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Rating Action:

Moody's downgrades the Class B CMBS Notes issued by Deco 7 -- Pan Europe 2 p.l.c.

20 May 2010

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 in full.

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 centre properties.

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 servicing.

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; and

(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 term.

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 analysis.

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 property location.

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 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 monitor.cmbs@moodys.com." 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 Moldenhauer
Vice President - Senior Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades the Class B CMBS Notes issued by Deco 7 -- Pan Europe 2 p.l.c.
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