EUR 179 million of EMEA CMBS affected
London, 20 May 2010 -- Moody's Investors Service has today downgraded the following class of
Notes issued by Deco 7 -- Pan Europe 2 p.l.c.
(amount reflects initial outstandings):
EUR179M Class B Commercial Mortgage Backed Floating Rate Notes due 2018
Certificate, Downgraded to Aa3; previously on May 10,
2010 Aa1 Placed On Review for Possible Downgrade
In addition, Moody's has affirmed today the Aaa rating of the Class
A2 Notes issued by Deco 7 - Pan Europe 2 p.l.c.
Moody's did not assign ratings to the Class X, Class C, Class
D, Class E, Class F, Class G and Class H Notes issued
by Deco 7 - Pan Europe 2 p.l.c. On 31 July
2008 Moody's withdrew the rating of the Class A1 Notes due to early redemption
1) Transaction Overview and Performance Update
Deco 7 - Pan Europe 2 p.l.c. is a multi-jurisdictional
European true sale CMBS conduit securitisation which closed in March 2006.
The Notes were initially backed by a pool of ten commercial mortgage loans
totaling approximately EUR 1.56 billion and secured by first ranking
legal mortgages on initially 499 commercial properties across Germany
(87.5%), the Netherlands (6.5%) and
Switzerland (6%). By property value, the portfolio
comprised 73% retail properties, 21% office/exhibition
centre properties and 6% multifamily properties.
Since closing, four loans have fully prepaid. As of April
2010, there are six loans secured by 112 properties remaining in
the pool with an outstanding balance of approximately EUR 684 million.
The remaining loans are not equally contributing to the portfolio.
The largest loan (Tiago) represents 31.1% of the current
portfolio balance, while the smallest loan (Schmeing) represents
1.4% of the pool balance. The current loan Herfindahl
index is 4.3 compared to 5.7 at closing. According
to the investor report as of January 2010, the properties are located
in Germany (74.3%), The Netherlands (13.5%)
and Switzerland (12.2%). The portfolio comprises
53.3% retail properties and 46.7% office/exhibition
Since July 2008, the Karstadt Kompakt Loan (27.6%
of the current pool) has been in default due to a payment shortfall.
The single tenant, Hertie GmbH & Co. KG filed for voluntary
insolvency. The Borrower cured the payment shortfall within the
cure period and prevented the loan from being transferred into special
As of January 2010, all the loans in the portfolio are current.
However, following the default of the Karstadt Kompakt loan,
the sequential payment trigger was breached. Therefore, all
principal distribution amounts are allocated sequentially to the Notes,
which provides protection to the more senior classes of Notes.
2) Rating Rationale
Today's rating action follows a detailed re-assessment of
the loan and property portfolio's credit risk that has been prompted
by the deteriorating performance of the third largest loan, the
World Fashion Centre loan (15.4% of the current pool).
Moody's main focus was on property value declines, term default
risk, refinancing risk and the anticipated work-out timing
for potentially defaulting loans.
As outlined in more detail below, today's rating action is
mainly driven by:
(i) The deteriorating performance of the third largest Loan, the
World Fashion Centre Loan;
(ii) The refinancing profile of the transaction with approximately 23.8%
of the loans maturing in 2010 and 2011, 1.4% in 2012
(excluding the Karstadt Kompakt Loan, which is currently in default)
and the remaining loans (accounting for 47.2%) in 2013;
(iii) The current work-out process of the Karstadt Kompakt Loan
following its default;
(iv) The most recent performance of the European commercial property markets;
(v) Moody's opinion about future property market performance.
Moody's anticipates that a very large portion of the portfolio will
default over the course of the transaction term. Coupled with the
negative impact of reduced property values, Moody's expects
a substantial amount of losses on the securitised portfolio. Those
expected losses will, given the anticipated work-out strategy
for defaulted loans, crystalise towards the mid to end of the transaction
The current subordination levels for Moody's rated classes,
42.0% and 26.1% for the Class A2 and the Class
B Notes, respectively (as of the April 2010 IPD), provide
protection against those expected losses. However, the likelihood
of higher than expected losses has increased as well, thereby resulting
in today's rating action in relation to the Class B Notes.
Since closing, four loans amounting to 47.3% of the
initial loan portfolio fully prepaid. The Karstadt Kompakt Loan
(19.6% of the initial loan portfolio) has paid down 38%
of its initial balance following a series of disposals. Except
for the ATU loan (30.2% of the closing portfolio),
for which the prepayment proceeds were applied fully pro-rata,
the prepayment proceeds were applied sequentially or modified pro-rata
to the Notes. At the same time, the loan portfolio provides
for limited scheduled amortisation over time. As a result,
the credit enhancement level of Class A Notes and the Class B Notes increased
from 29.1% and 17.6% at closing to 42.0%
and 26.1%, respectively.
3) Moody's Portfolio Analysis
Property Values. Property values across Continental European markets
have declined until the beginning of 2010. Moody's expects them
to remain flat and in some instances continue to decline until 2011.
Compared to the underwriter's ("U/W") values at closing, Moody's
estimates that the values of the properties securing this transaction
will decline on a like-for-like basis on average by approximately
22.4% until the trough in 2010 (ranging from a 38.4%
decline for the portfolio securing the Karstadt Kompakt Loan to a 2.3%
decline for the portfolio securing the Coop Loan). Looking ahead,
Moody's anticipates the values to remain relatively constant until maturity
of the loans. Moody's has taken this property value assessment
into account when assessing the loans' refinancing risk and potential
loss given default.
