Scope Ratings has assigned a final rating to the registered bond issued by Ärztliche Beteiligungsgesellschaft (AEBG) SA via its Compartment 2:

Namensschuldverschreibung, EUR 52.0m: assigned new rating BBB_SF

The rated instrument is a Namensschuldverschreibung (registered bond) synthetically exposed to the 6% mezzanine credit risk of a EUR 865.4m commercial real estate loan portfolio originated by Deutsche Hypothekenbank (Actien-Gesellschaft). The mezzanine tranche attaches at 0.7% and detaches at 6.7%. The bond pays a quarterly coupon of three-month Euribor + 4.90% per annum and has a legal maturity on 25 March 2052. The risk transfer is achieved through the issuer’s fully funded bilateral guarantee to Deutsche Hypothekenbank. At closing, the portfolio consists of 92 loans granted to 50 obligors to primarily finance retail, office, and multi-family properties in Germany, France and the Netherlands.

The transaction features a portfolio ramp-up until 25 December 2018, financed with tap issuances of further pari-passu bonds, which will be subject to a rating review.

Ärztliche Beteiligungsgesellschaft SA is a bankruptcy-remote special purpose vehicle under Luxembourg law.

Rating rationale

The rating reflects the legal and financial structure of the transaction; the credit quality of the reference portfolio; the expertise of the originator and servicer, Deutsche Hypothekenbank; and the counterparty risk exposure to the bank.

The registered bond benefits from the structural credit enhancement of 0.7% from subordination and 0.12% of synthetic annual portfolio excess spread. In addition, the bond benefits from the low loan-to-value of the reference commercial real estate portfolio (52%).

The rating is driven by Scope’s stable outlook on the commercial real estate business environment in Germany, France and the Netherlands, which reflect positively on property market values and refinancing conditions.

The rating considers the pro-rata amortisation mechanism implemented in the transaction. This mechanism reduces the outstanding bond notional at risk, but also reduces the credit enhancement available to the bond over time, exposing it to increasing portfolio concentration and single-asset risk. The risk from portfolio concentration is mitigated by the high credit quality of the largest exposures and those with the longest maturities. Credit enhancement more than offsets the expected-loss contribution of the five assets with weaker credit quality, which partially mitigates the exposure to single-asset risk.

The rating is linked to the credit quality of Deutsche Hypothekenbank. The bank holds the bond’s entire collateral in cash without risk-substitution triggers. In addition, the bank is the payer of the guarantee premium under an insurance agreement with AEBG SA – Compartment 2. The issuer uses the premium to fund taxes, senior costs and the interest payments on the bond. In order to analyse counterparty risks. Scope has relied on a private monitored rating on Deutsche Hypothekenbank.

Detailed modelling assumptions are available in Scope's rating report for this transaction.

Key rating drivers

High portfolio credit quality (positive). Scope assumes that the portfolio’s credit quality is commensurate with a BBB+, with a low weighted average loan-to-value ratio at 52%. Loans in the portfolio exhibit low probabilities of failure to refinance and high expected recoveries upon default.

Positive business environment (positive). Scope’s outlook on the commercial real estate business environment in Germany, France and the Netherlands is stable to positive, in particular for the property operations, financing, sale and loan work-out in ‘A’ locations.

Strong originator (positive). Deutsche Hypothekenbank has good experience and expertise in commercial real estate loan origination. Originator and investor interests are well aligned. Deutsche Hypothekenbank retains the junior and senior exposures to the loans.

Strong liquidity coverage (positive). Deutsche Hypothekenbank pays all taxes, costs and the interest on the bond, which eliminates liquidity risk for the transaction.

Asset concentration risk (negative). The pro-rata amortisation of the structure prevents the reference tranche to benefit from credit enhancement build-up from the portfolio’s amortisation. This is partially mitigated by the good credit quality of the assets with the longest maturities.

Counterparty risk (negative). The transaction is directly exposed to Deutsche Hypothekenbank’s credit quality as collateral account bank, without replacement mechanisms. Scope has assigned a private rating to the bank.

Limited property information (negative). The information available to Scope on the individual properties was limited. Related uncertainties about property grades and the average credit quality of tenants have been taken into account in Scope’s assumptions.

Rating-change drivers

Positive. Prepayment of the largest and worst-quality assets in the portfolio would affect the rating positively.

Negative. The rating can be negatively affected if the prepayment of the best assets in the portfolio leave the bond exposed to the remaining low-quality assets without sufficient credit protection.

Negative. A negative migration of the portfolio credit quality or higher-than-anticipated portfolio losses will affect the rating negatively.

Negative. A deterioration of Deutsche Hypothekenbank’s credit quality below BBB would have a direct negative impact on the rating of the registered bond.

Rating sensitivity

Scope tested the resilience of the rating against deviations from main modelling parameters including tenant quality, average recovery rates, and prepayments. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The rating would decrease by two notches if the average tenant quality is decreased to B.

The rating would decrease by nine notches if the recovery rate assumption on the portfolio is reduced by 50%.

The rating would decrease by two notches if the assets with the best credit quality (17 loans accounting for 25.8% of the current reference portfolio) were prepaid immediately.

Methodology

The methodology applicable for this rating is Scope’s General Structured Finance Rating Methodology, published August 2016, and the Methodology for Counterparty Risk in Structured Finance Transactions, published August 2016.

Scope analysts are available to discuss all the details of the rating analysis and the risks, to which this transaction is exposed.

Download the detailed rating report.
 
Regulatory and legal disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013.

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr Stefan Bund, Dr Sven Janssen.
The rating analysis has been prepared by Sebastian Dietzsch, Lead Analyst. Guillaume Jolivet, Committee Chair, is the analyst responsible for approving the rating.

Rating history
The rating concerns newly issued financial instruments, which were evaluated for the first time by Scope Ratings AG. Scope had already performed a preliminary rating for the same rated instrument in accordance with Regulation (EC) No 1060/2009 on rating agencies, as amended by Regulations (EU) No 513/2011 and (EU) No 462/2013.
Instrument; ISIN;  Date;  Rating action;  Rating
Namensschuldverschreibung; 10.10.2016; Preliminary;  (P)BBB_SF

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the issuer of the investment, represented by the management company.
As of the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG nor any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
Offering circular and transaction-related contracts; management due diligence presentation provided by the originator; fundamental property and tenant information provided by the originator; loan-by-loan portfolio information, and legal opinions.
Scope Ratings considers the quality of the available information on the evaluated entity to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.
Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating is “General Structured Finance Rating Methodology”, dated August 2016, and “Methodology for Counterparty Risk in Structured Finance”, dated August 2016. Both files are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Conditions of use / exclusion of liability
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