OREANDA-NEWS. Fitch Ratings has affirmed DECO 9 - Pan Europe 3 plc's (DECO 9) Class A2 notes and downgraded the class B and C as follows:

EUR104.7m class A2 (XS0262561276) affirmed at 'BBsf'; Outlook revised to Negative from Stable
EUR39.0m class B (XS0262561946) downgraded to 'CCCsf' from 'Bsf'; Recovery Estimate (RE) 50%
EUR37.6m class C (XS0262562753) downgraded to 'CCsf' from 'CCCsf'; RE0%
EUR15.2m class D (XS0262563215) affirmed at 'CCsf'; RE0%
EUR21.5m class E (XS0262563728) affirmed at 'Csf'; RE0%
EUR34.2m class F (XS0262564452) affirmed at 'Csf'; RE0%
EUR6.7m class G (XS0262565004) affirmed at 'Csf'; RE0%
EUR10.0m class H (XS0262565939) affirmed at 'Csf'; RE0%
EUR4.8m class J (XS0262566234) affirmed at Csf'; RE0%

The transaction closed in August 2006 and was originally the securitisation of 11 commercial real estate loans secured on collateral located in Germany (eight loans) and Switzerland. In October 2015, only two loans remained, both in default.


The affirmation of the class A2 notes reflects the stable performance of the PGREI portfolio, which has seen contracted income extend, along with progress with property disposals (albeit at a slow rate), from the distressed Treveria collateral. The remaining time until legal final maturity (July 2017) allows little room for manoeuvre in marketing the two portfolios, making the two servicers' task to accumulate sufficient recovery proceeds to repay the notes increasingly difficult. This growing risk is reflected in the Negative Outlook revision on the class A notes and the downgrade of the class B notes into a distressed rating category (CCCsf).

The EUR321m Treveria loan, of which 50% is securitised in DECO 9, entered special servicing in 2010 due to the opening of insolvency and enforcement proceedings. Since the default, 33 of the 60 assets have been sold. Gross sales prices have on average been at a 15% discount to 2011 market values (27% to allocated loan amount).

Discounts to 2011 market values have risen significantly in the last two years, reflecting negative selection as the more marketable assets leave the portfolio. While market conditions have eased for secondary real estate assets in Germany, the situation facing Situs could worsen given the pressure of time (only 21 months remain) and the poor quality of the portfolio (now 57.5% vacant, up from 36.7% in July 2014). Fitch expects steep discounts of 40%-60% to be applied, and therefore significant losses.

The EUR112.8m PGREI Portfolio loan defaulted at maturity in July 2014, as expected given the limited prospects of refinancing. It is secured by 55 assets (predominantly retail warehouses) located in Germany, almost fully let on a weighted average remaining lease term of 7.5 years (up from 5.8 years reported 12 months ago). This positive development reflects several lease extensions, with Netto, which accounts for half the rent, extending most of its leases until 2025. These extensions were ahead of lease break, and so any effect on passing rent is not yet visible.

Despite having entered special servicing, the collateral has not been revalued since closing. Fitch believes property values have declined significantly as leases run down and in line with appetite for retail warehouses. The extension to contracted income suggests the portfolio is of higher quality than Treveria, making a recovery in values as sentiment improves more plausible. However, this is unlikely to restore equity in the portfolio, and therefore prospects depend very much on how successful Hatfield-Philips International is in marketing the portfolio (believed to be underway). Fitch believes full repayment is unlikely.

The short time until legal final maturity raises concerns regarding timely recoveries. Underperformance against the disposal strategies in the next 12 months may lead to negative rating action for the senior tranche.

Fitch estimates 'Bsf' recoveries of approximately EUR125m.

No third party due diligence was provided or reviewed in relation to this rating action.

Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

Fitch did not undertake a review of the information provided about the underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

The information below was used in the analysis.
- Loan-by-loan data provided by servicer as at August 2015.
- Transaction reporting provided by servicer as at August 2015.