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Fitch Assigns German Residential Funding 2013-2 Limited Expected Ratings

Oct 7 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned German Residential Funding 2013-2 Limited expected ratings. The transaction is a multi-family (MFH) CMBS arranged for the refinancing of a commercial real estate loan advanced to the sponsor (the Gagfah group), itself refinancing loans previously securitised as part of the DECO 17 - Pan Europe 7 Limited transaction.

EUR431m class A due October 2024 (ISIN TBC): 'AAAsf(EXP)'; Outlook Stable

EUR83.6m class B due October 2024 (ISIN TBC): 'AAsf(EXP)'; Outlook Stable

EUR53.7m class C due October 2024 (ISIN TBC): 'Asf(EXP)'; Outlook Stable

EUR59.7m class D due October 2024 (ISIN TBC): 'BBBsf(EXP)'; Outlook Stable

EUR23.9m class E due October 2024 (ISIN TBC): 'BBB-sf(EXP)'; Outlook Stable

EUR47.8m class F due October 2024 (ISIN TBC): 'BBsf(EXP)'; Outlook Stable

The final ratings are contingent upon the receipt of final documents and legal opinions conforming to the information already received, and selection of issuer account bank and other transaction parties.


The expected ratings are based on Fitch's assessment of the underlying collateral, available credit enhancement and the transaction's sound legal structure.

GRF 2013-2 benefits from geographical diversification, with some 27% by market value located in Hamburg, and other pockets of concentration found in economically strong areas of Germany such as Hannover (20%), Braunschweig (6%), Gottingen (4%) and Osnabruck (2%).

The portfolio includes exposures also to less affluent areas of Germany (Mecklenburg-Vorpommern and Brandenburg as well as some areas of Schleswig-Holstein). Of the portfolio approximately 15% is seen as non-core by the sponsor and is targeted to be sold during the loan term. These assets are largely located in economically weaker, smaller cities, exhibiting higher than average vacancy levels.

The portfolio's performance has been stable, with occupancy fluctuating between 94%-95% since 2010. Minimum capital expenditure requirements, agreed as part of privatisation agreements with local authorities and covenanted in the loan agreement, should also support portfolio performance. Overall, Fitch considers the collateral quality as average.

Taking into account the EUR76.6m senior continuing debt, the reported loan-to-value (LTV) is 65%. Annual scheduled amortisation of 0.5% per annum will reduce the exit LTV to 62.8% by loan maturity. This leverage is slightly higher than for MFH CMBS peers but in line with the German Residential Funding 2013-1 (GRF 2013-1) transaction. A contingent and additional 0.5% amortisation per annum may be triggered on any loan payment date on or after 20 February 2016, if the sponsor is not able to meet its target net operating income margin of 61% (currently reported at 59%).

The transaction features a six-year tail period between loan scheduled maturity (2018) and legal final maturity of the notes (2024), although the borrower benefits from a one-year extension option. This amount of time reduces the risk of an uncompleted workout by bond maturity, particularly given the complex borrower structure and some sales restrictions relating to the privatisation agreement. The borrowers are pre-existing German limited partnerships with no employees or material outstanding liabilities. The borrowers' general partners are not insolvency-remote and their failure would lead to a solvent liquidation of the partnerships. Therefore, Fitch has concentrated its analysis on the enforceability of the security under this scenario.

Deutsche Bank AG, London Branch (A+/Stable/F1+) will be hedge provider, while Bank of America N.A., London Branch (A/Stable/F1) will be liquidity facility provider. While hedging expires at the loan's scheduled maturity in 2018, Euribor on the notes thereafter will be capped at 5%, partially mitigating interest rate risk during the tail. The issuer account bank provider is yet to be appointed.

The controlling class of notes from time to time will be the most junior tranche with sufficient equity as evidenced by the most recent valuation. Another material feature in the structure is that the issuer waterfall changes after loan maturity, so that interest on the class A and B notes will rank ahead of principal, with remaining funds allocated on an interest principal-interest principal basis from class C through E.


Fitch tested the rating sensitivity of the class A to F notes to various scenarios, including an increase in cost assumptions, capitalisation rates and vacancy assumption. Fitch for example noted that an increase of 1.2x in these three assumptions would result in the following downgrades.

Expected impact upon the notes' ratings of shift in capitalisation rate, cost and vacancy assumptions (class A/class B/class C/class D/class E/class F): Original Rating: 'AAAsf'/'AAsf'/'Asf'/'BBBsf'/'BBB-sf'/ 'BBsf'

Deterioration in all factors by 1.1x:


Deterioration in all factors by 1.2x:


A presale report, including further information on transaction related stress and sensitivity analysis, and material sources of information that were used to prepare the credit rating, is available at www.fitchratings.com.