London, 20 June 2012 -- Issuer: STABILITY CMBS 2007-1 GmbH -- Moody's Investors Service has today taken rating action on the following classes of Notes issued by Stability CMBS 2007-1 GmbH (amounts reflect initial outstanding):
....EUR726.7M Senior Credit Default Swap, Affirmed at Aaa (sf); previously on May 22, 2007 Definitive Rating Assigned Aaa (sf)
....EUR0.5M Class A+ Notes, Affirmed at Aaa (sf); previously on May 22, 2007 Definitive Rating Assigned Aaa (sf)
....EUR31.8M Class A Notes, Affirmed at Aaa (sf); previously on May 22, 2007 Definitive Rating Assigned Aaa (sf)
....EUR46.4M Class B Notes, Affirmed at Aa2 (sf); previously on May 22, 2007 Definitive Rating Assigned Aa2 (sf)
....EUR30.5M Class C Notes, Affirmed at A2 (sf); previously on May 22, 2007 Definitive Rating Assigned A2 (sf)
....EUR30.4M Class D Notes, Downgraded to Baa3 (sf); previously on May 22, 2007 Definitive Rating Assigned Baa2 (sf)
....EUR28.2M Class E Notes, Downgraded to B3 (sf); previously on May 22, 2007 Definitive Rating Assigned Ba3 (sf)
Moody's does not rate the Class F Notes.
RATINGS RATIONALE
Today's downgrade actions are driven by Moody's increased loss expectation for the pool since its last review, combined with the anticipation that the defaulted claims currently being worked-out will result in losses to the Class F Notes, and consequently contribute to eroding the credit enhancement available to the other Classes of Notes. The increased loss expectation is primarily due to the higher refinancing risk of most of the loans in the pool, and especially some of the largest ones, as a consequence of (i) Moody's generally lower value assessment for the properties securing the claims, with little hopes of recovery over the short term, (ii) the subdued refinancing market in Germany, especially for highly leveraged loans, and (iii) the uncertainty with respect to the path and timing for a recovery of the lending market.
The ratings of the Senior Credit Default Swap and Classes A+, A, B and C are affirmed because the loan repayment proceeds allocated sequentially increased substantially the credit enhancement to the senior Classes over the last year, and compensates for the higher expected losses.
The key parameters in Moody's analysis are the default probability of the securitised loans (both during the term and at maturity) as well as Moody's value assessment for the properties securing these loans. Moody's derives from those parameters a loss expectation for the securitised pool.
In general, Moody's analysis reflects a forward-looking view of the likely range of commercial real estate collateral performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside an acceptable range of the key parameters such as property value or loan refinancing probability for instance, may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated when the related securities ratings were issued. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions . There may be mitigating or offsetting factors to an improvement or decline in collateral performance, such as increased subordination levels due to amortisation and loan re- prepayments or a decline in subordination due to realised losses.
Primary sources of assumption uncertainty are the current stressed macro-economic environment and continued weakness in the occupational and lending markets. Moody's anticipates (i) delayed recovery in the lending market persisting through 2013, while remaining subject to strict underwriting criteria and heavily dependent on the underlying property quality, (ii) strong differentiation between prime and secondary properties, with further value declines expected for non-prime properties, and (iii) occupational markets will remain under pressure in the short term and will only slowly recover in the medium term in line with anticipated economic recovery. Overall, Moody's central global macroeconomic scenario is for a material slowdown in growth in 2012 for most of the world's largest economies fueled by fiscal consolidation efforts, household and banking sector deleveraging and persistently high unemployment levels. Moody's expect a mild recession in the Euro area.
As the Euro area crisis continues, the rating of the structured finance Notes remain exposed to the uncertainties of credit conditions in the general economy. The deteriorating creditworthiness of Euro area sovereigns as well as the weakening credit profile of the global banking sector could negatively impact the ratings of the Notes. For more information please refer to the Rating Implementation Guidance published on 13 February 2012 "How Sovereign Credit Quality May Affect Other Ratings". Please also refer to the recent rating actions on banks published on 15 February 2012, (please see "Moody's Reviews Ratings for European Banks" and "Moody's Reviews Ratings for Banks and Securities Firms with Global Capital Markets Operations" for more information).
