Guide to European CMBS

European CMBS

Guide to

EU6922 Guide to European CMBS COVER v3.qxd 10/03/2006 18:02 Page 1

BARCAP_RESEARCH_TAG_FONDMI2NBUR7SWED

Barclays Capital Securitisation Research 1

Author Hans Vrensen, CFA +44 (0) 20 773 3502 [email protected]

The author would like to thank Mark Nichol, who assisted in the production of this report.

Table of contents Introduction 3

Securitisation process 4

Market overview 8

CMBS conduits 10

Structural market trends 12

Investor base 13

CMBS allocation 14

CMBS is preferred asset class 15

Secondary market liquidity 15

Collateral characteristics 17

Deal structures 22

Performance and monitoring 25

Historical performance 25

Monitoring and expected performance 27

Credit analysis 31

Need for qualitative analysis 32

Assessment of borrower and tenant credit quality 33

Example of credit analysis 35

Analytical packages 39

Rating agency analysis 40

Pricing and relative value 42

Relative value 44

Approach and results overview 45

Appendices 47

European CMBS Issuance since 1997 47

List of published Barclays Capital CMBS research 50

Glossary 51


2 Securitisation Research Barclays Capital

Table of Figures Figure 1: CMBS securitisation process

Figure 2: CMBS cash & security flows

Figure 3: CMBS issuer position

Figure 4: European CMBS issuance (¤ bn)

Figure 5: Current outstanding European CMBS per year of issuance

Figure 6: Annual European CMBS issuance by broad rating category

Figure 7: Annual European CMBS issuance by currency

Figure 8: Annual European CMBS issuance by interest rate type

Figure 9: AAA spreads for European CMBS in 2005 (bp)

Figure 10: 2005 European CMBS issuance by issuer type

Figure 11: Top 10 European CMBS conduit programmes by 2005 issuance

Figure 12: Investor survey respondents by investor type

Figure 13: Investor survey respondents’ portfolio allocation by sector

Figure 14: Survey respondents – ABS sector preferences for 2006

Figure 15: Survey respondents ranking of secondary liquidity (on scale from 1=not important and10=most important)

Figure 16: European CMBS issuance by collateral location – 1997-2004 (left) and 2005 (right)

Figure 17: Moody’s tiering for selected European countries

Figure 18: Position of secured creditor in key European countries

Figure 19: Overview of lease structures in key European countries

Figure 20: Overview of planning environment in key European countries

Figure 21: European CMBS issuance by property type – 1997-2004 (left) and 2005 (right)

Figure 22: European CMBS – Loan and property granularity

Figure 23: 2005 European CMBS issuance by transaction type

Figure 24: Paydown structures in European CMBS issued in 2004 & 2005

Figure 25: Relative size of B notes in European CMBS market

Figure 26: One-year average rating transition for all European ABS and CMBS for 1999-2004

Figure 27: European CMBS loan delinquencies (left) and estimated UK commercial mortgage loss rates (right)

Figure 28: Key analytical criteria in European CMBS transaction types

Figure 29: Levels of CMBS analysis

Figure 30: BBB LTV for European CMBS by transaction type

Figure 31: BBB DSCR for European CMBS by transaction type

Figure 32: Risk profile by tenant Delphi score bands as a percentage of rent passing

Figure 33: Overview of score motivations for German and Austrian CMBS

Figure 34: Key criteria and overall score for German and Austrian CMBS

Figure 35: Comparison of recent German & Austrian CMBS transactions

Figure 36: Outstanding European CMBS rated per rating agency

Figure 37: CMBS rating process

Figure 38: Split ratings in European CMBS

Figure 39: European CMBS issue spreads (bp) in 2005

Figure 40: European CMBS issue spreads (bp) 2003-2005


Figure 42: CSWA spreads (AAA-BBB rated) against average of ranked risk indicators

Figure 43: A schematic representation of the components of ABS

Figure 44: Spreads and summary of risk indicators by sector

Figure 45: Spreads and summary of ranked risk indicators by sector



Introduction This guide aims to provide a comprehensive introduction to European Commercial Mortgage Backed Securities (CMBS). It targets those investors with a general understanding of fixed income markets but which have not had substantial previous exposure to European CMBS.

CMBS are debt securities where the bond’s payment of interest and principal depends on the cash flow generated by a single commercial mortgage loan or a pool of commercial mortgage loans, each ultimately secured by a single or larger number of commercial properties.

CMBS are typically listed on a recognised stock exchange and rated by at least one or more rating agencies. Most CMBS investors are fixed income investors, who might consider CMBS as one sector of the overall Asset Backed Securities (ABS) market, which also includes other sectors, such as Residential Mortgage Backed Securities (RMBS), Credit Card ABS and Auto Loan ABS. European CMBS issuance has been growing strongly in the last two years. In most cases, a CMBS transaction will have multiple tranches of bonds at different rating levels, similar to other ABS deals. The majority of European CMBS are floating rate notes (FRN), where the interest is based on a fixed margin and a floating benchmark interest rate, such as 3 mth Libor.

European CMBS has become increasingly attractive to a broader range of investors, due to relatively good spreads, the lack of any note-level defaults to date and the low number of loan level delinquencies.

This guide consists of seven sections. We start with an introduction as to how CMBS is created by looking at the securitisation process. Secondly, we focus on a general CMBS market overview, which explores the investor base, before looking in more detail at collateral characteristics and differences among European jurisdictions. Next, we consider deal structures and certain aspects of CMBS structuring. In the fifth section, we review historical performance to date and analyse different levels of monitoring to project future performance. Sixth, we describe approaches to CMBS credit analysis. Finally, we review historical pricing and describe the results from our recent relative value analysis.

Intro to European CMBS

CMBS are backed by commercial mortgages

CMBS is a growing sector in the overall

ABS market

CMBS is increasingly attractive to a broader

range of investors



Securitisation process CMBS securities are created in a securitisation process, which has three distinct phases and a number of relevant players. We first introduce the transaction parties and after that explain the three phases in the process.

The main transaction parties are listed and briefly described below:

� Borrower(s) is/are the owner(s) of commercial properties looking for debt finance to enhance their overall returns.

� The lender originates a commercial mortgage loan to the borrower and in return provides security to the lender, which typically includes a registered mortgage.

� The arranger structures the CMBS transaction, coordinates the rating process and determines the final loan collateral pool.

� The issuer is typically a newly formed special purpose vehicle (SPV) that issues the CMBS notes to the investors and buys the collateral loan pool from the originator.

� Investors are the ultimate holders of the CMBS bonds and beneficiaries of any security provided by the borrowers or other transaction parties.

� Other players include the rating agencies, placement agent, servicers, liquidity facility provider, swap provider and security trustee, which each play significant supporting roles in the process.

Figure 1: CMBS securitisation process

Pool ofCommercial Mortgages

IssuerSPV

Borrowers

Lender Arranger RatingAgencies

PlacementAgent

Tenants

OriginationPhase

Structuring & IssuancePhase

Holding & Trading Phase

AA/Aa2

BBB/Baa2

AAA/Aaa

A/A2Investors

Trustee

LiquidityProvider

Servicer


IssuerSPV

Borrowers

Lender Arranger RatingAgencies

PlacementAgent

Tenants

OriginationPhase

Structuring & IssuancePhase

Holding & Trading Phase

AA/Aa2

BBB/Baa2

AAA/Aaa

A/A2

AA/Aa2

BBB/Baa2

AAA/Aaa

A/A2Investors

Trustee

LiquidityProvider

Servicer

Source: Barclays Capital.

As can already be deduced from the above description of the role of the individual transaction parties, the three distinct phases in the securitisation process are:

1) The loan origination phase involves the agreement of loan terms between the borrower and the lender, including interest rate, amortisation, financial and other covenants and the loan security package. With most CMBS, there will be more than

Main parties include borrower, lender,

arranger, issuer and investor

Three phases in securitisation process:

1) origination;

2) structuring & issuance;

3) holding & trading



one loan included in the collateral pool and this phase can be time-consuming as the lender builds up a pool of loans.

2) The structuring and issuance phase consists of the legal structuring of the CMBS transaction itself, including the rating of the individual tranches of notes. The rating analysis determines the ratings of the proposed capital structure or size of the tranches for certain desired rating levels. This tranching has a significant impact on the cost of funding for the issuer, as will be discussed later. Also, the marketing to potential investors and the ultimate pricing and sale to investors by the placement agent takes place. The proceeds from the sale of the notes will be used by the issuer to purchase the loan pool from the originator.

3) During the holding and trading phase, the CMBS investors receive interest and principal on the notes as well as on-going reporting on the performance of the transaction from the servicer. The investors can also trade the CMBS in the secondary market. In the case of cash flows from the loan pool being insufficient to pay debt service on the notes, liquidity will be provided to keep the notes current and avoid default. In the event of default, the security trustee will enforce on the security package and recover the value of the properties on behalf of the note holders.

Please see Figure 1 for a schematic overview of the process.

Figure 2: CMBS cash & security flows

Borrowers Lender/Servicer

IssuerSPV Investors

LiquidityProvider

RentsLoan

amountPurchaseamount

NoteProceeds

I&P on Notes andSecurity Package

I&P on Loans andSecurity on Props

Loan Pool andI&P on Loans

Tenants

Borrowers Lender/Servicer

IssuerSPV Investors

LiquidityProvider

RentsLoan

amountPurchaseamount

NoteProceeds

I&P on Notes andSecurity Package

I&P on Loans andSecurity on Props

Loan Pool andI&P on Loans

Tenants


We can highlight the same phases from a cash flow perspective:

1) Loan origination phase – the lender provides the loan amount to the borrower, who will be obliged to pay interest and principal (if any) on the loan. Also, the borrower provides security on the properties to the lender.

2) Structuring and issuance phase – investors provide the issuer with the note proceeds in return for interest and principal on the notes and the note security, which will be held by the trustee on behalf of the investors. The issuer uses the note proceeds to purchase the loan pool, including the security from the lender.

3) Holding and trading phase – tenants pay rent to owners of property, who are borrowers in CMBS transactions. Borrowers pay interest and principal to the servicer, who collects these for and passes them on to the issuer. The servicer, in turn, pays interest and principal on the notes to the note holders on behalf of the issuer.

Please see Figure 2 for a schematic overview of the flows.

The process can be highlighted by following

cash flows and security provided



It might be useful to consider one more angle, namely the net effect of the securitisation on the position of the issuer. Simply put, the issuer can be viewed as an entity with assets and liabilities. The issuer also benefits from external supports, such as the liquidity provider. The assets consist of the pool of commercial mortgage loans, which pay interest and principal. It should be noted that not all loans in the pool will be exactly the same; some might be of better credit quality than others.

The liabilities of the issuer are principally the CMBS notes, which require interest and principal to be paid on them. The ratings are monitored by the rating agencies. The issuer also has other expenses, which mainly involve the service fees from parties that provide supporting services to the securitisation. As implied by the credit ratings, not all CMBS notes are the same either. The highest rated notes (AAA/Aaa) have the lowest credit risk and will be only be allocated any losses in the last instance. The lowest rated notes (BBB/Baa2 in our example) are exposed to the highest credit risk and will suffer losses first.

Therefore, higher-rated notes typically have lower spreads than lower-rated notes. Consequently, it is more cost effective for the issuer to issue as much AAA-rated paper as possible. The rating agencies’ role is to determine appropriate sizing of each of the tranches to match the risk profile of the assigned ratings. Therefore, there might be some built-in room for discussion between the rating agency and the arranger as what is the right capital structure for the transaction. In our section on risk analysis, we discuss this in greater depth. Please see Figure 3 for a schematic overview of the process.