Based on the above property value assessment, Moody's estimates
that the current transaction's weighted average ("WA") securitised LTV
is 88.3% compared to the current U/W LTV of 65%.
Based on Moody's values, the LTVs for the securitised loans range
between 73% (Tiago Loan) and 109% (World Fashion Center
Loan). As two loans have additional debt in the form of B-Loans
(accounting for EUR 15.8 million), based on estimated Moody's
values, the overall whole loan leverage is on average 90.2%.
Refinancing Risk. The transaction's exposure to loans maturing
in the short term is high. 8.4% of the pool matures
in October 2010 (Procom Loan) and 15.4% of the pool is due
for refinancing in April 2011 (World Fashion Centre Loan). The
remaining loans mature in 2012 and early 2013. As Moody's expects
property values in Continental Europe to only slowly recover from 2011
onwards, all loans will be still highly leveraged at their respective
maturity dates. Consequently, in Moody's view, for
all of the loans, the default risk at maturity has increased substantially
compared to the closing analysis.
Term Default Risk. The occupational markets in Continental Europe
are currently characterised by falling rents, increasing vacancy
rates and higher than average tenant default rates. In addition,
two loans in the pool are secured by properties which are subject to significant
lease rollover risk over the next few years (Tiago Loan and World Fashion
Center Loan, which represent on aggregate 46.5% of
the pool). These loans are especially exposed to weakening occupational
markets. Moody's has incorporated into its analysis an allowance
for deterioration in coverage ratios and weakening tenant quality,
in turn increasing the term default risk assumption for these loans.
The World Fashion Centre Loan. The World Fashion Centre Loan is
performing below Moody's closing expectations. It is an initially
five year fixed-rate loan maturing in April 2011. The loan
is secured by an office complex and exhibition hall located in Amsterdam.
Though the vacancy has improved since closing, i.e.
the current vacancy rate is 10.6% compared to 13.4%
at closing, the net rental income has decreased from EUR 11 million
at closing to currently EUR 9 million and as a result the current DSCR
of 1.18x is below the DSCR of 1.37x at closing. As
the lease terms for this property are usually rather short with one to
three years, the property is exposed to high lease rollover risk.
26.4% of the leases expire in 2010, 23.5%
in 2011 and 12.4% in 2012. No re-valuation
has been provided since closing. Based on the initial valuation
as of September 2005, the reported LTV is 73.3%.
Moody's estimates the current LTV to be substantially higher at
109%, taking into account the property market performance
over the past two years as well as the significant reduction of the rental
income. In Moody's view, the term default risk as well as
the refinancing risk of this loan have increased compared with the closing
Loan in Default. Since July 2008, the Karstadt Kompakt Loan
has been in default. Since the occurrence of the loan event of
default and the notification of loan acceleration, the borrower
and the sales agent have been working on disposing the properties securing
the loan. As the single tenant Hertie GmbH & Co. KG
is insolvent, there is almost no rental income generated by the
properties (except for small amounts from sub-tenants).
The ability of the borrower to meet the debt service of the loan depends
therefore on property disposals. According to the servicer,
15 properties of the portfolio have been disposed since the insolvency
of the tenant. The proceeds from the disposals have been used to
cover the debt service and to partially pay down the loan balance.
So far, the properties were sold on average 32% above the
vacant possession value (VPV) established by the latest re-valuation
as of July 2008. As of Januar 2010, there are 50 properties
remaining. The UW LTV is 58.3% based on the UW market
value as of September 2005. Moody's estimates the current LTV to
be at 101%, taking into account that the portfolio is currently
nearly completely vacant. As the borrower relies on further disposals
to pay the debt service, the loan is also exposed to execution risk
and potentially adverse selection in the disposal process. Given
the size of this loan in this transaction, a failure of the disposal
plan might result in further rating sensitivity in the future.
Moody's will closely monitor the further development of this loan.
Overall Default Risk. Based on its revised term and maturity default
risk assessment for the securitised loans, Moody's anticipates that
a very large portion of the portfolio will default over the course of
the transaction term. Except for the already defaulted Karstadt
Kompakt Loan, the default risk of the remaining loans is predominantly
driven by the refinancing risk. In Moody's view, the World
Fashion Centre and the Procom Loan (23.8% of current portfolio
balance) have the highest default risk, while the Tiago Loan (31.1%
of the current portfolio) has the lowest risk of defaulting. Moody's
modeled the Karstadt Kompakt Loan as defaulted.
Concentration Risk. The portfolio securitised in this transaction
exhibits an above average concentration in terms of property types and
Work-Out Strategy. 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 depressed
market conditions. Therefore, Moody's has assumed that in
most cases, upon default, a sale of the mortgaged properties
and ultimate work-out of the loan will occur at a later point in
time or via orderly disposals as in the case of the Karstadt Kompakt Loan.
Increased Portfolio Loss Exposure. Taking into account the increased
default risk of the loans, the most recent performance of the commercial
property markets in Continental Europe, Moody's opinion about future
property value performance and the most likely work-out strategies
for defaulted loans, Moody's anticipates a substantial amount of
losses on the securitised portfolio, which will, given the
anticipated work-out strategy for defaulted loans, crystallise
only towards the mid to end of the transaction term.
3) 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 30 April
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 firstname.lastname@example.org."
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).
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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Moody's downgrades the Class B CMBS Notes issued by Deco 7 -- Pan Europe 2 p.l.c.
Vice President - Senior Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454