EUR 115 million of EMEA CMBS affected
London, 08 October 2010 -- Moody's Investors Service has today downgraded the Classes B, C
and D Notes issued by Portfolio GREEN German CMBS GmbH ("Issuer"),
(amounts reflecting initial outstandings):
....EUR40M Class B Secured Floating Rate Notes
due 2050, Downgraded to A2 (sf); previously on Sep 3,
2010 Aa1 (sf) Placed Under Review for Possible Downgrade
....EUR40M Class C Secured Floating Rate Notes
due 2050, Downgraded to Ba1 (sf); previously on Sep 3,
2010 A2 (sf) Placed Under Review for Possible Downgrade
....EUR35M Class D Secured Floating Rate Notes
due 2050, Downgraded to B2 (sf); previously on Sep 3,
2010 Baa3 (sf) Placed Under Review for Possible Downgrade
The ratings of the Classes A, E, F and G are not affected
by this rating action. Moody's does not rate the Class H Notes.
Today's rating action concludes the review for possible downgrade
of the Classes B, C and D Notes initiated on 3 September 2010.
The rating downgrade has been prompted by (i) the deterioration and increased
volatility of the cash flows generated by the properties securing the
two largest borrower groups, (ii) the weakened credit quality of
the total pool, resulting from reduced property values to date and
Moody's expectations regarding property value performance and lending
markets going forward, and (iii) the uncertainty and magnitude of
fees and expenses incurred by transaction parties and the outcome of the
pending court proceedings initiated by a borrower.
The magnitude of the rating actions is mainly driven by Moody's reassessment
of the two largest borrower groups (41% of the current pool).
Both borrower groups suffer from significant cash flow deterioration compared
to initial cash flows and Moody's expectations. According
to the most recent update by the Sub-Servicer, the sole tenant
(Deutsche Bahn AG, Aa1) of the office property securing the loans
in borrower group G13 (32% of the current pool) recently signed
a new lease commencing on 1 January 2011. The new lease will run
until 31 December 2018 and the annual rental cash flow for the property
will be approximately EUR 6.9m, a reduction of 35%
compared to the previous lease. Given the secondary nature of the
property and the reduced rental income, Moody's has adjusted
its value to EUR 95.2 million, resulting in a new Loan-to-Value
("LTV") ratio of 102% for the borrower group. The current
underwriter's ("U/W") LTV ratio for the borrower group is 82%.
The cash flows of the senior living and hotel property securing the two
loans of the second largest borrower group G11 (9% of the current
pool) have declined to EUR 1.0m, a drop of 67% compared
to the net operating income as of closing of the transaction. The
lower than anticipated cash flow was caused by increased vacancies and
a general rent reduction due to expansion and maintenance works at the
property. Going forward, there remains significant uncertainty
about the level of cash flow because rent levels are subject to annual
re-negotiations between the borrower and the tenant. The
property is not generating sufficient cash flow to cover the debt service
payment, but to date, the sponsor has been covering the shortfall.
As yet, no public information is available as to whether the rental
income will increase again in the next year. Given the reduction
of income and the level of uncertainty for future cash flows, Moody's
has adjusted its value to EUR 24.1 million, resulting in
a LTV ratio of 117%. The current U/W LTV ratio for the borrower
group is 56%.
Moody's has a higher default risk assessment and loss expectation
for the loans associated with these two borrower groups. Given
their relative size within the pool (41% of current pool),
the two largest borrower groups significantly contribute to the total
expected loss of the whole pool.
In the event of a default of the loans associated with the two largest
borrower groups, Moody's expects an orderly work-out
strategy involving some modifications to further deleverage the loans
with the aim of a refinancing at a later point in time.
In its rating review, Moody's has also analysed the remaining
pool (59% of the current pool). Given the granular nature
of the remaining portion of the underlying loan pool , Moody's
is only provided with a limited amount of data compared to other EMEA
CMBS transactions. Therefore in its analysis of the remaining pool,
Moody's applied a generic approach in order to determine the default
probabilities. Moody's has assumed effective value declines
on the portfolio since the peak of the market in 2007, which has
increased both the default risk assessment as well as loss severity of
the remaining loans in the pool.
The transaction's exposure to loans with reset dates in the next five
years is considerable. Approximately 79% of the loans in
the current portfolio have their reset dates between 2010 and 2015.
As Moody's expects a slow recovery of property values in Germany,
most of the loans will be still highly leveraged at their respective reset
dates. Although most loans in the pool have very long terms,
Moody's believes that interest rate resets pose an additional risk
to the borrowers, given the uncertainty of future interest rates
and the limited availability of alternative financing for the loans.
