Rating action

Scope Ratings has today placed the BBB_SF rating of Ärztliche Beteiligungsgesellschaft (AEBG) SA – Compartment 2 under review for a possible downgrade.

Transaction overview

The rated instrument is a Namensschuldverschreibung (registered bond) 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 plus 4.90% yearly. Legal maturity is 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.

AEGB SA is a bankruptcy-remote special purpose vehicle under Luxembourg law. The transaction features a portfolio ramp-up until 27 December 2019, financed with tap issuances of further pari-passu bonds.

The latest performance report dated May 2019 indicates no defaults. The credit quality of the reference portfolio remained stable. The weighted average debt-service-coverage ratio (DSCR) increased to 3.5x from 2.6x at last review, and the average loan-to-value (LTV) ratio marginally increased to 45.9%, down from 47.9% at last review.

Since last review, the reference portfolio has seen EUR 132.1m of amortisation, from the repayment of nine reference loans of average credit quality. The reference portfolio will comprise assets from Germany (66.2%), France (30.3%) and the Netherlands (3.5%).

Rating rationale

Scope has placed the BBB_SF rating under review for a possible downgrade due to uncertainties triggered by the recapitalisation of Norddeutsche Landesbank, the parent of the transaction’s account bank and cash collateral holder, Deutsche Hypothekenbank. The recapitalisation has the potential to impair the credit profile of Deutsche Hypothekenbank and, in turn, transaction performance. Deutsche Hypothekenbank continues to have a stable credit profile and no negative impact on the bonds’ rating. Scope maintains and monitors a private rating on the bank.

The performance of the transaction is in line with Scope’s expectations, with no defaults in the reference portfolio to date. The credit quality of the reference portfolio has remained stable. Scope continues to have a stable outlook on the commercial real estate markets in Germany, France and the Netherlands, which reflects positively on property values and refinancing conditions.

Key rating drivers

Counterparty risk. The uncertainty around Deutsche Hypothekenbank, spurred by the recapitalisation of its parent, may adversely impact the transaction’s credit profile.

Other rating drivers have remained unchanged since closing.

Rating-change drivers

A positive conclusion to the ongoing Norddeutsche Landesbank recapitalisation, or the sale of Deutsche Hypothekenbank to a parent with stronger credit quality, might result in a positive resolution of the review.

Other rating change drivers have remained unchanged since closing.

Quantitative analysis and 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’ loan-to-value at maturity. The analysis has also accounted for the amortisation profile, information on each loan and borrower, and available credit enhancements embedded in each of the loans.

Scope has analysed the market value decline associated with the properties securing the loans. Assumptions on property values affect the loans’ probability of refinancing and recovery upon default. Scope’s market-value-decline assumptions are up to 16.9% for Germany, 15.4% for France, and 0% for the Netherlands. These assumptions incorporate a loan’s time to maturity, the current stability of the country-specific market for commercial real estate, and current prices, which, except for the Netherlands, are currently above historical levels and whose recent value gains are subject to a reversion towards long-term historical prices.

Scope has assumed for the outstanding portfolio an average default probability of 11.1% for a weighted average life of 6.3 years. This assumption is based on tenant 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 95.0%. This considers a BBB rating-conditional stress on property market values of 12.2%-21.0%, distressed-sale discounts of 15.0%-20%, liquidation costs of 15.0%-18.5%, depending on the property’s jurisdiction, and an absolute recovery-rate cap of 98.0%, loan by loan.

Scope’s pairwise asset correlations have remained unchanged since closing.

Sensitivity analysis

Scope tested the resilience of the rating against deviations in the portfolio’s tenant quality and the portfolio’s recovery rate. 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 following shows the changes that occur when the portfolio’s tenant quality deteriorates by three notches, and the portfolio’s expected recovery rate reduces by 10%, respectively:

• Sensitivity to tenant-quality assumption, two notches; sensitivity to recovery rates, four notches.

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope has derived the distribution of portfolio losses, with the use of Scope Portfolio Model (Model) Version 1.
This is a synthetic transaction; thus, Scope did not do a cash-flow analysis. The equivalent is the loss-allocation and risk cover release analysis, which considered the amortisation vectors from the assets and took into account the transaction’s main structural features, such as the notes’ priorities of payments, note size and the coupon on the notes. This analysis produces an expected loss and expected weighted average life for the notes.
Scope performed this analysis with the use of Scope Cash Flow SF Model Version 1.
The outcome of the analysis is an expected loss and an expected weighted average life for the instrument.

Methodology
The methodology/ies used for this rating(s), the General Structured Finance Rating Methodology, and the Methodology for Counterparty Risk in Structured Finance are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has not received a third-party asset due diligence assessment/asset audit. No asset due diligence has been conducted, but material misrepresentations will result in protection claims being void.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Sebastian Dietzsch, Director
Person responsible for approval of the rating: David Bergman, Managing Director
The final ratings were first released by Scope on 10 November 2016. The ratings were last updated on 20 September 2017.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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