Figure 3: CMBS issuer position


IssuerSPV

Assets Liabilities

I&P I&P

Risk/Loss

Lowest/Last

Highest/First

AA/Aa2

BBB/Baa2

AAA/Aaa

A/A2

RatingAgencies

LiquidityProvider


IssuerSPV

Assets Liabilities

I&P I&P

Risk/Loss

Lowest/Last

Highest/First

AA/Aa2

BBB/Baa2

AAA/Aaa

A/A2

AA/Aa2

BBB/Baa2

AAA/Aaa

A/A2

RatingAgencies

LiquidityProvider


Finally, we would like to draw attention to the different security arrangements. Given that Europe consists of individual countries with different legal systems and legislative environments, there is no uniform security structure in European CMBS transactions. The enforcement process differs by jurisdiction and is also subject to change as new laws are passed. Within Europe, the UK and the Netherlands are considered to be the most creditor-friendly countries. This will be further discussed in the collateral section.

On the loan level, the security can include all or a selection of the following: (registered) mortgage or fixed charge over the property, charge over the lease contracts, pledge over the borrower’s shares and pledge over the borrower’s bank accounts.

On the note level, the security can include all or a selection of the following: assignment of loan level security, reps and warranties from the lender, assignment of rights under liquidity and other securitisation contracts, charge over issuer bank accounts and a floating charge over any remaining issuer assets.

Issuer has assets and liabilities

Liabilities are differently rated CMBS notes

More highly rated CMBS notes will reduce the

issuer’s costs

Security package and procedures can differ

per deal and jurisdiction



We do not discuss swaps in this report, since these can be fairly involved. We believe it is sufficient to highlight the need for fixed to floating rate and certain currency swaps depending on the situation to protect CMBS investors from interest rate and currency fluctuations. Investors should also consider the rating of the swap counterparty, swap breakage costs and their priority in the payment waterfall.



Market overview The European CMBS market saw approximately ¤125bn of new issuance in the period between 1995 and 2005 through 196 different transactions (please see Appendix 1 for a complete list). Annual issuance has grown rapidly to ¤40.7bn from 63 deals in 2005, which more than doubled 2004’s level of ¤19.4bn, achieved through 33 transactions. The 2005 CMBS issuance total represents a new annual record for the sector, as illustrated in Figure 4.

Figure 4: European CMBS issuance (¤ bn)

0

5

10

15

20

25

30

35

40

45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20050

10

20

30

40

50

60

70Issuance (LHS)

Transactions (RHS)


The European CMBS market makes up only 11% of the commercial mortgage lending market. Unsurprisingly, this figure is higher for the UK, at 25%, since it has been the dominant jurisdiction in European CMBS for many years. We estimate these market shares by taking the Barclays Capital estimate of current outstanding CMBS, and dividing it by the total commercial property mortgage debt in Germany, the UK, France, Italy and the Netherlands, as estimated by DTZ Research. Both the 11% and 25% figures are well below the US average, which is believed to be between 35% and 40%. In other words, the UK, but especially continental European CMBS, have good prospects for expanding their share of the commercial mortgage market.

Figure 5: Current outstanding European CMBS per year of issuance

20036%

200211%

200416%

200552%

19990%

200010%

20015%


Issuance reached a new record high of ¤40.7bn

in 2005, double that of 2004

CMBS’s relatively low market share of the

commercial mortgage market leaves room for

further growth



As a result of the strong issuance growth and due to pre-payments on existing deals, the percentage of total outstanding issuance from the last three calendar years amounts to 74%, as illustrated in Figure 5.

Figure 6: Annual European CMBS issuance by broad rating category

0

5

10

15

20

25

30

35

40

45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Other

Sub BBB

BBB

A

AA

AAA


AAA issuance in European CMBS has constituted 65% of total issuance since 1995, with AA making up a further 16%, A at 11% and BBB 6%. The annual issuance per broad rating category is shown in Figure 6. In 2005, we saw higher-than-average AAA issuance at 74% of total, mostly compensated by lower AA (9%) and A (8%) issuance.

Euro area investors that are restricted from investing in GBP-denominated bonds were frustrated by the limited issuance of euro-denominated CMBS during 2005. Total euro-denominated CMBS issuance in 2005 was ¤12.1bn, or 29% of total European issuance, as shown in Figure 7. This explains to some extent the relative tightening of euro-denominated spreads during 2005, which we will discuss later in this report.

Figure 7: Annual European CMBS issuance by currency

0

5

10

15

20

25

30

35

40

45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Other

USD

EUR

GBP


Fixed rate CMBS investors were also frustrated in 2005 despite the record volume of overall issuance. This was due to the extremely limited amount of fixed rate issuance, with only £595mn of total fixed rate CMBS issuance in 2005 from two UK transactions, as shown in Figure 8.

74% of current outstanding CMBS was issued in the last three

years

AAA-rated issuance was 74% in 2005, above the

historical average

Issuance by currency: euro-denominated

issuance was only 29%

Only £600mn in fixed rate issuance in 2005



Figure 8: Annual European CMBS issuance by interest rate type

0

5

10

15

20

25

30

35

40

45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Other

FIXED

FLOATING


The spreads for different maturities in European CMBS, as illustrated in Figure 9, indicate a moderate upward slope in 2005, which seems consistent to some degree with the inverted yield curve in gilts. We discuss historical spreads in more detail in the final section of this guide.

Figure 9: AAA spreads for European CMBS in 2005 (bp)

0

10

20

30

40

50

60

0 1 2 3 4 5 6 7 8 9 10 11Weighted Average Life


CMBS conduits As illustrated in Figure 10, 2005 was the year in which CMBS conduit programmes came into their own. Issuance from the 17 different CMBS conduit programmes provided ¤23.8bn in issuance, or 59% of total issuance in 2005. It should be noted that European CMBS conduit transactions still include numerous deals that have only a single borrower as opposed to many loans. Over one-third of 2005 conduit transactions were single borrower transactions.

AAA-spreads moderately higher for

longer maturities in 2005

Conduits accounted for 59% of issuance in

2005, but many still have only one borrower



Figure 10: 2005 European CMBS issuance by issuer type

Conduit Deals59%New Issuers

19%

Repeat Issuers8%

Taps & Refis14%


We note that the trend of having multiple loan contributors in CMBS transactions continued from 2004 into 2005, with four different transactions (Cornerstone Titan (2), Ursus EPC and European Prime Real Estate No.1) in 2005. Joint-contributor deals are also likely to grow in 2006, although we could see a shift in contributor banks, from London-based ones to include more continental European banks and/or UK building societies.

Figure 11 illustrates that there were 17 CMBS conduit programmes in Europe at year-end 2005. 10 issued 2 or more deals during 2005. Also, 7 out of 17 issued for the first time in 2005. Looking forward, we would expect more banks to announce CMBS conduit programmes, including in the UK and France. It is positive for investors, that CMBS conduits deal structures can be expected to be more uniform, reducing the analytical time required.

Figure 11: Top 10 European CMBS conduit programmes by 2005 issuance

Rank Conduit name Sponsor No. of deals Euro issuance

1 Opera Finance Eurohypo 6 4.7bn

2 DECO Deutsche Bank 4 2.5 bn

3 ECLIPSE Barclays Capital 4 2.3bn

4 Titan (Cornerstone) CSFB/GMAC 3 1.8bn

5 Windermere Lehman Brothers 2 1.7bn

6 Real Estate Capital Rothschild 2 1.7bn

7 Talisman ABN-AMRO 2 1.3bn

8 EPIC Royal Bank of Scotland 2 1.2bn

9 ELoC Morgan Stanley 2 1.1bn

10 Taurus Merrill Lynch 2 0.9bn

Seven Others 7 4.9bn

Total 36 23.8bn


As can be derived from Figure 10, repeat issuers accounted for 8% of total 2005 issuance, including names such as ProLogis via its Pan-European Industrial Properties programme, the Business Mortgage Finance programme and the BBC, with its White City securitisation. Furthermore, two (former) UK building societies were also repeat issuers through Sandwell Commercial Finance No. 2 and Dolerite Funding 2. New issuers, which accounted for 19% of 2005 issuance, included 14 different names, mostly fund managers and sophisticated property owners. In 2005, new issuers included a wider range of jurisdictions than in previous years, with French and German borrowers.

Four multi-contributor deals in 2005, more

expected in 2006, but perhaps with different

contributors

Conduit repeat issuers can save investors time

by having more structural

standardisation



Finally, taps and refinancings accounted for 14% of 2005 issuance. The market saw two large refinancings of existing CMBS transactions through issuance from new CMBS issuers, via the £2.1bn Broadgate Finance and the ¤1.3bn Vesteda Residential Funding II transactions. There were also two taps and one restructuring of existing securitisations. The taps came from the £185mn Trafford Centre and £400mn Land Securities programme. The restructuring was the Canary Wharf II transaction, combining the two existing CMBS transactions, changing the collateral properties and adding net new issuance of £225mn. There were two synthetic transactions in 2005 and no credit tenant lease transactions.

Structural market trends In this section, we discuss four recent developments that are affecting the European CMBS market structure:

1) Firstly, cash flow modelling for CMBS transactions has become more widely available, via third-party vendors such as Trepp and Intex. Despite some persistent control issues with regards to disclosure of these models, we are optimistic that the industry will put these self-imposed restraints aside and allow public access to the modelling information. These improvements will facilitate more and easier secondary trading. Trepp and Intex have already made great progress in Europe, but we expect 2006 to be the year in which they will resolve some of the impediments to their growth in providing sophisticated, consistent and widely available CMBS cash flow models to European investors.

2) The second structural market development is the emergence of an active and responsible industry organisation with CMSA-Europe. CMSA, which successfully organised its first European conference in Brussels in October, has launched new activities and expanded its existing initiatives, benefiting the CMBS sector during 2005. In particular, the launch of the Investor Reporting Package, which provides issuers, servicers and investors with a market standard template for reporting information on European CMBS, will prove very useful, in our view. We note that some issuers already refer to this standard in the offering circular and are hopeful that more issuers follow suit. This standard is already widely accepted in the US CMBS markets.

3) With regards to the public disclosure of investor reports, the CMSA and the European Securitisation Forum (ESF) have recently formed a joint task force to address issues relating to the Market Abuse Directive. Some issuers, such as Eurohypo, have taken a leadership role in this area, by making the investor reports for the Opera Finance transactions publicly available. Apart from making it easier for investors to analyse a large number of complex transactions, the third-party cash flow models in combination with the increased transparency will facilitate more secondary trading. Secondary trading has certainly been hindered in the past by a lack of available information on transactions.

4) We expect the development of a number of synthetic CMBS indices that would allow arrangers to hedge away the risk of spread widening after loan origination, but prior to closing. This will provide CMBS lenders with further cost efficiencies. Also, we anticipate that the use of this index will provide a stepping stone for the introduction and acceptance of credit default swaps (CDS) on individual CMBS names to allow investors a wider range of trading strategies. This also makes sense in light of the historically low spreads, where demand for protection may be more prevalent than before. Please refer to Asset-backed CDS in Europe: Next step for European ABS market.

Overall, we believe that these structural developments bode well for further issuance growth and secondary trading of European CMBS paper in 2006 and beyond.

Cash flow models available on more deals

and expected to become more widely available…

… Industry organisations setting

standards in data disclosure…

… and discussing extent of public disclosure…

… and introduction of synthetic CMBS index

expected to be stepping stone for CDS of ABS

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Investor base The investor base for European CMBS has broadened to include a wider range of different investor types from an increasing number of countries, including Japan, the US and Australia. The traditional bank investors were motivated to invest in CMBS as a way to gain exposure to commercial mortgages without the costs of setting up an origination and servicing infrastructure. The newer CMBS investors are more motivated by relative spread and risk diversification. We will expand on the attractiveness of CMBS compared to other ABS sectors, in the final section on relative value.

In November 2005, Barclays Capital carried out a survey of 50 ABS investor clients. This included many CMBS investors. Our 50 survey respondents are representative of the European ABS investment market as a whole, given their geographic location, size of their ABS portfolios and type of investor, as illustrated below.

� 25 respondents from the UK and 25 respondents from a further 10 different continental European countries.

� The estimated size of the European ABS portfolio of the 50 respondents combined is over ¤170bn, which represents 28% of the entire European ABS portfolio. The average respondent’s European ABS portfolio is ¤3.4bn, with the largest portfolio over five times this average and the smallest at approximately 2% of this average.