MOODY'S PORTFOLIO ANALYSIS
Stability CMBS 2007-1 GmbH closed in 2007 and represents the synthetic securitisation of initially 218 commercial mortgage loans granted to 91 distinct borrower groups and secured on aggregate by 119 properties located in Europe. The loans were originated by IKB Deutsche Industriebank Aktiengesellschaft ("IKB") in the course of its ordinary commercial mortgage loan activity.
Since closing of the transaction, the reference portfolio has reduced from EUR 909 million to EUR 403 million as per April 2012, for 84 claims to 51 distinct borrower groups . The portfolio's concentration has increased as shown in a current Herfindahl Index of 11 compared to 32 at closing. The largest 3 borrower groups are now representing 37% of the pool, by comparison to 23% at closing.
The main property type remains office building, at 84% of the portfolio compared to 77% at closing, followed by retail and mixed use properties. The asset location remains predominantly Germany with 82% of the pool (90% at closing) with the remaining being distributed across Austria, the UK, Luxembourg and the Netherlands.
The structure is sponsored by KfW, which provides credit protection to IKB for the reference portfolio. KfW in turn hedged its exposure through a senior credit default swap and the issuance of certificates of indebtedness to the issuer, Stability CMBS 2007-1 GmbH. The issuer financed the acquisition of the certificates through the issuance of credit-linked notes to investors. The legal final maturity of the transaction is May 2022.
No loss claim was reported since closing, however 3 claims to 2 distinct borrower groups and totaling 2.5% of the pool balance have defaulted and are currently being worked out. These defaulted claims are expected to produce losses which will be allocated reverse-sequentially, starting with the Class F Notes. Overall, the current pool is expected to experience limited losses.
In the course of its annual review of the transaction, Moody's obtained updated information about the 10 largest borrower group in the portfolio, totaling 69% of the pool combined, and conducted a more comprehensive analysis of these largest exposures. Noticeably, the default probability at maturity of the largest claim, representing 25% of the pool, was reviewed upwards and is now high. Indeed, the whole-loan LTV ratio of this very large syndicated loan is expected to be 116% based on Moody's estimated property value at maturity in December 2013, making refinancing unlikely. However, with a more moderate A-loan LTV of 78%, and accounting for the very strong covenant of the tenant, the length of the leases and the potential future rental increase due to inflation, a default of this claim is not anticipated to result in any substantial losses for the securitised position.
Potential operational risks of the transaction were also reviewed in light of the current credit situation of the loan originator and servicer, IKB. Moody's withdrew IKB's ratings on 14 July 2011. Please see Moodys.com for the press release relating to this rating action. Although the risk of default of IKB should not impact directly on the ratings of the senior CDS and Notes due to the synthetic nature of the transaction, any weakening of the credit strength of the servicer could trigger a gradual deterioration of the servicing and reporting. This risk is mitigated by the fact that compliance with the servicing standards is a condition to the allocation of realised losses that must be checked by the trustee.
RATING METHODOLOGY
The methodologies used in this rating were Moody's Approach to Real Estate Analysis for CMBS in EMEA: Portfolio Analysis (MoRE Portfolio) published in April 2006, and Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA published in June 2005. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Other factors used in this rating are described in European CMBS: 2012 Central Scenarios published in February 2012.
The updated assessment is a result of Moody's on-going surveillance of commercial mortgage backed securities (CMBS) transactions. Moody's prior assessment is summarised in a press release dated 24 June 2011. The last Performance Overview for this transaction was published on 9 May 2012.
In rating this transaction, Moody's used both MoRE Portfolio and MoRE Cash Flow to model the cash-flows and determine the loss for each tranche. MoRE Portfolio evaluates a loss distribution by simulating the defaults and recoveries of the underlying portfolio of loans using a Monte Carlo simulation. This portfolio loss distribution, in conjunction with the loss timing calculated in MoRE Portfolio is then used in MoRE Cash Flow, where for each loss scenario on the assets, the corresponding loss for each class of notes is calculated taking into account the structural features of the notes. As such, Moody's analysis encompasses the assessment of stressed scenarios.
REGULATORY DISCLOSURES
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The rating has been disclosed to the rated entity or its designated agent(s) and issued with/with no amendment resulting from that disclosure.
Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.
Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.
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Thomas Babin Analyst Structured Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Christophe de Noaillat Associate Managing Director Structured Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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