the increasing costs
associated with the borrower administration into account, both in
terms of fees but also in terms of CAPEX that is being spent in order
to stabilise certain assets in the portfolio.
The KQ Warehouse Loan
The defaulted loan is secured by a large logistics site in Leipzig and
a smaller logistics property in Kircheim. Since Quelle AG as the
single tenant of the Leipzig property was liquidated, the borrower
only receives rental income from the subtenant of the Kircheim property,
which is insufficient to service the debt service of the loan.
The liquidity facility is drawn to make payments under the borrower level
swap and the Notes. In Moody's view, the asset management
of the Leipzig property has been neglected, given that the asset
manager that is connected with the Sponsor has little incentive to provide
further services. Hence there is little visibility on potential
new tenants yet.
A new third party valuation resulted in a value assessment for the two
properties of EUR 26.713 million compared to a value of EUR 122.99
million at closing. The resulting LTV of the securitised portion
of the loan is 304%, while the Whole Loan LTV is 348.7%.
Moody's believes that the updated valuation is conservative and
adjusted its value assumption to EUR 28.5 million, resulting
in Moody's A-loan LTV of 285%. The adjusted
value also reflects the expectation that the most likely work-out
scenario will be a sale of the properties sooner rather than later,
even if no new tenant was found. Any new tenant that is not in
the mail order business would likely require significant changes to the
property site, especially if more than one tenant was to occupy
the properties. Nevertheless, Moody's has decreased
its cost assumptions for this loan, since the new value assessment
already reflects large amounts of investments and loss of rent in order
to re-let the estate to a non-mail order tenant.
Portfolio Values. After taking into account the recent revaluations
of the Mangusta portfolio and the KQ Warehouse portfolio, the new
WA U/W A-loan LTV for the loan pool is 148.0%.
On a Whole Loan basis the U/W LTV is 168.1% as per the April
2010 IPD. These numbers do not yet reflect the updated valuation
in relation to the Steigenberger Hotels Loan, which was available
only after the April IPD. Based on Moody's current market
values, the total A-loan LTV of the portfolio is 164.5%.
On a loan level Moody's A-loan LTVs range from 90.7%
for the Nuremberg Loan to 285% for the KQ Warehouse Loan.
The main value difference between Moody's and U/W values are lower
values for the Tiden Loan and the Steigenberger Hotels Loan portfolios.
Moody's value on the Tiden properties is significantly below the
reported U/W value, mostly due to the adverse lease profile and
the current rental levels being perceived above market rent. If
the net cash flows achieved from the properties were to stabilise in the
next 18 months on the current level in contrast to Moody's expectations,
this would likely change Moody's value assumption for the properties.
ICR. The interest coverage ratio for the securitised loan pool
is unknown, since no timely reporting is received for the Mangusta
and the KQ Warehouse Loan.
Refinancing Risk. The Steigenberger Hotels Loan (15.4%
of the current pool balance) matures in October 2010. The Tiden
and the Nuremberg Loan (combined 26.9% of the current pool
balance) mature in October 2012 and January 2013. Moody's
notes that the two loans are ultimately linked to the same sponsor,
which increases their correlation of default risk. All loans in
the pool will have high LTVs on their maturity date and will hence be
subject to increased refinancing risk.
Term Default risk. Both the Steigenberger Hotels Loan and the Nuremberg
Loan are exposed to single unrated tenants, hence their term default
risk will be considerably linked to the tenants. The Tiden Loan
faces substantial lease rollover risk until its maturity in January 2013
and will therefore be exposed to the weaker occupational market for office
space in Germany. However, compared to Moody's last
rating action on the transaction in October 2009, the term default
risk assessment of those loans has not changed.
Work-Out Strategy. Apart from the Mangusta and the KQ Warehouse
Loan as discussed above, in scenarios where a loan defaults,
Moody's current expectation is that the special servicer will most likely
not pursue an immediate fire sale of the property in today's market conditions,
especially upon a default at maturity if the property is still generating
sufficient cash flows to service the interest of the debt. Therefore,
Moody's has assumed for those loans that, upon default, a
sale of the mortgaged properties and ultimate work-out of the loan
will occur at a later point in time, but taking into account the
legal final maturity date of the Notes in 2016.
Increased Portfolio Loss Exposure. Taking into account the high
portion of already defaulted loans and the default risk of the remaining
three loans, the most recent performance of the commercial property
markets in Germany, Moody's opinion about future property value
performance and the most likely work-out strategies for defaulted
loans, Moody's anticipates a very high amount of losses on the securitised
portfolio. In addition, the likelihood of higher than expected
losses on the portfolio has increased substantially, resulting in
a downgrade of the most senior class of Notes.
What could change the ratings - Up
In Moody's view, there is event risk which can have a significant
impact on the rating of the Notes. As an example, Moody's
most likely scenario for the KQ Warehouse Loan is a sale of the asset
rather than waiting to find a new tenant before a sale. If a new
tenant was found before any property sale, and if such tenant was
a mail order company, it would significantly increase the recovery
proceeds of the loan. This is because rental income would be available
and the refitting and tenant improvement cost that would occur with any
non-mail order tenant would not need to be spend. Giving
another example, the properties securing the Mangusta Loan have
experienced poor asset and property management, leading to a depressed
market price in case of a sale in the near term future. In Moody's
view, the assets would yield much more investor interest if they
were stabilised in due course. It is however unlikely that the
transaction will benefit from this scenario given Moody's view that
a more immediate sale is the most likely special servicing strategy.
Moreover, due to the transaction being in sequential repayment mode,
a successful repayment of the Steigenberger Hotels Loan on its maturity
date would increase credit enhancement, which would be credit positive.
The examples above would increase the credit strength of all classes of
Notes. Moody's however expects most rating volatility on
the Class B and C Notes.
What could change the ratings - Down
Even though Moody's has factored a high default risk at loan maturity
into its analysis, a default of the not yet defaulted loans would
potentially have a negative impact on the rating of the Notes.
Moreover, since both the Steigenberger Hotels Loan and the Nuremberg
Loan are secured by single tenanted properties, a default of the
tenants would also be credit negative for the Notes.
4) 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 19 May
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 [email protected]"
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
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 five classes of CMBS Notes issued by Titan Europe 2006-1 plc