� The four main investor types include banks, fund managers, structured vehicles and others, and are all well represented, as illustrated in Figure 12. It should be noted that a number of survey respondents have activities in more than one investor category. For example, a bank might, in addition to its own investments, manage an ABCP conduit or a SIV.

The survey focused on many other topics, such as growth plans and portfolio restrictions, which are beyond the scope of this guide. We refer interested readers to European ABS investor survey results, dated 12 December 2005.

Figure 12: Investor survey respondents by investor type

Fund Managers39%

Banks32%

Structured Vehicles25%

Others4%


We highlight that based on our survey, the traditional bank investors might no longer be the largest category of ABS investors. The fund managers category includes a wide range of investors, such as pension funds, hedge funds, life insurance funds, general fixed income funds, dedicated ABS funds, money market funds and leveraged credit arbitrage funds.

Our 50 survey respondents are

representative of the European ABS

investment universe

Traditional bank investors no longer

largest ABS investor category

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CMBS allocation When asked about their global ABS portfolios, our respondents’ total amounts to over ¤250bn, of which approximately 68%, or over ¤170bn, is allocated to European ABS. The respondents’ global ABS portfolio is allocated to various ABS sub-sectors as shown in Figure 13. Even though it is not entirely comparable, our survey respondents’ allocation broadly matched the European ABS sector breakdown, with some exceptions. Allocation to Consumer ABS and Other ABS exceeds the European ABS universe percentages. This is due to allocations to US credit card and US student loans, which are popular with European investors. Also, the allocation to whole business (WBS) is less than half of the universe percentage. This might be due to an under-representation of fixed rate investors in our survey.

Figure 13: Investor survey respondents’ portfolio allocation by sector

RMBS52%

Consumer ABS15%

CMBS11%

WBS4%

Other18%


Unsurprisingly, our respondents’ sector

allocation broadly matched the European

ABS universe



CMBS is preferred asset class Finally, we look at what asset types European ABS investors prefer to see more supply of. The surprise here was that there were many different answers. When we categorised the responses, we excluded non-specific responses such as more BBB or more cheaper assets, etc. This resulted in having 35 responses, some of which included multiple sectors and more specific asset types than others.

Figure 14: Survey respondents – ABS sector preferences for 2006

26%23%

13%11%

9%6% 6%

4%2%

0%

5%

10%

15%

20%

25%

30%C

MBS

RM

BS

Con

s A

BS

CD

O/C

LO

WBS

SME

Esot

eric

s

Hom

eEq

uity

Stud

ent

Loan

s


As presented in Figure 14, the survey responses support further growth in CMBS and RMBS, with 26% and 23% of respondents, respectively, specifically mentioning these sectors as those in which they would like to see more supply. We refer also to our relative value analysis at the end of this guide, which concludes that European CMBS presents good relative value for investors as of year-end 2005.

Secondary market liquidity One of the most frequently discussed topics in European ABS is the limited amount of secondary trading. The main reason given is typically that European ABS investors are mostly buy-and-hold investors. When asked in our survey whether this was indeed the case, 84% of respondents responded in the affirmative. As a percentage of their overall ABS portfolio, 88% of ABS assets were acquired in the primary market. This implies that the large survey respondents are slightly more likely to be buy-and-hold investors than the smaller ones.

With 12% of ABS assets bought in secondary, this accounts for ¤20bn for our survey respondents. Since our survey respondents account for 28% of the overall universe, we can assume that they also represent 28% of secondary trading. Based on that, we estimate total European ABS assets acquired via secondary trading at approximately ¤73bn.

However, when we asked how important secondary market liquidity was, the responses were a bit different from what might have been expected from buy-and-hold investors. On a scale of 1 to 10, 10 being the most important, a majority of respondents scored secondary market liquidity 7 or higher. The exact breakdown is provided in Figure 15.

What ABS sectors would investors like to see

more supply of?

CMBS and RMBS are most preferred

ABS sectors

84% of respondents are buy-and-hold investors, with on average 12% of

assets acquired in the secondary market

Secondary trading estimated at ¤73bn

Despite being mostly buy-and-hold, investors

think liquidity is important



Of course, many respondents mentioned that even though they might not use it, it would be nice to know it is there. However, some investors might be frustrated by the lack of freely available performance data in certain sectors, such as CMBS, which makes it very difficult to get bids from any other dealer than the one that originally brought the deal to market. When these data restrictions are resolved, we expect an increase in secondary trading in these ABS sectors.

Furthermore, with the expansion of the European ABS investor base, we would expect structured investors and fund managers to become even more prevalent. These investors might be expected to trade more actively than the traditional bank investors. If this bears out, we would expect a decrease in the number of buy-and-hold investors in European ABS. Overall, we are positive on the growth of secondary market trading in European ABS as some of the impediments fall away and investors perhaps become more active traders.

Figure 15: Survey respondents ranking of secondary liquidity (on scale from 1=not important and10=most important)

13%

8%

13%

36%

31%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1-2 3-4 5-6 7-8 9-10


Perhaps some investors have been unable to

trade effectively due to lack of data

Broadening of investor base might bring more active traders into the

sector



Collateral characteristics The dominance of the UK in the European CMBS markets continued in 2005, with 73% of total issuance. Non-UK jurisdiction issuance, at 27%, was slightly below the long-term average of 29%. Please refer to Figure 16. The single jurisdiction that showed the strongest growth was Germany, accounting for 10% of total issuance, with a number of true sale conduits and multi-family property portfolio transactions and one synthetic transaction.

Figure 16: European CMBS issuance by collateral location – 1997-2004 (left) and 2005 (right)

UK71%

The Netherlands

5%

France7%

Germany2%

Italy3%

Spain3%

Sweden3%

Other6%

UK73%

The Netherlands

6%

France2%

Germany10%

Other3%

Spain2%

Sweden1%Italy

3%


At this point, it might be useful to highlight the differences that exist in Europe. Each country has different property, tax and lease laws and customs. Since tax is an especially complex area, we will not discuss it here. Instead, we focus on the differences in three areas that can have a significant effect on CMBS investors:

1) security enforcement procedures;

2) lease agreements;

3) planning process.

The manner in which security is provided and enforced, and bankruptcy is administrated varies widely among European jurisdictions because the legal environment and procedures involved differ. This is especially relevant for CMBS transactions because they are secured by commercial property assets, which are, subject to the laws, regulations and customs of the market in which they are located. Differences between European collateral security and bankruptcy regimes result in variations in likely recovery on mortgage loans. The rating agencies’ recovery rate assumptions, therefore, differ per jurisdiction of the location of the properties. Moody’s organises countries into tiers based on the features of their respective collateral security and bankruptcy regimes, so that locations with similar features would be grouped together into the same tier, as illustrated in Figure 17.

Continued dominance of the UK with 73% of

issuance, but Germany increased to 10%

We highlight differences in Europe in

enforcement procedures, leases and

planning regimes



Figure 17: Moody’s tiering for selected European countries

Tier Countries

A UK and Netherlands

B Germany, Ireland, Switzerland and Sweden

C France, Belgium and Spain

D Italy, Greece and Portugal

Source: Moody’s Investors Service.

The tiers are denominated by the letters A to D, with Tier A comprising locations that offer what Moody’s views as the optimal legal environment for secured creditors. The organisation of the various countries into tiers highlights the comparative differences between their respective collateral security and bankruptcy regimes. Figure 18 provides further background and support as to the tiering of some of the key countries. We note that changes to laws could affect this. Finally, the differences between creditor-friendly countries, such as the UK and the Netherlands, and debtor-friendly countries, such as Italy, can be discerned. However, many other countries have laws that are not consistently debtor- or creditor-friendly but are somewhere in between the two extremes.

Figure 18: Position of secured creditor in key European countries

UK Germany France Italy

Formal Stay Period Limited Yes Yes Yes

Management retained No Yes Yes Yes

Limited restructuring No Yes No No

Creditors can initiate proceedings Yes Yes Yes Yes

Priority upon Liquidation Yes Yes No No

Ability to act unilaterally Yes Yes No No

Ability to enforce security Yes Yes No Yes

Ability to control process Yes No No No

Ability to ignore other creditors Yes Yes No No

Source: Moody’s Investors Service.

In the case of lease agreements, we note differences for the six key European jurisdictions (UK, France, Germany, Italy, Spain and the Netherlands) in Figure 19. The most important differences for CMBS investors are the length of the leases, renewal rights and rent adjustments during the lease term. In this respect, we refer to Do lease structures impact property cash flow stability?, dated 9 May 2005, in which we conclude that despite the differences in office lease structures in London and Paris, the cash flow stability is not that much better for the UK upward-only rent-review lease compared with the 3-6-9 French lease.

Furthermore, we considered differences in the planning regimes of key countries with regard to the relevant legal environment, authorities, process and timing involved. These differences are highlighted in Figure 20.

The UK and the Netherlands are the

most creditor-friendly countries in Europe




Barclays Capital Securitisation Research

19

Figure 19: Overview of lease structures in key European countries

Rent payable every

Typical lease length

Statutory right to renew the

lease

Frequency of rent reviews

Frequency and basis of

indexation of rent

Lease disposal – Early

termination rights

Rents – Exclusions

Letting Agent's fees (as % of first year’s rent)

Local tax (as % of annual rent)

VAT (as % of annual rent)

Restriction on ownership of property by foreigners

UK Quarter 10-15 years Yes 5 years (upwards only)

Annual (but indexation

rare)

Via break clause only

Service charge, utilities

10% Property tax (variable)

17.5% (where landlord opts

to tax)

No

Germany Month 5+5 years No Rare Triggered by changes in cost of living index


Service charge, parking, VAT

20-25% Property tax (variable), typically

included in service charge

16% (where parties opt to

tax)

No

France Quarter 3/6/9 years or fixed term of 6, 9 or 12 years

(offices), 9 years (shops)

Yes None Annual by agreement

(cost of construction

index)


Service charge, utilities,

parking, on site corporate restaurant

15-30% Property tax (depends on location and

type of premises) +

additional tax in Île de France

(depends on class of

premises)

20% No

Italy Quarter 6+6 years Right to renew after first term,

but not subsequently,

if given the correct notice

by landlord

None Annual (75% of index)


Service charge, utilities

10-15% None 20% (where landlord is

liable for VAT)

No

Spain Month 3-5 years No 3-5 years Annual Via break clause only

Service charge, utilities,

property tax

8.5-10% (typically paid by landlord)

Property tax (landlord

obligation but typically

passed onto tenant)

16% No

Netherlands Quarter 5-10 years (trend towards shorter period)

No (office & industrial) Yes

(shops)

None Annual Via break clause only

Service charge, VAT, fitting

out

14-16% Property tax (depends on

location)

19% (where parties opt to

tax)

No

Source: DTZ Research.


20 Securitisation Research

Barclays Capital

Figure 20: Overview of planning environment in key European countries UK Germany France Italy Spain Netherlands Principle legislation/ code

The Planning and Compulsory Purchase Act 2004 received Royal Assent in Spring 2004 and came into force in September 2004.

Building regulations are set by the individual (state) and lay down technical requirements of the building and the building site.

The comprehensive code of French planning law is set out in the Code de l’Urbanisme. National town planning regulations (Règlement National d’Urbanisme – RNU) affect construction siting and servicing, The Construction and housing codes (Codes de la Construction et de l’Habitation) are essentially national technical building regulations.

Laws governing planning and building regulation have been decentralised to the regional authorities. However, each regional law must conform to the general principles established by state framework legislation.

The planning framework comprises the Law on Land Regime and Valuations 1998 (Ley sobre Régimen de Suelo y Valoraciones 6/1998) and the regional Development Acts (Leyes Urbanisticas) – all autonomous regions now have a degree of law-making power.

The Town and Country Planning Act 1985 (Wet op de Ruimtelijke Ordening) sets out the framework while the Housing Act 1982 (Woningwet) is the legislative instrument for the building permit. Other key elements are the Building Decree of the state (Bouwbesluit) and municipal building regulations (Bouvwverordening).

Planning authority

The planning department of the local authority (these are districts, borough councils, unitary authorities or regional development agencies (depending on location)).

