EUR 442.3 million of CMBS affected
London, 12 November 2009 -- Moody's Investors Service has today downgraded the Class A1 and A2 Notes
issued by Titan Europe 2006-5 p.l.c. (amounts
reflect initial outstanding):
EUR330M Class A1 Commercial Mortgage Backed Floating Rate Notes due 2019,
Downgraded to Aa1; previously on Oct 19, 2009 Aaa Placed On
Review for Possible Downgrade;
EUR112.3M Class A2 Commercial Mortgage Backed Floating Rate Notes
due 2019, Downgraded to Baa3; previously on Oct 19, 2009
Aaa 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 2006-5 p.l.c.
Moody's does not rate the Class A3, B, C, D, E
and F Notes issued by Titan Europe 2006-5 p.l.c.
Today's rating action concludes the review for possible downgrade that
was initiated on 19 October 2009 and takes Moody's updated central scenarios
into account, as described in Moody's Special Report "Moody's Updates
on Its Surveillance Approach for EMEA CMBS".
1) Transaction and Portfolio Overview
Titan Europe 2006-5 p.l.c. closed in December
2006 and represents the securitisation of initially eight commercial mortgage
loans originated by Credit Suisse International. The loans are
secured by first-ranking mortgages over initially 41 commercial
properties located in Germany (94%) and Spain (6%).
The properties were predominantly mixed-use (51%,
mostly multi-family) and hotel (31%).
Since closing, there have been almost no changes in the portfolio
composition. One loan (Hotel Balneario Blancafort Loan --
6.1% of the initial portfolio balance) left the portfolio.
The remaining loans are not equally contributing to the portfolio:
the largest loan (the DIVA Multifamily Portfolio Loan) represents 38.9%
of the current portfolio balance, while the smallest loan (the Hilite
Warehouse Loan) represents 1.8%. The current loan
Herfindahl index is 3.8, compared to 4.2 at closing.
The remaining loans are secured by 40 properties which are still predominantly
mixed-use/multi-family (48%) and hotel (34%).
All of the remaining properties are located in Germany.
The DIVA Multifamily Portfolio Loan has defaulted and is in special servicing
since September 2008 due to insolvency of the borrower. Since October
2009, the loan is also in payment default: debt service was
not paid from the October 2008 interest payment date ("IPD") until the
June 2009 IPD. On the October 2009 IPD, debt service was
partially paid. The remaining loans are current; however three
of other six loans are on the servicer's watchlist. The Quartier
206 Shopping Centre Loan and the Monzanova Office Loan are on the watchlist
due to cash trap trigger breaches while the Hilite Warehouse Loan is on
watchlist due to a rating cash trap event.
Following the default of the largest loan, the sequential payment
trigger has been breached and all amortisation payments, prepayments
and repayments will be allocated fully sequentially. The Class
A1 Notes rank senior to the Class A2 Notes. Since closing,
the subordination available to Moody's rated Classes has marginally
increased, from 50.1% to 51.8% for the
Class A1 Notes and from 33.1% to 34.1% for
the Class B Notes.
As a result of the continued payment default under the DIVA Multifamily
Portfolio Loan there was a EUR1.14 million draw under the liquidity
facility on the October 2009 IPD. Liquidity draws also occurred
on most of the previous IPDs since October 2008. The Class F Notes
(not rated by Moody's) are subject to deferred interest in the amount
of EUR295,260 as of the last IPD.
2) Rating Rationale
The downgrade of the Class A1 and A2 Notes follows a detailed re-assessment
of the loan and property portfolio's credit risk. Hereby,
Moody's main focus was on property value declines, term default
risk, refinancing risk and the anticipated work-out timing
for already defaulted and potentially defaulting loans in the future.
In its review, Moody's especially concentrated on the four largest
loans in the portfolio accounting for on aggregate 92.7%
of the current portfolio i.e. the DIVA Multifamily Portfolio
Loan (38.9% of the current portfolio), the Hotel Adlon
Kempinski Loan (26.0%), the Quartier 206 Shopping
Centre Loan (18.7%) and the ABC Retail Portfolio Loan (9.1%).
