London, 12 November 2012 -- Moody's Investors Service has today placed on review for possible downgrade the following classes of notes (the "Notes") issued by Deco 7 -- Pan Europe 2 plc (the "Issuer") (amounts reflecting the initial outstanding amount):
....EUR809M A2 Notes, Aaa (sf) Placed Under Review for Possible Downgrade; previously on Mar 29, 2006 Definitive Rating Assigned Aaa (sf)
....EUR179M B Notes, A3 (sf) Placed Under Review for Possible Downgrade; previously on Mar 20, 2012 Downgraded to A3 (sf)
Moody's does not rate the Class X, C, D, E, F, G and H Notes.
Today's rating action has been prompted by a shortfall in the interest payment to the Class B Notes at the October 2012 interest payment date ("IPD"). Whereas EUR 236.9k was due on the Notes, only EUR 168.5k was paid resulting in an interest deferral of EUR 68.4k.
Due to the payment defaults arising under the Karstadt Kompakt Loan (28% of the current pool), the liquidity facility has been utilised to make interest payments under the Notes since the January 2011 IPD. An appraisal reduction in relation to the portfolio backing the Karstadt Kompakt Loan has reduced the available liquidity facility amounts for this loan to only 56% of interest shortfalls on this loan since the October 2011 IPD. Reduced liquidity drawings combined with increased costs at issuer level (e.g. special servicing fees) have so far resulted in an interest deferral of EUR 3.6 million for all classes of Notes. The cumulative drawn amount under the liquidity facility as per October 2012 is EUR 3.2 million.
Deco 7 - Pan Europe 2 p.l.c. closed in March 2006 and represents the securitisation of initially ten mortgage loans originated by Deutsche Bank AG, London Branch. As of October 2012, there are five loans remaining in the pool with an outstanding balance of EUR 522 million (34% of the original pool balance). As reported in the latest investor report from July 2012, the underlying properties are located in Germany (79%) and The Netherlands (21%). The portfolio comprises of 74% office/exhibition centre properties and 26% retail properties.
Moody's will conclude its review once it fully assesses (i) the likelihood and severity of recurring interest deferral on the Class B Notes and (ii) the increased risk of interest shortfalls to the Class A2 Notes. While the current deferred interest on the Class B Notes will likely be recouped from future disposal proceeds under the Karstadt Kompakt Loan, Moody's expects ongoing shortfalls to the quarterly interest payments due under the loan. In its analysis, Moody's will focus on the future liquidation of the portfolio backing the Karstadt Kompakt Loan and the loan's interest profile following the switch from fixed rate to floating rate starting with the October 2012 IPD. Moody's will also factor into its analysis a potential increase in issuer level costs that could arise from the default of the Procom Loan (10% of the current pool) and Schmeing Loan ( 2% of the current pool) on their maturity dates in October 2012.
The key parameters in Moody's analysis are the default probability of the 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.
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. We expect a mild recession in the Euro area.
The principle methodology used in this rating was Moody's Approach to Real Estate Analysis for CMBS in EMEA: Portfolio Analysis (MoRE Portfolio) published in April 2006. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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 20 March 2012. The last Performance Overview for this transaction was published on 1 October 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.
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