Building regulation and planning decisions are made at the municipal level (Gemeinden – 16,000 in number), by the Baugenebmigungsbeborde (local building permission authority).

An application for a building permit (permis de construire) is made to the municipal authority (commune). If the project involves risks to the neighbourhood or environment, the district authority (department) may consider the application instead.

Planning permission and other permits are issued by the planning department of the town council (comune), headed by the elected officer for town planning (assessore).

The planning department of the municipality takes responsibility for regulating land use and granting planning licences (licencia urbanistica).

Planning decisions are made at the level of the municipal council (Gemeenteraad) through the town hall. Applications for development are made to the local executive (burgemeester en wetbouders) of the municipality.

Planning consent required

Planning permission is required for all ‘development’. This includes building, subdivision, extensions, change of use (from one class to another), engineering works, mining and the erection of certain advertisements. Some works do not constitute development. Improvements which do not materially affect the external appearance of the building are expressly permitted. Similarly, if a property undergoes development which does not result in a change of use (as specified in the Use Classes Order 1987), planning permission is not required. Generally, a proposal will be permitted of, on balance, it meets the policy objectives of the local development plan.

Planning permission and a building permit is required for new build, constructional changes and changes to use of any building structure (for example, industrial space to office space). Building regulations (Bauordnungen) of the states (Bundesländer) list the proposals which do not require planning permission. Originally only minor works were exempt but since 1990 housing proposals are exempt from permission provided they conform with proposals of the B-Plan (binding land use plan of the local authority). In these cases, only notification of the proposal to the building control authority may be required. Note: there is considerable variation between the states in this regard.

A permis de construire is the principal permit required for a range of building activities, including construction, exterior alteration, change of use and increase in size. However, engineering works (laying of pipelines and cables) and very minor works do not require a permit as such. Other permits exist for certain types of activity, such as demolition permit (permis de démolir) and the subdivision permit (permis de lotir). Consent has to be given if the proposal conforms to both the national town planning regulations and the general land use plan of the commune (Plan d’Occupation du Sol – POS).

Planning permission (Permesso di Costruire), which must be accompanied by a determined amount of money, is required for new buildings, external alterations and extensions, restoration and for any material change in the use of any buildings. Planning permission is also required for demolition works, mining, quarries excavation, deposit of waste material and sewage disposal. Planning consent should normally be granted, provided the proposal complies with the general town plan (piano regolatore generale) and the relevant building regulations (regolamento edilizio).

Planning permission is required for earth moving and plot marketing, new building and construction, demolition, change of use and modification of the structure or external aspect of the building. Only minor alterations, interior work (such as painting and papering) and large public works carried out by the state do not require permission. The licencia urbanistica is the main permit; though other permits exist for subdivision, change of use and demolition works. The proposal must comply with the building regulations and zoning requirements of the local plan (planes generales de ordenarión urbana – PGOU) or, more generally, be in respect of pre-defined ‘developable’ land.

The 1982 Housing Act requires a building permit (Bouvergunning) for all new buildings and permanent structures, extensions, physical alterations and changes in function. Where a local plan stipulates, construction work for infrastructure and similar projects may require a construction permit (Aanlegvergunningen). Furthermore, land and building uses are categorised and any change within a category does not require consent. Specific permits are required for other works including demolition, withdrawal from residential use and subdivision. There is also an environmental permit for certain proposals.

Planning application process

Local authorities have an eight-week period to determine planning applications, after which time an appeal can be lodged on the grounds of non-determination. However, this time frame is rarely met in practice, with 80% of local authorities deciding applications within 13 weeks. Major applications can take significantly longer to determine.

If all the necessary documents are complete and comply with building codes, the building permit application has to be decided upon within three months where it relates to an ‘ordinary’ case, ie, one not involving highly complex issues.

The municipal authority will normally respond to applications within two months for commercial developments. It can take up to five months if special consultations or public inquiry are required.

The planning authority has 75 days (155 in towns with more than 100,000 inhabitants) to respond to the applicant once all the necessary documents are submitted. Failure to do so results in automatic granting of permission.

There are time limits on response times to applications. Generally, a decision as to whether to grant a planning licence should not take more than three months.

A planning application will normally be decided upon between two to six months. If there is no decision within 13 weeks of application, the proposal is deemed granted by default – unless the city council has agreed to extend a decision by an additional 13 weeks.

Source: GVA Grimley.



The breakdown of issuance in 2005 by property type was different from previous years, with retail making up 34% of the collateral in European CMBS. This is an increase on previous years, following 18% in 2003 and 23% in 2004. The other property type allocations include office at 37%, residential at 13% and industrial at 6%. Please refer to Figure 21.

Figure 21: European CMBS issuance by property type – 1997-2004 (left) and 2005 (right)

Office46%

Other5%

Industrial6%

Telecom8%

Residential6%

Leisure3%

Mixed2%

Retail23%

Healthcare1%

Office37%

Mixed3%Residential

13%

Industrial6%

Leisure0% Healthcare

1%

Other6%

Retail34%


Despite the fact that many conduit deals still have only one borrower and over 50% of issuance is still involving only a single borrower, there has been an increased number of deals with more granular loan and property pools, as illustrated in Figure 22. Note that both axes in Figure 22 are logarithmic, allowing for outliers. This is due mostly to transactions relating to multi-family property portfolios and more granular loan pools from UK building societies and repeat issuers, such as Business Mortgage Finance.

Figure 22: European CMBS – Loan and property granularity

1

10

100

1,000

Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05

No.

Loa

ns p

er D

eal

1

10

100

1,000

10,000

100,000

No.

Pro

pert

ies

per

Dea

l

Loans (LHS)

Properties (RHS)


In 2006, we expect more multi-family property portfolio transactions and significant issuance backed by non-performing commercial mortgages, especially from Germany. We believe these should provide more granularity to investors and are likely to compete with each other, since they are ultimately backed by German commercial property pools. However, we believe that there will be additional granular CMBS transactions outside these specific collateral types, from UK building societies and other European lenders.

Retail increased to 34% and residential to 13%

of issuance

Despite many single-borrower conduit deals,

there has been an increase in more

granular deals

Expecting more granular CMBS

in Europe



Deal structures It is important for investors new to the European CMBS market to realise that there is no uniform deal structure in European CMBS. Traditionally, some of the larger UK listed property companies, such as British Land and Canary Wharf, borrowed via the CMBS market by securitising large single office estates or shopping centres. In addition, there was CMBS issuance from companies such as M&S, J Sainsbury’s, British Telecom and Telecom Italia, which were backed by long-term leases to the credit-rated sponsors/tenants. These early transactions had only a single borrower.

In the same period, there were also transactions sponsored by German banks, which involved the synthetic risk transfer of a reference pool of mortgages via a CMBS. Also, large companies with large portfolios of properties, such as ProLogis, started issuing CMBS backed by a large number of properties, but again only one loan. In more recent years, as discussed previously, there has been more issuance from CMBS conduit programmes, which tend to have a larger number of loans. Therefore, we can define the following five deal categories in European CMBS:

1) Single-borrower single-property CMBS (SBSP).

2) Single-borrower multiple-property CMBS (SBMP).

3) Multiple-borrower multiple-property (MBMP).

4) Synthetic CMBS (SYN).

5) Credit Tenant Lease CMBS (CTL).

The maturing of the European CMBS market has been demonstrated by the increase in the share of multi-borrower transactions (MBMP), whose share of annual issuance has increased from 26% in 2003 and 22% in 2004 to 42% in 2005. However, as in previous years, single borrower deals (both SBMP and SBSP) still made up the majority of annual issuance, at 54%, compared with 10% in 2004 and 32% in 2003, as shown in Figure 23.

Figure 23: 2005 European CMBS issuance by transaction type

0

5

10

15

20

25

30

35

40

45

1997 1998 1999 2000 2001 2002 2003 2004 2005

CTL MBMP SBMP SBSP SYN


Given that there is no dominant transaction type, it does not come as a big surprise that there are large differences among CMBS structures, as well. The main structural differences, which will be discussed in greater detail, are in the following areas:

There is no uniform deal structure in European CMBS

There are five different deal types in European

CMBS; SBSP, SBMP, MBMP, SYN and CTL

Share of multi-borrowers has increased

to 42%, but single-borrowers are still

at 54%



� Priority of paydown – release premiums.

� A/B note structure.

� Liquidity.

� Servicing.

The main issues to consider with the priority of payments (or waterfalls) are whether they apply pre- or post-enforcement. The possible variations are numerous and make investor review sometimes difficult. By way of illustration, we can consider separate waterfalls for interest first and principal second, or vice versa. There might be a separate waterfall for deals that have a liquidating portfolio for the allocated loan amount and the release premium payable on sale.

Also, we can have straight sequential or pro-rata paydown. Modifications of both are also quite common, where perhaps 50% is paid down sequentially and the rest pro rata (or vice versa or a different percentage). There are also each of these paydowns in a single CMBS deal, but applicable to a certain subset of loans, ie, some loans are sequential, others pay down pro rata and the remainder might pay down modified sequential. And there are paydown structures that switch from pro rata to sequential at different trigger events (and back).

As said before, the variations are numerous, and we do observe wide range of different paydown structures in European CMBS. However, some uniformity and consistency in each of the individual conduit programmes can be seen as the start of some standardisation. The exact nature of the paydown structure has an effect on the credit enhancement and subordination of individual notes classes and, therefore, should be reflected in their credit ratings. As illustrated in Figure 24, the increase in modified pro-rata paydown and decline of straight sequential paydown are the main changes in this respect from 2004 to 2005.

Figure 24: Paydown structures in European CMBS issued in 2004 & 2005

23%

49%

5%13%

0%

10%

Single trancheSequentialModified pro-ratapro ratasequential switching conditionally to pro rataReverse sequential

18%

40%

26%

8%

0%3%

5%

Single trancheSequentialModified pro-ratapro-rataSeq switching to pro rataReverse sequentialn/a

Source: Moody’s Investors Service, Barclays Capital.

The A/B note structure is a relatively new phenomenon in the European CMBS market, where traditionally there have been mezzanine loans. A/B note structures are different from mezzanine loans in that they share the same collateral. In short, there are two loans: one senior loan (A-piece) included in the CMBS transaction and one junior loan (B-piece). The B-piece holder has certain rights relating to their position as junior lender. These rights can affect the credit quality of the A-piece, depending on the exact

Some standardisation within conduit

programmes

Paydowns moving away from straight sequential

... A/B notes becoming better understood

and accepted



structuring of the inert-creditor agreement. Despite some initial confusion, the market has made significant progress in better understanding these A/B structures, now seen in most European conduit CMBS transactions. The increased importance of B notes is illustrated in Figure 25, with almost 23% of issuance now having B-notes included in their loan pools.

Figure 25: Relative size of B notes in European CMBS market

2004

80.0%

17.7%

2.3%

Loans without B notes

Representation of senior notes in loans

Representation of junior notes in loans

2005

73.2%

22.7%

4.1%

2003

71.0%

26.2%

2.8%


As discussed before, liquidity is used to fund temporary shortfalls in order to keep the CMBS current in regards to interest. The key differences lie in the amount of liquidity provided; because it poses a cost to the issuer, there is an incentive for the arranger to limit the amount of liquidity that is made available. Also, some liquidity facilities amortise as the loan pool size reduces, down to a certain minimum level.

Finally, there are a number of possible situations with servicing. Traditionally, servicing of the pool has remained with the originating bank. In some cases, these banks have set up independent, but wholly owned, mortgage servicing units, such as Morgan Stanley Commercial Mortgage Servicing. The third option is to have the serving done by a third-party, independent servicer, such as Hatfield Philips and GMAC. The reason this might be relevant is that there could be conflicts of interest between the CMBS investors and the servicer, especially if the latter is also the B-piece holder. In general, we would think that investors prefer a clear separation of roles.

However, despite these positive developments, we note that the continuing structural complexity of the European CMBS market still requires investors’ full attention, though it allows them to command a spread premium compared with more standardised, plain vanilla ABS sectors.