As outlined in more detail below, today's rating action is mainly
(i) The most recent performance of German commercial property markets;
(ii) Moody's opinion about future property market performance in Germany;
(iii) The worse than expected performance of the DIVA Multifamily Portfolio
Loan, the Hotel Adlon Kempinski Loan and the Quartier 206 Shopping
Centre Loan (contributing on aggregate 83.6% to the current
(iv) Adverse borrower actions in relation to the Hotel Adlon Kempinski
Loan and the Quartier 206 Shopping Centre Loan by waiving rental obligations
of tenants that are understood to be related to the sponsor of the loans.
Driven by a higher default risk assessment during both the loan terms
and at the loan maturity dates, Moody's now 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 very high amount of losses on the securitised portfolio.
Those expected losses will, given the anticipated work-out
strategy for defaulted loans, crystallise mostly towards the mid
to end of the transaction term.
In addition, the Class A2 Notes are subordinated to the Class A1
Notes in the capital structure. Due to this additional leverage,
the higher portfolio risk assessment has a relatively bigger impact on
the expected loss of the Class A2 Notes than on the expected loss of the
Class A1 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
Property Values. Property values in Germany have declined in the
last quarters and are expected to continue to decline at least until 2010.
Moody's estimates that compared to the underwriter's ("U/W")
market values at closing, on aggregate the values of the properties
securing this transaction have declined on a like-for-like
basis by 35% to date (ranging from a 42% decrease for Hotel
Adlon Kempinski Loan to a 7% decrease for the Carat Park Shopping
Centre Loan). Looking ahead, Moody's anticipates further
declines until 2010, resulting in on aggregate a 40% value
decline from the closing U/W value to Moody's trough value (ranging from
a 46% decline for the Quartier 206 Shopping Centre Loan to a 16%
decline for the Carat Park Shopping Centre Loan).
Based on this property value assessment, Moody's estimates that
the transaction's mid-2009 weighted average ("WA")
securitised loan-to-value ("LTV") ratio was
105% compared to the reported U/W LTV of 78%. Due
to the further envisaged declines, the WA LTV will increase in Moody's
opinion to 115% in 2010 and will only gradually recover thereafter.
Based on Moody's anticipated trough values, the LTVs for the
securitised loans range between 133% (DIVA Multifamily Portfolio
Loan) and 71% (Hilite Warehouse Loan). As two loans (the
DIVA Multifamily Portfolio Loan and the Quartier 206 Shopping Centre Loan)
have additional debt in the form of B-loans (amounting to EUR62
million in total), based on estimated trough values, the overall
whole loan leverage is on aggregate 128%.
Moody's has taken the anticipated property value development,
including a gradual recovery from 2011 onwards, into account when
analysing the default risk at loan maturity and the loss given default
for each securitised loan.
Refinancing Risk. Except for the ABC Retail Portfolio Loan which
matures in 2015, the remaining loans mature in 2016. Moody's
adjustment of the refinancing risk assessment is primarily due to the
decrease in property values to date and the expectation that property
values in Germany will only slowly recover from 2011 onwards. This
is most relevant for the defaulted DIVA Multifamily Portfolio Loan where
a liquidation of the property portfolio is expected during the next couple
of years. The default risk at maturity for almost all the other
loans has also increased considerably (with the Quartier 206 Shopping
Centre Loan being most affected) since Moody's exit LTVs for these
loans have increased compared to the closing analysis.
Term Default Risk. The occupational markets in Germany are currently
characterised by falling rents, increasing vacancy rates and higher
than average tenant default rates. In particular, loans secured
by properties which are subject to significant lease rollover over the
next few years could be, in Moody's view, exposed to weakening
occupational markets. As a consequence, 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 nearly all of the loans.
