DBRS Rates TS Lago One GmbH Class A Notes

DBRS Ratings Limited (“DBRS”) has today assigned a AAA (sf) rating to the Class A notes issued by TS Lago One GmbH. (“TS Lago”). The Class B notes are not rated by DBRS.

The transaction is a securisation of German residential, multi-family and to a smaller extent commercial mortgage loans. It originally closed in December 2008. The transaction has significant seasoning at approximately 10 years.

Commerzbank is the servicer of the assets and fulfills a number of other supporting roles in the transaction including swap provider, liquidity facility provider and bank account provider. The transaction is therefore dependent on the performance of Commerzbank in these roles. DBRS have rated Commerzbank on a private basis and Commerzbank have at the time of DBRS rating the transaction a rating that fulfills DBRS methodology

The transaction features a mandatory repurchase agreement, under the terms of which, in March 2016, Commerzbank, as the initial seller, contracts to repurchase from the issuer the assets at a price that can be summarized as principal of the outstanding bonds and any accrued interest. In its analysis DBRS assumes that the mandatory repurchase agreement is not honoured and the transaction’s ability to repay interest when scheduled to do so and pay principal by the legal final maturity is not reliant on the mandatory repurchase agreement.

Similarly, DBRS understands that Commerzbank has previously repurchased from the transaction loans that are more than 90 days delinquent. Commerzbank are under no obligation to purchase loans from the transaction and DBRS assumed that delinquent loans will not be repurchased in the future. In doing so DBRS assumed that defaulted loans will be subject to the foreclosure process and market value declines and those losses will be borne by TS Lago.

DBRS estimated the default probability and Loss Given Default using its European RMBS Master Methodology. Given the seasoning of both the transaction and the underlying collateral, DBRS viewed analysing the performance of the underlying assets in the transaction as being the most appropriate input to establishing the estimate of the 2 year probability of default. In estimating the 2 year probability of default DBRS used the loans that had purchased from the transaction over the previous 24 months as a proxy for defaulted loans.

The valuations provided to DBRS were the Mortgage Lending Values (MLV). The MLV is a conservative German industry standard valuation which is designed to exclude fluctuations in value that are deemed to be short term in nature. DBRS methodology assumes that borrowers’ probability is linked to the amount of equity that they have within their property and typically it is believed that the current loan balance over the market value is an appropriate method of estimating this. Consequently, as the MLV is not a market value, in estimating loan to values that were used as an input into the estimation of probability of default, DBRS estimated a 10% uplift from the MLV.

Furthermore, given the seasoning of the loans in the portfolio, DBRS applied half of the positive indexation between the weighted average origination date and the end of Q3 2012 in estimating valuations of properties.

The transaction consists of loans where an external party may hold have charge over a share of the security property. DBRS was provided with data that permitted the calculation of the most conservative possible interpretation of the valuation and applied that in its analysis.

As mentioned earlier, the portfolio consists of loans backed by residential property, commercial property and multi-family housing. DBRS assumed AAA market value decline of 58% for residential loans and 65% for multi-family loans and commercial loans. The assumed time to recovery for all loans was 30 months.

The transaction does not benefit from any form of reserve fund and unusually, excess spread cannot be used to cover principal losses. Owing to the dynamics of the German market, in particular, the absence of a housing crash prepayment rates are higher than are currently typically seen in other jurisdictions. All other things being equal this will allow credit enhancement to build up as the transaction is sequential paying with no possibility of pro-rata payment if the high prepayment rate persists then all other aspects remaining equal the transaction should build up credit enhancement.

There is, however, a liquidity facility which is available to pay interest on the rated bonds in the event of liquidity shortages.

The ratings are based upon DBRS review of the following analytical considerations:
• The transaction’s capital structure and the form and sufficiency of available credit enhancement. Relevant credit enhancement is in the form of subordination.
• The credit quality of the mortgages backing the notes and the ability of the servicer to perform collection activities on the collateral.
• The transaction parties’ capabilities with respect to originations, underwriting, servicing and financial strength.
• The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the transaction documents.
• The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions.

Notes:
All figures are in Euro unless otherwise noted.

The principal methodologies applicable are:
• Master European Residential Mortgage-Backed Securities Rating Methodology
• Legal Criteria for European Structured Finance Transactions
• Swap Criteria for European Structured Finance Transactions
• Operational Risk Assessment for European RMBS Servicers
• Unified Interest Rate Model Methodology for European Securitisations

These can be found on dbrs.com under Methodologies. For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area”.

The sources of information used for this rating include investor reports and revised documents provided by the issuer. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The final ratings concern existing financial instruments issued in the past.

This is the first DBRS rating on these financial instruments.

For additional information on this rating, please see the linking document.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Alastair Bigley
Rating Committee Chair: Erin Stafford
Initial Rating Date: 19 February 2013