Liquidity sizing and amortisation differ

between deals

Possible conflicts of interest make servicer

independence important

However, continuing structural complexity

justifies spread premium



Performance and monitoring In this section, we look at historical performance and different levels of monitoring, focusing on the possible effect various market trends might have on existing European CMBS transactions.

Historical performance When considering historical performance, we can look at relative historical rating transitions, as well as default rates for loans in CMBS transactions and loss rates for commercial mortgage loans.

With regard to historical rating transitions, we note that there were 58 changes in major rating categories during 1999-2004 in European CMBS, with 38 upgrades and 20 downgrades. The upgrade-to downgrade ratio is therefore 1.90:1, which is only slightly below the European ABS average of 2.30:1. These changes exclude intra-major category changes.

Figure 26: One-year average rating transition for all European ABS and CMBS for 1999-2004

ALL EUROPEAN ABS SUB-SECTORS COMBINED

From (down)/To (across) AAA AA A BBB Sub BBB No of Ratings

AAA 99.80% 0.18% 0.02% 6529

AA 3.19% 95.76% 1.00% 0.05% 2195

A 0.77% 2.80% 94.74% 1.45% 0.23% 4279

BBB 0.35% 0.35% 2.27% 95.75% 1.29% 3177

Sub BBB 0.12% 0.12% 2.77% 97.00% 866

17046

CMBS – 1999-2004


AAA 100.00% 727

AA 4.33% 95.36% 0.31% 323

A 0.77% 2.30% 92.60% 4.34% 392

BBB 0.62% 0.93% 1.24% 96.59% 0.62% 323

Sub BBB 0.66% 1.32% 98.03% 152

1917

CMBS – 2005


AAA 100.00% 210

AA 12.94% 87.06% 85

A 1.96% 8.82% 89.22% 102

BBB 1.19% 4.76% 96.59% 1.19% 84

Sub BBB 2.44% 2.44% 2.44% 92.68% 41

522

Source: Bloomberg, rating agencies, Barclays Capital.

Historical CMBS upgrade-to-downgrade

ratio is 1.90:1



Based on the rating transitions presented in Figure 26, we note the following developments during 1999-2004:

� No AAA rated CMBS notes were downgraded, which is better than the ABS average.

� The likelihood that AA rated CMBS bonds were upgraded to AAA was 4.33%, compared with 12.94% in 2005, which is also better than the long-term ABS average.

� 4.34% of A rated CMBS bonds were downgraded, almost three times higher than the average for ABS bonds at 1.68%.

� 0.62% of BBB rated CMBS bonds were downgraded to below BBB, compared with 1.19% in 2005, both lower than the 1.29% ABS average.

� Sub-BBB CMBS moved to BBB in 1.32% of cases, less than half the ABS average.

The rating changes affected 12 different transactions and were caused by the following four main factors:

� The prepayment or amortisation of a large portion of the original loan pool collateral may lead to rating actions, especially if particularly strong (or weak) loans are no longer part of the collateral pool. The reduced diversity of the smaller loan pool may prevent any upgrades initially, but this also depends on whether the paydown is fully sequential. In older CMBS transactions, sequential paydown structures are more prevalent, which are likely to lead to upgrades for the senior classes in the event of prepayments and significant amortisation. This factor has accounted for the majority of rating changes in European CMBS to date, especially in the older ELoC transactions.

� Rating changes in senior unsecured ratings of dominant tenants that support the transactions have been typical for telecoms, supermarket or financial services tenants. An upgrade or downgrade of the tenant in these credit tenant lease CMBS transactions is likely to affect at least the junior class.

� Rating changes on public sector Pfandbriefe (German covered bonds) or other collateral that support synthetic CMBS transactions typically affect the classes backed by this collateral, unless the performance of the underlying reference credits offsets the rating action.

� The performance of the underlying loans (or reference credits) is below the rating agencies’ expectations. This occurred in a small number of cases in 2005, including both hotel CMBS transactions in Europe. HOTELoc and Global Hotel have suffered from well-publicised multiple downgrades, due to disappointing asset performance.

When considering historical performance, for the first time we are able to analyse both default rates and loss rates.

According to new data provided by S&P, delinquencies for commercial mortgage loans in European CMBS transactions were 0.22% of outstanding loans as at Q4 05, having been between 0.22% and 0.45% over the last two years, if non-performing loan (NPL) transactions are excluded. This statistic provides the best comparable versus delinquencies in other ABS asset types, such as European auto ABS at 0.3% and European RMBS at 0.4%. For completeness, we also present delinquencies excluding NPLs and new deals in Figure 27.

Four main drivers of rating changes:

Except for A rated bonds, CMBS

experienced better rating transition

compared to the overall ABS average

Prepayment benefits senior notes with

sequential paydown

Rating changes of dominant tenants in

credit tenant lease CMBS

Rating changes of collateral in synthetic

CMBS

Underperformance of loans due to problem assets

CMBS delinquencies below RMBS and auto

ABS



Barclays Capital’s loss rates have been estimated using the De Montfort University survey results for defaulted loan balances and recovered amounts of these defaulted loans, with the assumption that losses equal balances minus recoveries and that only 50% of the survey respondents provided an answer to the particular question related to this issue. The estimated loss rate for UK commercial mortgage loans for 2004 was 0.05%, up from 0.02% in 2000, as illustrated in Figure 27. This compares favourably with the year-end 2005 European auto ABS figure of 0.9%, but is above the loss rate for European RMBS at 0.0017% as at year-end 2005.

Given the increasing importance of this area, we expect additional statistics regarding loss rates for commercial mortgage loans to become available very soon from one of the rating agencies. However, we expect both delinquencies and loss rates for loans in European CMBS to be very low, enabling ABS investors to compare CMBS with other low delinquency and loss sectors in European ABS.

Figure 27: European CMBS loan delinquencies (left) and estimated UK commercial mortgage loss rates (right)

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05

excl NPL

excl NPL & New Deals

0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

0.06%

2000 2001 2002 2003 2004

Source: De Montfort University, Standard & Poor’s, Barclays Capital.

Monitoring and expected performance Since good performance in the past is no guarantee of future performance, we next turn to our monitoring framework to assess future performance. In order to project this, we monitor each of the four fundamental markets affecting European CMBS transactions:

1) CMBS market;

2) The commercial mortgage lending market;

3) The commercial property investment market; and

4) The commercial property letting markets.

Our estimated loss rate was 0.05% for UK

commercial mortgages in 2004, better than auto ABS, but worse

than RMBS

Expecting loss rate statistics for CMBS loans

to become available from rating agencies

We use four fundamental levels of

analysis to project future performance



CMBS market In this market, we monitor individual transactions, issuance trends, structural trends as discussed earlier and early repayments. In European CMBS, repayment rates have varied significantly amongst different transaction types and vintages in terms of profile as well as over time, reflecting the diverse collateral characteristics in terms of granularity in the number of borrowers or the structural features, including pay-down structures. On average, repayment rates are about 17% of outstanding balances, but have increased significantly in recent years, explained largely by declines in interest rates and increases in the capital values of the underlying properties.

Given the current prospects for interest rates and capital values, we expect a stabilisation of CPRs in European CMBS, which, in combination with our expectation that CMBS spreads will remain range bound, should reduce investor concerns about prepayments.

Commercial mortgage lending market The reason for monitoring this market is that CMBS-funded conduits compete with other lenders in the commercial mortgage lending market. This is important because stronger competition in this market from balance sheet and syndicate lenders may force CMBS-funded lenders to become more aggressive in offering terms to borrowers.

Therefore, we look at overall loan to value (LTV) trends. On average, LTVs increased from 46% in 1997 to 53% in 2004. In our view, this is a significant but not dramatic increase. These overall estimates compare favourably with the weighted average LTVs for UK and non-UK European CMBS at 73% and 71%, respectively. However, this is not surprising because a large proportion of institutional property owners are prevented or discouraged from using any leverage at all.

We also consider lending on speculative development projects, which is considered one of the most risky types of property lending, since the property is typically under construction and there are no signed lease agreements in place. The lender is exposed to construction risk, as well as letting and market risks. This type of lending was widely blamed for the problems that banks experienced with commercial property lending in the late 1980s and early 1990s. Speculative development projects averaged only 2% of the total loan book in Europe, with the UK at 5% and the Netherlands at 10%.

Another way that banks are able to increase the level of risk in their property lending is to take more subordinated positions, by accepting a mezzanine or even an equity position. The percentage of mezzanine lending of the total UK loan book was only 1.4% as at year-end 2004. However, if one adds the equity portion of 0.7%, subordinated positions would have made up 2.1% of the total loan book.

Overall, with limited lending to speculative development projects and mezzanine positions, we believe that the commercial mortgage lending market does not present too much risk, despite the overall increase in LTV levels.

Finally, linking back with the CMBS market, we note that LTVs do not seem to be on the increase, even though debt service coverage ratios (DSCR) seem to be on a slight downward trend. In our view, the likelihood of developments in the commercial mortgage market causing significant stress in the short term is low, based on the actual LTV and DSCR trends in CMBS. This is further supported by our outlook for the investment and letting markets, which we discuss in the following section.

Prepayments in CMBS differ per deal type, but

have increased to around 17% over the

last few years

But prepayments are expected to stabilise

CMBS-funded lenders are affected by

developments in the competitive commercial

mortgage lending market

Only 2.1% of the loan book comprised

subordinated loan positions, but this is

expected to grow

Risks from the lending market are limited

Little risk from mortgage market

affecting CMBS as LTV and DSCR trends are

healthy



Commercial property investment market In the property investment market, commercial properties are transacted and prices determined. Credit risk in CMBS is partly driven by the LTV. As values are determined in the investment market, we consider trends in this market relevant for CMBS. Therefore, we consider long-term trends of values, as expressed in initial yields, and the drivers of value for office, retail and industrial properties.

Office yields: Compared with year-end 2004, we note that average initial yields for European office properties are estimated to have declined further in 2005, with the exception of Frankfurt and Swedish office markets.

Retail yields: most prime retail yields in Europe declined from 1996 to 2004, with both Milan and Stockholm shaving off a full 100 bp off their yields. Note that these are prime yields, not average yields (as for offices). We note that within the retail sector, there has been quite different performance for certain retail sub-sectors.

In our view, the drivers of property yields are the supply and demand for capital for investment in commercial property. Both are difficult to predict because there are many individual market participants with widely differing motivations, some being both buyer and seller. Demand for capital for investment into commercial property comes from (potential) buyers of commercial property.

Based on the above, we believe that possible stresses from the UK property investment market include any developments that could cause a long-term decline in commercial property values. However, this would require a complete overhaul of the planning regime, allowing for large-scale development of new properties or perhaps the sale of a large number of government-owned properties, both increasing the supply of investment properties. The outperformance of other assets relative to property may trigger a reduction in demand. None of these events seems likely to occur in 2006, especially with the current interest from Middle Eastern investors looking to recycle their petrodollars into UK property, as well as the pending introduction of UK REITs. In our view, there is only a moderate chance of value declines in the short term.

However, in the short term, we believe that the positive effect from the pending UK REIT and German REIT legislation and the recycling of petrodollars into commercial property will support current levels of initial yields. This yield stabilisation will maintain current values, and, consequently, we estimate that LTVs in existing European CMBS transactions will remain stable.

Commercial property letting markets In the property-letting market, commercial properties are let and rents are set. Credit risk in CMBS is in part driven by the DSCR. Given that rents are determined in the letting market, we believe trends in this area are relevant for CMBS. Irrespective of current leases in place, in the long term the DSCR is affected by market rents and market vacancies, as contract rents are reviewed and leases are broken or renewed. Therefore, it is worth examining trends in rents and vacancy rates for office, retail and industrial properties.

Office letting markets: The UK office markets have continued to improve since 2003, with vacancy rates estimated to have declined further in 2005. The German office markets have been slower to recover and have overall higher vacancy rates, despite large differences between cities.

Retail letting markets: Compared with forecasts for 2004, actual retail rental growth was not below forecast, but also negative for individual UK and German retail markets.

