Scope affirms the BBB_SF rating on the registered bond (Namensschuldverschreibung) issued by Ärztliche Beteiligungsgesellschaft (AEBG) SA via its Compartment 2.

The rating action takes into account the issuer’s proposal to add one new exposure to the reference portfolio and to update the transaction’s capital structure accordingly. This action also considers the increase in instrument size to EUR 62.7m (the ‘proposal’). The proposal will become effective on 26 September 2017, and follows the process outlined in the amended bond purchase agreement (Geänderter Kaufvertrag Namensschuldverschreibungen). Scope has determined that the proposal, will not in and of itself and at this time negatively affect the current rating of the bonds. Scope does not express an opinion as to whether this proposal could have other non-credit-related effects.

Rating rationale

Today’s affirmation reflects the stable credit performance of the reference portfolio as well as the credit quality of the new reference exposure in line with the existing reference portfolio’s average.

The rating is driven by Scope’s stable outlook on the commercial real estate markets in Germany, France and the Netherlands, which supports property values and refinancing conditions.

The credit profile of Deutsche Hypothekenbank Actien-Gesellschaft, account bank and holder of the bonds’ cash collateral, has no negative impact on the bonds’ rating. Scope maintains and monitors a private rating on the bank.

Key rating and rating-change drivers

The rating and rating-change drivers have remained unchanged since the closing date.

Collateral performance

The latest performance report dated May 2017 indicates no defaults. The credit quality of the reference portfolio has slightly improved since the last review: the weighted average debt-service-coverage ratio (DSCR) has increased to 200% from 192%, and the average loan-to-value (LTV) ratio has declined to 46% from 49%.

However, since February 2017, the reference portfolio has amortised by EUR 44.0m, mainly from the prepayment of three assets of above-average credit quality.

The issuer will add a new exposure to the reference portfolio on 26 September 2017. The DSCR of the new exposure is 105%, below the portfolio’s average; its LTV is 73.3%, above the portfolio’s average. After the addition, the portfolio’s country composition will change to 62% for Germany, 33% for France, and 5% for the Netherlands.

Quantitative assumptions

Scope has analysed the reference portfolio loan by loan using a Monte Carlo simulation. For each loan, Scope has assumed i) a specific default probability, inferred from the credit estimate assigned to a loan over its weighted average life, ii) a specific recovery upon default, and iii) asset correlations between the loans. The resulting default distribution and default timing were used to project cash flow, reflecting the transaction’s amortisation and loss-allocation mechanisms, as well as the credit enhancement of the registered bond.

To assess a single loan’s credit quality, Scope has considered the tenants’ quality, the property profile and the loans’ LTV at maturity. The analysis has also accounted for the amortisation profile, information on each loan and borrower, and available credit enhancement embedded in each of the loans.

Scope has analysed the market value decline on the properties securing the loans. Scope has assumed the property values, which affect the loans’ probability of refinancing and recovery upon default. Market-value-decline assumptions are 5-34% for properties in Germany, 5-48% for France, and 5-40% for the Netherlands. These assumptions incorporate a loan’s time to maturity, the current stability of each country’s commercial real estate market, and current property prices, which are currently above historical levels and expected to revert to long-term historical prices.

Scope has assumed for the outstanding portfolio an average default probability of 22.7% for a weighted average life of 8.0 years. This assumption is the result of the tenants’ credit quality and the probabilities of refinancing failure, driven by Scope’s long-term market-value-decline assumptions.

Scope has assumed a rating-conditional average portfolio recovery rate of 96.2%. This considers a BBB rating-conditional stress for the market-value-decline assumptions and accounts for distressed-sale discounts of 15%, liquidation costs of 18.2-18.5% (depending on the property jurisdiction), and an absolute recovery-rate cap of 98% loan by loan.

Scope’s pairwise asset correlations remain unchanged from closing.

Rating sensitivity

Scope tested the resilience of the ratings against deviations of the portfolio’s tenant quality and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The rated instrument’s quantitative result declines by three notches when the portfolio’s tenant quality deteriorates by three notches; by eight notches when the portfolio’s expected recovery rate reduces by 10%.

About the issuer

The rated instrument is a registered bond (Namensschuldverschreibung) synthetically exposed to the 6% mezzanine credit risk of an initially 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 consisted of 94 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.

Methodology

The methodology applicable for this rating is Scope’s General Structured Finance Rating Methodology, published August 2017, and the Methodology for Counterparty Risk in Structured Finance, published August 2017.

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

For more details also refer to the initial rating report for Ärztliche Beteiligungsgesellschaft (AEBG) SA – Compartment 2 - Namensschuldverschreibung, published by Scope 10 November 2016.

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.
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
Namensschuldverschreibung; 10.10.2016; preliminary; (P)BBB(SF)
Namensschuldverschreibung; 09.11.2016; new; BBB(SF)
Namensschuldverschreibung; 21.06.2016; affirmation; 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. The issuer has participated in the rating process.

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; updated loan-by-loan portfolio information as of 31 May 2017, loan-by-loan information on additional assets as of 05 July 2017, quarterly investor reporting (as of 31 May 2017).

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 2017, and “Methodology for Counterparty Risk in Structured Finance”, dated August 2017. The new issue rating report for this transaction contains important information about the rating. All documents 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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