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 including the already defaulted DIVA Multifamily
Portfolio Loan. The default risk of the loans is driven by both
potential payment defaults during the term of the loans as well as refinancing
risk. Aside from the DIVA Multifamily Portfolio Loan, in
Moody's view, the Quartier 206 Shopping Centre Loan has the highest
risk of defaulting and the ABC Retail Portfolio Loan has currently the
lowest default risk
Moody's notes in this respect the following key factors impacting
the overall default risk of the Top 3 loans in the pool:
(i) The DIVA Multifamily Portfolio Loan defaulted and was transferred
into special servicing in September 2008. In Moody's analysis,
this loan is deemed to be defaulted. There is very limited visibility
over the cash flows currently generated by the property portfolio and
over the amount of distributions that can be expected from the insolvency
administrator of the borrower over time. There is also no information
on the disposal/liquidation plan for the portfolio; however Moody's
expects an opportunistic disposal of the portfolio over the next couple
of years. The property portfolio was re-valued in September
2008, showing a 24% decline since closing. This has
also resulted in an appraisal reduction in relation to the transaction's
(ii) The net operating income with respect to the hotel property under
the Hotel Adlon Kempinski Loan has declined by 15% since closing.
In conjunction with yield widening, this resulted in an assumed
45% value decline compared to the U/W value as of closing.
Furthermore, the sponsor of the loan has waived EUR2.33 million
of the main non-hotel tenant's rental obligation until July
2011 (this non-hotel tenant is a company that is understood to
be related to the sponsor). The waived rental amount will be repaid
upon the condition that the tenant had an accounting profit for the financial
year 2010. There was no requirement for the servicer to provide
consent to this waiver. Moody's is concerned that this waiver or
similar actions in the future have a negative impact on the marketability
and the value of the property security as well as on the refinance-ability
of the loan.
(iii) The mixed use retail/office property securing the Quartier 206 Shopping
Centre Loan is fully let, however the largest tenant AMJ Holding
has ceased its operations and terminated it leases. The sponsor
of the loan (the same sponsor as the sponsor under the Hotel Adlon Kempinski
Loan) has waived this tenant's outstanding rental arrears of EUR 2.2
million (this tenant is understood to be also indirectly related to the
sponsor of the Hotel Adlon Kempinski Loan and the Quartier 206 Shopping
Centre Loan). The servicer did not consent to this waiver and is
working closely with the borrower to clarify the situation. According
to the borrower/sponsor, the AMJ Holding's premises have already
been let to two newly founded companies that continue the previous tenant's
operations under the same branding. Since this new tenant appears
to be the same as the one that originally ceased its operations,
Moody's has concerns whether the tenant will continue to pay its
rent in the future. A further concern is that such waivers or similar
actions in the future have a negative impact on the marketability and
the value of the property security as well as on the refinance-ability
of the loan. Furthermore, even with the rent from AMJ Holding
(and almost 100% occupancy) the loan's ICR as of the July
2009 IPD (the last time sufficient borrower reporting was provided) was
1.00x. Amortisation on the loan will start from October
2011 and it is uncertain how the borrower will be able to meet the additional
debt service amount without additional funds provided by the sponsor.
Concentration Risk. The portfolio securitised in this transaction
exhibits an average concentration in terms of property types and property
Work-Out Strategy. In scenarios where a loan defaults,
Moody's current expectation is that the servicer will most likely not
pursue an immediate 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.
Increased Portfolio Loss Exposure. Taking into account the increased
default risk of the loans, the most recent performance of the commercial
property markets in Germany, Moody's opinion about future property
market performance and the most likely work-out strategies for
defaulted loans, Moody's anticipates very high amount of losses
on the securitised portfolio, which will, given the mostly
back-loaded default risk profile and the anticipated work-out
strategy for defaulted loans, crystallise only towards the mid to
end of the transaction term.
4) Rating Methodology
The principal methodologies used in rating and monitoring the transaction
are "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 are available on 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 2 November
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@example.com.
To obtain a copy of Moody's Pre-Sale 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
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades two classes of EMEA CMBS Notes issued by Titan Europe 2006-5 p.l.c.
Structured Finance Group
Moody's Investors Service South Africa (Pty) Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454