Analysis of investment market is key for

LTV credit risk

Initial yields expected to remain stable, resulting

in stable LTVs

Hanging Text Analysis of letting market relevant for long-term

DSCR credit risk



Based on the expected recovery in the property letting markets, we do not expect a negative effect on DSCRs in CMBS from the property-letting markets, with the possible exception of over-rented properties and UK retail high street shops.

In short, these are our views on the major markets:

1) CMBS: pre-payments are expected to stabilise, structures are getting more standardised and more granularity in underlying collateral is becoming available.

2) Commercial mortgage lending: little risk for CMBS market because lending to speculative development and mezzanine tranches has been limited. No immediate threats from overall LTV and DSCR trends.

3) Commercial property investment: initial yields expected to remain stable as UK and German REIT legislation might become effective and Middle Eastern investors are more active buyers of European properties.

4) Commercial property letting: London offices leading a broad recovery, despite slow pickup in Germany. Some weakness expected in UK retail rents, with high street suffering more than shopping centres and retail warehouses.

Overall, our monitoring implies a favourable

environment for European CMBS for the

foreseeable future



Credit analysis As highlighted previously, there is no single dominant transaction type in European CMBS. This makes it difficult to come up with a standard analytical approach for European CMBS investors. However, in order to provide investors with a general framework for analysis of European CMBS transactions, we highlight the key criteria for each transaction type below (please see Figure 28).

If we start with credit tenant lease transactions, the key analysis should focus on the quality of the tenant – as reflected in its rating – as well as the underlying lease. Regarding the latter, it is important that the lease agreement is watertight and provides a sufficient term to allow for (full) amortisation of the loan. Other criteria, such as DSCR, LTV, borrower quality and cash flow stability, are of less concern. This does not imply that these criteria can be ignored, but typically, the deals are structured tightly to have a DSCR very close to 1.01x. In some cases, the LTV is above 100%, which is not necessarily problematic as long as the structure allows for full (scheduled) amortisation. Since the borrower is typically a newly-formed special-purpose vehicle, an assessment of its credit quality is not really relevant. The quality of the properties is also immaterial, as long as the lease agreement is watertight, with no breaks and escape clauses.

Figure 28: Key analytical criteria in European CMBS transaction types

Transaction Type/ Key Criteria

Credit Tenant Lease

Single-Borrower Single-Property

Single-Borrower Multi-Property

Multi-Borrower Multi-Property Synthetic CMBS

Pool Diversity Depends Yes Yes

DSCR Yes Yes Yes Yes

LTV Yes Yes Yes Yes

Borrower Quality Yes Yes Depends

Property Quality Yes Yes Depends

Tenant Quality Yes Yes Depends

Lease Quality & Profile Yes Yes


At the other end of the spectrum, we consider synthetic CMBS transactions, which typically have a large number of reference loans. Due to this granularity, the quality of any single borrower, property, tenant or lease is not really material to the performance of the loan reference pool. On an overall, weighted average basis, the qualitative borrower, property, tenant and lease criteria are difficult to measure. The credit rating agencies are likely to “shadow rate” each individual loan in the reference pool based on static (or dynamic) DSCR coverages during the loan term and balloon LTV ratio at refinance. Therefore, we believe that DSCR and LTV are the key criteria for investors to focus on for synthetic, as well as multi-borrower multi-property, transaction types.

For synthetic CMBS transactions, there is the additional complexity of the public sector Pfandbriefe or originator MTNs (and in certain cases, additional cash) collateral. In the case of multi-borrower multi-property transaction types with a limited number of loans, the borrower and property quality can start to matter to a greater extent than in more granular loan pools.

The single borrower deal types require a broad focus on most criteria, except for multi-property transactions with a large number of properties, where detailed tenant and lease analysis provides less added value. The required focus on lower level criteria depends largely on the granularity of the collateral pool. The more properties, the less need to focus on individual leases and tenants.

We highlight key criteria for each European CMBS transaction type

Key criteria for credit tenant leases are tenant quality and lease profile

Key criteria for synthetics and other

multi-borrower multi-property deals are DSCR

and LTV

Required focus with single borrower

transactions depends on number of properties



Based on the above, we can identify six different analytical levels in CMBS credit analysis.

Figure 29: Levels of CMBS analysis

CMBS

Tenants/Leases – Credit Quality & Over/Underrented

Property – Ability to attract tenants

Borrower – Bankruptcy remote?

Loan – LTV & DSCR

Pool Diversity

CMBS

Tenants/Leases – Credit Quality & Over/Underrented

Property – Ability to attract tenants

Borrower – Bankruptcy remote?

Loan – LTV & DSCR

Pool Diversity


Need for qualitative analysis 1) We can think of credit analysis, in its most basic format, along two lines. Firstly, we can

assess how likely it would be that we lose money. In CMBS, we can look at the DSCR and assume that if it is below 1.00, there will be a default because there is insufficient cash flow to cover the debt service. Therefore, DSCR can be used as an indicator for the probability of default.

2) Secondly, we need to know how much money we are likely to lose if we do lose it. This can be defined as the severity of the loss. In CMBS, we can look at the LTV ratio as an indicator for this loss severity. Clearly, the higher the LTV, the higher the likely loss. The final loss will also be affected by the costs involved in enforcing the security, the time delay required to sell the property and any loss in value due to the forced nature of the sale.

3) By multiplying the probability of default with the loss severity, we can come to an expected loss. Each level of expected loss can be mapped to a rating category, which will be discussed more fully in the section dealing with the rating agency analysis.

Despite the need to focus on certain criteria, we present some LTV and DSCR statistics that suggest to us that investors should still consider qualitative factors in their analysis. Figure 30 shows that for LTVs at the BBB level, no clear pattern can be discovered for each transaction type. The range of BBB LTV values for multi-borrower multi-property deals (MBMP) is fairly wide. So despite recommending that investors focus on LTV and DSCR in evaluating these MBMP transactions, we note that the LTV is not consistent across deals. We believe that it is most likely qualitative factors – such as diversity and quality of the property, tenants, leases and cash flow – that explain these LTV differences. We do note that the LTVs for synthetic CMBS have been lower than most other transaction types. However, at this point, much more synthetic CMBS issuance seems unlikely.

DSCR and LTV are ratios to measure probability of default and severity

of loss, respectively

LTVs for MBMP and other CMBS transaction

types vary widely and analysis of qualitative

factors is needed



Figure 30: BBB LTV for European CMBS by transaction type

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

Jan 00 Jul 00 Feb 01 Aug 01 Mar 02 Sep 02 Apr 03 Nov 03 May 04 Dec 04

BBB LTV SYN

BBB LTV MBMP

BBB LTV SBMP

BBB LTV SBSP


If we next consider DSCRs for the different transaction types, we find it again difficult to identify any clear trends or patterns. Data limitations are also not helping, but the lack of any clear trends further supports the view that qualitative analysis matters in European CMBS, please see Figure 31.

Figure 31: BBB DSCR for European CMBS by transaction type

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan 00 Jul 00 Feb 01 Aug 01 Mar 02 Sep 02 Apr 03 Nov 03 May 04 Dec 04

BBB DSCR SBSP

BBB DSCR SBMP

BBB DSCR MBMP

BBB DSCR SYN


Assessment of borrower and tenant credit quality Assessment of the credit quality of borrower(s) and tenant(s) is typically difficult due to the fact that the majority of companies do not have unsecured debt ratings from the three major credit rating agencies. Coverage by Moody’s, Fitch and S&P is typically limited to companies with public debt. Additional rating services, such as those provided by Moody’s KMV and Moody’s RiskCalc, do cover additional companies without public debt. However, these services require either a stock market listing or significant data entry of a company’s financial data, which still pose practical limits to coverage.

No clear patterns between different

transaction types for DSCR either

Most tenants and/or borrowers are not rated

by the three major rating agencies



However, a new service from Investment Property Databank and Experian does focus on providing credit ratings for tenants. This is called IRIS (IPD Rental Information Services) and matches up the name of each individual tenant with its Experian’s Delphi rating. The IPD universe contains 160 portfolios with approximately 6,500 properties and over 40,000 tenants as of March 2005. IRIS is targeted at institutional owners of commercial property portfolios and allows for both an initial assessment and ongoing monitoring of a portfolio’s tenant quality. It allows individual managers to trace their tenants’ credit scores over time, as well as compare them with their peer group managers.

As a result of the IRIS analysis, we can split the tenant pool into five categories of risk: high, medium-high, low-medium, low and negligible. A weighted average could also be calculated based on either passing rent (for tenants) or outstanding loan amount (for borrowers). As illustrated in Figure 32, we can track the Delphi score bands of pools of tenants, which in this particular instance covers the entire IPD universe, as described above. In March 2005, IPD was able to match 95% of tenants in its universe with an Experian Delphi score.

Please note that approximately 15% of rent passing is represented by rent from tenants in the high and medium-high risk categories. The majority of tenants (69% in March 2005) are in the negligible and low risk bands. Comparing tenant pools of individual tenants with the IPD universe, as well as a CMBS universe (to be populated in the future), will be possible in the future. This type of comparative analysis should accommodate arrangers’ due diligence, rating agencies’ credit analysis, and investors’ investment analysis (both primary as secondary).

Figure 32: Risk profile by tenant Delphi score bands as a percentage of rent passing

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun 04 Aug 04 Oct 04 Dec 04 Feb 05

High % Medium High %

Low Medium % Low %

Negligible % Unmatched & Ineligible %

Source: IPD Rental Information Services (IRIS), Experian and Barclays Capital.

Finally, IPD has also started tracking tenant default rates, which were reported at 1.72% of passing rent for the 12 months up to March 2005 (we are awaiting new figures for March 2006). This is fairly similar to a 1.56% idealised default probability for the Ba2 rating category as published by Moody’s. In other words, based on the single observation of 1.72%, the credit quality of the IPD tenant universe seems to be in the Ba2/BB range. As this information becomes available to the universe over time, it will provide an interesting benchmark for lease default rates in CMBS transactions.

New IRIS service makes assessment of tenant quality possible with

Experian’s Commercial Delphi credit score

Experian able to provide Delphi scores for 95% of

IPD universe tenants

69% of passing rents with tenants in low and

negligible risk bands

1.72% tenant default for March 2005 similar to a Ba2 default probability



The Experian Delphi credit score and/or IRIS service could be used by lenders and issuers in the CMBS market, as well. Data required when calculating the Delphi score include the name and address of the tenant or borrower and the amount of the passing rent or loan. These could be widely available for each CMBS transaction. Having Delphi scores would allow for the initial assessment of credit quality of tenants, as well as borrowers. In addition, the servicer could update the credit score data periodically to monitor the credit quality on an ongoing basis. This would provide investors with an additional objective risk measure related to borrower and/or tenant risk both at issuance and during term, allowing for more transparency and facilitating secondary trading. It would also allow servicers to take a more active role in managing the credit risks related to borrowers and/or tenants over time.

Example of credit analysis After describing what we feel is a useful analytical framework, we believe it might be useful to present a recent example. In this respect, we turn to a comparison of German and Austrian CMBS.

The major differences that we identify between five German and Austrian CMBS transactions issued in summer 2005 are symptomatic of the current state of the European CMBS market. Similar to what we are seeing in the CMBS market in general, in the limited German-Austrian universe, there is no dominant deal type. We are seeing: two single-borrower, multi-property transactions (SBMP); two multi-borrower, multi-property transactions (MBMP); and even a single synthetic transaction (SYN).

We believe that using a qualitative scoring system is useful in comparing disparate transactions. We focus on scoring each transaction for the following four levels of fundamental criteria (with 1 being the worst for investors and 10 being the best for investors):

1. CMBS structure – Complexity and supports.

2. Loan pool DSCR/ICR and LTV fundamentals and borrower quality & strategy.

3. Property quality and value stability.

4. Tenant quality and cash flow stability.

We emphasise that on the three levels of loan, property and tenant/lease criteria, we favour diversity and dislike concentration. However, it should be noted that concentration can be partly or wholly offset by quality. In other words, a single loan, single property CMBS let to a AAA-rated tenant for 20 years is likely to be more stable from both a cash flow and value perspective compared to a 1,000 loan CMBS deal secured by small rural properties with high vacancies and unrated tenants. Also, while we have garnered as much information as possible to make a judgement based on each criterion, in some cases where we are not satisfied that we have obtained sufficient information, we have reverted back to the average score of 5.