Moody's estimates that compared to the U/W values at closing in 2007,
the values of the entire property portfolio securing this transaction
have declined on a weighted average basis by 27% through mid-2010.
Based on Moody's assessment of the total pool, the weighted
average Moody's LTV ratio is approximately 100%.
Due to the additional leverage, the higher portfolio risk assessment
has a relatively larger impact on the expected loss of the mezzanine classes
than on the expected loss of the most senior Class A Notes. This
is because the Class B, C and D Notes are subordinated classes in
the transaction's capital structure and the credit enhancement levels
for these classes is less pronounced than for the Class A Notes.
As a result, the downgraded classes are particular sensitive to
a non-performance of the two largest borrower groups.
Moody's rating review also includes the analysis of potential implications
of the drawings under the liquidity facility of the Issuer to date and
in particular on the July 2010 IPD and the pending court proceedings concerning
the validity of the transfer of a loan receivable initiated by a borrower.
On the IPD in July 2010, an amount of EUR 4.1 million was
drawn from the liquidity facility. The drawing mainly resulted
from (i) lesser collections for the collection period preceding the July
2010 IPD and, (ii) fees and expenses incurred on the Portfolio over
the course of the transaction from the cut off date up to the July 2010
IPD, but only accurately reflected in the reports for the July 2010
IPD, together with legal fees and Portfolio Prime Servicing expenses,
incurred during the collection period immediately preceding the July 2010
Moody's analysed historical collection and distribution ratios on
the transaction level. Over the last four payment periods ,
Moody's noticed tightened excess spread levels or even negative
excess spreads within the transaction. In Moody's view the
tightening of excess cash flows is the result of higher than expected
fees and expenses arising on transaction level and mainly caused by legal,
servicer and Issuer fees. In the short-term, Moody's
anticipates continuing negative spread in the transaction and ultimately
further drawings under the liquidity facility. However, in
the long run, the persistence of the negative spread in the transaction
is not yet visible .
Furthermore the court proceeding at the Federal Court of Justice (Bundesgerichtshof),
initiated by a borrower protesting against the validity of the transfer
of the loan receivable of approximately EUR 1.1m to the Collateral
Agent, is still pending. The proceedings at, both,
the District Court (Landgericht) and the Higher Regional Court (Oberlandgericht)
ended with rulings against the borrower. In case the outcome of
the proceeding is positive for the borrower, the most junior Class
H Notes may be depleted by a principal amount of up to EUR 1.1m.
Within the scope of its analysis, Moody's considered certain
stress tests to evaluate the potential impact on the ratings by a depletion
of the Class H Notes resulting from a loss of the invalid transfer of
the loan receivable and the further negative carry on transaction level.
Moody's expects only a very limited credit impact resulting from
these circumstances .
There could be upgrade rating pressure in case of (i) a significant improvement
of the cash flows received under the property of the second largest borrower
group, (ii) the repayment of one or both of the two largest borrower
groups on their respective reset dates and (iii) a faster than expected
repayment rate of the total portfolio.
In this transaction, Lehman Brothers Bankhaus AG ("Seller") sold
its economic interest in claims for interest and principal under a portfolio
of mortgage loans granted to individual and corporate borrowers in Germany
to the Issuer. The legal title in the underlying loans and respective
collateral was ultimately transferred to the Collateral Agent (Florian
(No.3) GmbH). The initial 416 mortgage loans with a principal
balance of EUR 585.4 million were combined into 98 borrower groups.
The loans are secured by commercial properties, including office
(40% of the current pool), retail (15%), residential
(13%), mixed-use (13%) and other types including
hotel and nursing homes (19%) located in Germany.
Since closing of the transaction in November 2007, the number of
loans decreased to 256, the number of borrower groups decreased
to 61 and the outstanding balance decreased to EUR 300.5 million
(51% of the total balance at closing) as per last interest payment
date ("IPD") in July 2010. Approximately 31% of the current
loan pool is represented by the largest borrower group (G13) with a total
loan balance of currently EUR 97.3 million. The average
size of a borrower group of the remaining 69% of the pool is approximately
EUR 3.4 million.
The principal methodologies used in rating Portfolio GREEN German CMBS
GmbH 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 did not receive or take into account a
third party due diligence report on the underlying assets or financial
instruments related to the monitoring of this transaction in the past
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.
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 23
August 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 adopts all necessary measures so that the information it uses
in assigning a credit 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.
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.
Andrea M. Daniels
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Structured Finance Group
Moody's Investors Service Ltd.
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Moody's downgrades three Classes of EMEA CMBS issued by Portfolio GREEN German CMBS GmbH
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