Delphi score could provide an additional

objective risk measure for borrower and/or tenant risks in CMBS

Comparison is difficult due to different deal

types

Comparing deals by scoring each on four

fundamental levels

On loan, property and tenant levels, we note

possible trade-off between diversification

and quality



Figure 33: Overview of score motivations for German and Austrian CMBS

Deal name Structural complexity & supports

DSCR/LTV and borrower quality & strategy Property quality Tenant quality

Talisman 1

Junior class is controlling, accounts controlled by borrowers

2.33 & 69.5%, 1 B-note and 2 mezzanine loans, largest loan has non-SPV borrower and disposal strategy

Just below average, with 10% vacancy, anchor tenant vacating and borrowers with repositioning and/or disposal strategies

Assumed average

Forest Finance

Propcos and parent are single tax group, some propcos have employees, soft scheduled amortisation

1.5 & 55.5%, Immofinanz is largest Austrian-listed property fund, non-registered springing mortgages

88% Vienna concentration, 22% City Tower with three 100% pre-let development properties

Above average with 40% AAA-rated tenants

Valesco Funding

50/50 pro-rata-sequential with triggers back to sequential

1.95 & 80.5%, Fortress is US fund manager, amortisation tied to letting, LTV and ICR targets with cash sweep trigger

Well diversified across Germany, but 24% vacancy in the portfolio as borrower is seeking to re-let DB vacated space

Above average with 68% of rent from Deutsche Bank (AA-), but options to vacate

Titan 2005-1

Sequential scheduled amortisation and repurchase obligation, Class X strips out excess spread

1.70 & 75%, B-note on largest loan (65%)

Assumed average

Above average with 62% of rent from Deutsche Telekom (BBB+)

Proscore-VR 2005-1

Typical synthetic, with tightly defined losses and additional risk of KfW collateral rating changes

NA & 33%, with almost 7 years of seasoning, but no current ICR/DSCR leaves doubt on servicer's system capabilities

Highly diversified by region and property type, but secondary quality

Assumed average


Providing insight into our scoring methodology, we highlight several key criteria in Figure 33. In turn, these qualitative and fundamental scores per key criteria for each deal result in the following overall ranking, presented in Figure 34.

Figure 34: Key criteria and overall score for German and Austrian CMBS

Structural DSCR/LTV Property Quality Tenant Quality Overall

Forest Finance 6 7 6 7 26

Proscore-VR 2005-1 7 7 7 5 26

Titan 2005-1 7 6 5 6 24

Valesco Funding 7 5 4 7 23

Talisman 1 7 6 4 5 22


In Figure 35, we provide the key indicators for each deal, allowing investors to select the indicators that fit their own investment requirements best. An apples-to-apples comparison of these five transactions is not really possible due to a lack of consistent information available for all transactions. For some, we have DSCR and LTV. For others, we have no DSCR, but only ICR. In the case of one transaction, we unusually do not have any ICR or DSCR. Also, the capital structures vary widely, with some rated down to BB/Ba2, others only to BBB and still others merely to A (which was retained by the sponsor).



Finally, we attempt to use our fundamental and qualitative analysis to determine strong and poor relative value within the limited universe of comparison.

We note that there is not that great a differential between the scores of the individual deals. Forest Finance and Proscore-VR 2005-1 are ranked highest. This is interesting, if we consider pricing. We note the AAA pricing of all five transactions is in a very tight 24-26 bp range. However, Proscore has the widest spread at 26 bp, also the highest fundamental score (together with Forest Finance), which indicates that it would be good relative value to the other deals considered. On the other hand, Talisman 1, which has the lowest fundamental score and also the lowest BBB primary spread at 85 bp. Therefore, Talisman BBB could, on this basis, be considered relatively poor value.

We note the small differential in primary spread pricing among the transactions, but expect future spread differentiation in secondary trading, as the collateral performance of each transaction is likely to vary going forward.

Finally, we do want to point investors to the limitations of our analysis in terms of the small sample size and qualitative nature of the analysis, given that the scoring is based on limited information for certain deals.

Forest Finance and Proscore-VR have

highest fundamental scores

Proscore-VR AAA is good value, while

Talisman BBB is poor value on a relative basis


38 Securitisation Research

Barclays Capital

Figure 35: Comparison of recent German & Austrian CMBS transactions

Talisman-1 Finance plc Forest Funding plc Valesco Funding plc Titan 2005-1 plc Proscore-VR 2005-1 plc

Type of Transaction MBMP SBMP SBMP MBMP SYN

Pricing Date 20 May 05 25 May 05 10 Jun 05 29 Jun 05 04 Jul 05

Size (EUR mn) 554.3 250 246.5 348.8 734.8

ASSET OVERVIEW

No. Loans 4 1 1 6 3,072

No. Properties/Tenants 112/approx. 7,250 54/850+ 109/NA 20/NA 2,605/NA

Day 1/Maturity WA LTV (%) 72.7%/65.9% 60.4%/50.8% 85.8%/75% 75.8%/73.6% 54.4%/(est.12%)

Day 1 WA DSCR (%) ICR 236% 150% ICR 198% 170% NA

WA remaining loan/lease life 5.5/5.3 years 10/9.4 years 7.10/NA years 5.4/NA years 24.6/NA years

Largest loan concentration 35%/70% (top 2) 100% 100% 65%/85% (top 3) 0.33%/6% (top 20)

Largest geo. concentration Greater Berlin 39% Vienna 88% North Rhine-Westphalia 37% Berlin 41%/ NRW 30% Lower Saxony17%/NRW 15%

Largest sector concentrations Retail 54%/Residential 37% Office 52%/Residential 20% Office 50%/Bank Halls 31% Office 71%/Residential 26% Mixed Use 75%/Retail 10%

Current Net Rent/Net ERV 39.6/46.9 20.6/NA 21.7/23.4 32.7/27.0 NA/NA

Originator/Sponsor ABN AMRO Bank Immofinanz, Austria’s largest listed property co.

Hypo Real Estate/Eurocastle Investment (Fortress)

CSFB DG-Hypothekenbank

Servicer/Lead Manager Hatfield Philips/ABN Amro NA/BNP Paribas Hypo Real Estate/ Lehman Brothers

Hatfield Philips/ CSFB

DG Hyp & several KG’s/ DZ Bank AG

LIABILITY OVERVIEW

AAA Subordination (%) 24.5% 24.0% 59.4% 31.0% 14.7%

AAA/BBB Pricing (bps) 25/85 24/45 (A-rated retained) 25/85 (BBB/A) 24/80 (Baa2/BBB+/BBB+) 26/105

Ratings (FIT/MDY/S&P) FIT/MDY/S&P FIT/S&P FIT/S&P FIT/MDY/S&P MDY/S&P

Most junior rated tranche BB/NR/BB A/A NR/BBB BB/Ba2/BB Ba2/BB

Priority of pre- and balloon payments Scheduled principal and interest both paid

sequentially, but modified pro rata prepayments with certain sequential triggers

Amortisation is soft and can be deferred, with possible

reverse sequential prepayments

50/50 pro rata-sequential, with two sequential triggers, loan level amortisation tied to letting and LTV targets

Scheduled repayments are sequential. Prepays and final

repays are paid 50% sequential and 50% pro rata

Sequential amortisation of Credit-linked Notes, ranking pari passu and pro-rata with

CDS. Losses allocated in reverse sequential order

Liq Fac (Amt/%Day1/Floor) 27/4.9%/NA 12.5/5%/NA 16.5/6.7%/NA 28/8%/NA None

AAA WAL/Final Note Maturity May-09/Jan-14 Jun-14/May-18 Oct-11/May-15 Dec-10/Jun-14 Nov-10/Feb-48

Comments No pre-funded reserves, Borrower has 14 employees, non-registered mortgages,

40% AAA-rated tenants

68% of rent from Deutsche Bank (AA-) with 24% vacancy across pool

Largest loan (65%) has Deutsche Telekom (A-) as

main tenant

Partially funded synthetic CMBS with KfW collateral, and

no ICR data on 71% of pool

Source: Barclays Capital and Rating Agencies.



Analytical packages In the US market, several third-party vendors, including Trepp, Intex and Conquest, are focused on providing analytical software packages to CMBS investors. These packages have been designed for US CMBS transactions, which are typically more granular, multi-borrower, multi-property transactions.

The packages allow investors to do analyses before issuance and monitor transactions during term in a standardised manner. The great advantage of these packages is that they allow for comparisons between deals and the standardisation of assumptions for different deals. In addition, the availability of data and analytical models promotes secondary market liquidity, something many investors are seeking.

Trepp’s database of European CMBS transactions includes 40 different transactions, including the ECLIPSE, ELoC, Opera Finance, Titan and Windermere transactions. Intex’s database of European CMBS transactions includes at least 47 transactions, which contain updated information, including, among others, the Eurohypo, ECLIPSE. DECO, Real Estate Capital, ELoC and Taurus transactions. Some overlap between Trepp and Intex exists, as 31 deals are covered by both. Therefore, total “analytical” coverage is for approximately 56 deals, a 70% increase from the 33 deals covered as of mid-year 2005. However, with a total of 196 European CMBS transactions since 1997, Intex’s and Trepp’s combined coverage is 29%, again, an improvement from the 25% as of mid-year 2005, despite the record 2005 issuance.

Despite these positive developments for investors, there are still a few areas for improvement. Firstly, we believe a further increase in the number of deals covered would be positive. This does seem to be on its way, as illustrated by the percentages above. Also, Trepp has announced the opening of a London office to service the European investor base.

Secondly, there are still a number of shortcomings in the analytical capabilities of these packages because they have not been designed for the European CMBS market specifically. For example, little analytical capacity is available on the property or lease level, since it is not really relevant for the multi-borrower multi-property type of transaction, discussed above. However, as European CMBS issuance is increasingly shifting to the multiple-borrower transaction type, building- and lease-level analysis might become less relevant in the future. However, for the half of current CMBS issuance that is in the single-borrower category, investors are unable to stress lease renewal and break probabilities, re-letting and rent assumptions. Therefore, it will remain difficult to come to a sophisticated analysis of the many benchmark transactions in the European CMBS market to date, such as Canary Wharf Finance II, Broadgate Finance, Trafford Centre and Meadowhall CMR.

On the other hand, the lack of detailed property and lease level information disclosed by arrangers makes it particularly difficult for Intex and Trepp to provide investors with this functionality. We would encourage investors to insist that arrangers inform Intex, Trepp and other analytical software providers with the full data tape to allow for proper, uniform and independent modelling. To base the modelling solely on the offering circular is, perhaps, not sufficient to ensure the quality of the modelling.

We are encouraged by the expanding coverage of analytical software providers for European CMBS transactions. It allows US-based investors to analyse European deals in a familiar analytical format. However, European investors may need some assistance in adapting to these packages.

Packages allow for standardised analysis

and monitoring, promoting secondary

liquidity

Trepp and Intex combined cover has

improved to approximately 29% of

European CMBS transactions to date, compared with 25% only six months ago

Increased coverage and analytical refinements

are areas for improvement

Lack of property and lease analytics might

matter less in the future

Proper analysis of certain deals is possible only if the full data tape

is given to the software providers



Rating agency analysis Most CMBS investors rely in the first instance on the analysis performed by the rating agencies, even if they also do their own credit analysis. Rating agency analysis plays a crucial role in the original structuring of the transaction as it determines the exact size of each of the note tranches.

Despite the fact that there are three rating agencies actively rating European CMBS, not every transaction is rated by all three. In 2005, we saw the largest percentage of annual issuance (64%) rated by all three rating agencies, as illustrated by Figure 36.

Figure 36: Outstanding European CMBS rated per rating agency

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005

One Two Three

Source: Rating agencies, Barclays Capital.

It is difficult to assess any differences between the individual rating agencies’ methodologies, as some of them have not explicitly published updated approach pieces. However, it might be fair to assume that the similarities are probably greater than the differences. We highlight the different stages of the ratings process below. The key thing to point out is that credit ratings are not only the result of quantitative modelling, but also include extensive legal and property analyses. The rating process also includes a certain level of dialogue with the arranger as the arranger seeks to reconcile the (often different) feedback from the three different agencies. Please refer to Figure 37.

Rating agency analysis crucial in original

tranching and structuring

64% of European CMBS in 2005 was rated by all

three rating agencies



Figure 37: CMBS rating process

Rating Analysis

of MortgagePool

TranchingFeedback &Adjustment

Risks

FinalSizing

Liquidity &ExternalSupports

PropertyAnalysis

LegalAnalysis Arranger

QuantitativeModelling &

Stress Testing

Risks

AA/Aa2

BBB/Baa2

AAA/Aaa

A/A2

Rating Analysis

of MortgagePool

TranchingFeedback &Adjustment

Risks

FinalSizing

Liquidity &ExternalSupports

PropertyAnalysis

LegalAnalysis Arranger

QuantitativeModelling &

Stress Testing

Risks

AA/Aa2

BBB/Baa2

AAA/Aaa

A/A2

AA/Aa2

BBB/Baa2

AAA/Aaa

A/A2


The process results in the actual credit ratings, as communicated via the rating agency pre-sale reports and updated via their surveillance websites and press releases. The differences of opinion between rating agencies are illustrated by the number of split ratings (defined as two rating agencies having a different rating on the same note class at issuance). As can be seen in Figure 38, disagreements are becoming less common, as the percentage of split ratings has dropped from over 20% in 2001 to a little more than 5% in 2005. However, the lack of ratings on a large number of note classes probably masks the actual differences of opinion. In other words, big differences of credit opinion often result in certain rating agencies not being asked to rate certain note classes.

Figure 38: Split ratings in European CMBS

0

5

10

15

20

25

30

35

40

45

1997 1998 1999 2000 2001 2002 2003 2004 2005

Issu

ance

(¤

b)

0%

5%

10%

15%

20%

25%Split Rated Equal Rated % Split


Ratings determined by quantitative, legal and

property analyses

Disagreements between rating agencies are

declining – only 5% of 2005 issuance had

split ratings



Pricing and relative value After some initial tightening in Q1 05, European CMBS spreads widened during the remainder of 2005, as illustrated in Figure 39. The average AAA spread was 21 bp for the entire year. Deals priced after mid-year were 24 bp on average, versus 18 bp in the first half of the year. Spreads were at their tightest levels in early March, with three very different CMBS transactions pricing at 14 bp at the AAA level. The BBB average spread was 93 bp for the full year, with deals after mid-year pricing at 106 bp on average, compared with 81 bp during the first half of the year. BBB spreads were at their tightest levels in mid- to late April, with three CMBS transactions pricing at 70 bp at the BBB level. In the second half of the year, we witnessed a wide range of spreads, partly as a result of more challenging property type collateral.

Figure 39: European CMBS issue spreads (bp) in 2005

0

10

2030

40

50

6070

80

90

100110

120

130

Jan 05 Feb 05 Apr 05 May 05 Jul 05 Aug 05 Oct 05 Nov 05 Dec 05

AAA pricing AA pricing A pricingBBB pricing Poly. (AAA pricing) Poly. (AA pricing)Poly. (A pricing) Poly. (BBB pricing)


Spread drivers in 2005 included concerns over general levels of credit, especially with the GM and Ford downgrades. Also, after tightness in the first half, some deals priced considerably wider due to either structural or collateral concerns. Widening in Q4 05 was partly driven by the sheer volume of supply, which accounted for 34% of the full year’s issuance.

In the next section, we compare year-end 2005 CMBS spreads with spreads available on other ABS sectors in both Europe and the US. Our relative value framework also considers a number of relevant risk factors.

Despite the recent widening during 2005, we note that AAA spreads have tightened by approximately 45% since July 2003. In addition, BBB spreads have come in from 200-220 bp to approximately 95-100 bp as of year-end 2005. Therefore, the difference between AAA and BBB spreads narrowed to approximately 70 bp at year-end 2005 from 160 bp in July 2003. This long-term tightening has made CMBS an attractive source of debt funding for an increasing range of property owners.

Spreads widened in H2 05, due to busy

pipeline and doubling of issuance

Spreads affected by non-CMBS issues as well

Since July 2003, AAA spreads have tightened by approximately 45%




0

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Prior to 2003, spreads displayed no clear trends as issuance was fairly limited between 1995 and 2002. Only approximately one-quarter of European CMBS issuance outstanding today was in fact issued prior to 2003. Therefore, we believe spread movements prior to 2003 are likely to be less relevant for the current CMBS market.


0

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AAA A Poly. (A) Poly. (AAA)


As a final point, we note that the spreads on euro-denominated deals and deals with better-than-average granularity seem to have priced tighter relative to the overall CMBS market. CMBS deals with particularly unusual property types, such as nursing homes, hotels, specialist care facilities, etc, seem to carry wider spreads in the market. This seems to support the premise that the market is efficient. Also, we could expect arrangers to respond by bringing more euro-denominated and granular deals to the market.

Spreads prior to 2003 not that relevant any

more

Euro-denominated and granular deals price tighter and unusual

collateral forces wider pricing



Relative value In this section we consider the relative value of CMBS across eight different US and European sectors using a top-down approach For additional details, please see “Securitisation Relative Value 2006” in our Global Securitisation Annual, 1 January 2006. Figure 42 summarises the results of our analysis, plotting investment grade representative spreads against the average of six ranked risk indicators for each sector. On the basis of this analysis, in the medium-risk space, European CMBS appears to offer good value. For more risk-averse investors, European RMBS offers good value and for investors with higher risk appetites, US home equity loans (HEL) and UK pubs represent relatively good value. The consumer ABS sectors appear rich in this analysis, but this may well reflect factors not taken into consideration, such as strong historical credit performance and good secondary market liquidity.

Figure 42: CSWA spreads (AAA-BBB rated) against average of ranked risk indicators

Europe Pubs

Europe CMBS

Europe RMBS

Europe AutosEurope Cards

US AutosUS Cards

US HEL

US Student Loans (Gov Guaranteed)

0

5

10

15

20

25

30

35

40

45

50

2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0Average of ranked risk indicators (lower is better)

Spre

ad in

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over

Lib

or


Finding relative value in the global ABS market is as much an art as a science owing to the complexities of structured product (ie, wide ranging structural features, vastly different underlying collateral characteristics), varied secondary market liquidity, and different legal jurisdictions. Assessing relative value across such a diverse asset class as global ABS is an enormous challenge, and in any case, it is unlikely that all investors would agree on a single methodology for conducting such an assessment. Nevertheless, we endeavour to create a framework (albeit simplified) to uncover relative value across major US and European ABS sectors using a top-down approach. While such a “one size fits all” approach is not entirely accurate or appropriate in all instances, at a minimum the analysis provides a jumping off point from which investors can start their own search for that elusive goal – relative value. The following analysis is primarily a credit risk assessment; as such, we exclude US student loan ABS owing to the government-guaranteed nature of the underlying collateral.

European CMBS offers best relative value

among eight different ABS sectors in mid-risk

category

Relative value is as much an art as a science




Approach and results overview In assessing relative value, one can move from the general to the specific (the deductive or “top-down” approach) or from the specific to the general (the inductive or “bottom-up” approach). The bottom-up approach works best in a relatively homogeneous market, which lends itself to making direct comparisons between different bonds. The wide variation in assets, structures and geographies that make up the global ABS market renders the bottom-up approach cumbersome in our case. The top-down approach, on the other hand, is well suited to comparing different types of bonds at the sector level. Rather than focusing on specific bonds, our relative value analysis will, for the most part, be restricted to comparing different ABS sectors. Within each sector, a bottom-up approach can then be used to identify specific bonds of interest.

Figure 43 provides a schematic representation of an ABS transaction. The major components are the economy, the underlying assets, the structure and the market. The economy forms the backdrop for the performance of assets. It drives what we identified above as the systemic component of returns. The asset generates the cash flow that ultimately supports the operation of the transaction. The structure allocates this cash flow (principal and interest) to different note holders. Finally, the notes themselves are priced within the context of a wider market. This model is clearly a simplification, but it does allow us to break a complex object down into simpler pieces, which we can then compare and contrast across the different ABS sectors.

Figure 43: A schematic representation of the components of ABS


Using Figure 43 we can separate the relative value process into discrete steps:

� Step 1: Compare the economic and demographic fundamentals of different jurisdictions;

� Step 2: Compare the underlying assets;

� Step 3: Compare the structures;

� Step 4: Take into account market spreads; and

� Step 5: Combine risk indicators from Steps 1-3 with the market spreads from Step 4 to arrive at a relative value assessment.

For a full description of our methodology and the results for each of the identified steps, please see “Securitisation Relative Value 2006” in our Global Securitisation Annual, 1 January 2006. In this publication we present only the results, and we note that CSWA means capital structure weighted average, including all investment grade note classes.

We use a top-down approach in assessing

relative value at the sector level

Major components: the economy, assets,

structures, markets

(4) Market (1) Economy & Demographics

(2) Asset

(3) Structure

Cash Flow

Note

Note

Note

Principal and Interest



(5) Investors Relative Value Assessment





Figure 44: Spreads and summary of risk indicators by sector

Indicator US

HEL US

Cards US

Autos Europe

Cards Europe

Autos Europe

RMBS Europe

CMBS Europe

Pubs

CSWA Spread 37 6 7 14 11 17 37 46

Structural Protection Index

16 21 21 21 18 22 13 20

CSWA Ratings Implied 3-Year Expected Loss (bp)

3 4 2 4 3 2 5 14

Typical AAA Subordination (%)

18 14 11 12 8 10 30

Delinquencies (%) 6.55 3.93 0.31 5.05 0.68 0.50 0.36

Loss rates (%) 5.56 0.48 5.00 1.00 0.00 0.03

CSWA Downgrade Experience (%)

0.00 0.00 0.16 0.55 0.19

Issuance 2005 ($bn) 500 61 87 14 8 182 45 5


The results are further refined by ranking each indicator for each of the considered ABS sectors and calculating a straight average for the overall risk indicator ranking.

Figure 45: Spreads and summary of ranked risk indicators by sector

Indicator US

HEL US

Cards US

Autos Europe

Cards Europe

Autos Europe

RMBS Europe

CMBS Europe

Pubs

CSWA Spread 37 6 7 14 11 17 37 46

Structural Protection Index

7 2 2 2 6 1 8 5

CSWA Ratings Implied 3-Year Expected Loss (bp)

4 6 2 5 3 1 7 8

Typical AAA Subordination

2 3 5 4 7 6 1

Delinquencies 7 5 1 6 4 3 2

Loss rates 6 3 5 4 1 2

Average risk indicator rank

5.00 4.40 2.60 4.40 4.80 2.40 4.00 6.50

Issuance 2005 1 4 3 6 7 2 5 8

CSWA Downgrade Experience

1 1 3 5 4

Note: We include CSWA downgrade experience and 2005 issuance for information only – it is not included in our average risk indicator rank. Source: Barclays Capital.

Overall, we note that European ABS investors might be coming to similar relative value views even without considering our relative value framework. We refer to Figure 14, which shows that according to our ABS investor survey, CMBS ranks as the favourite ABS sector for 2006.

Finally, we want to offer a word of caution. The financial markets have a tendency to self correct, and attractive value relative to risks is typically not available for very long. As additional investors are attracted to the sector, pricing might tighten.



Appendices

European CMBS Issuance since 1997

Deal Name Ticker Issuance (¤)

Currency of Senior

Class Issue date

Legal Maturity of

Longest Note Deal Type

Country of Collateral

Property Type

AAA Spread at Issuance

Northavon Investments NORTIN 107,669,440 GBP 1997/03 5/10/26 CTL UK Office NA

PARCS Limited PARCS 202,582,334 GBP 1997/04 30/4/04 SBMP UK Office NA

La Defense PLC 1 LADF 1 307,947,014 FRF 1997/10 14/10/09 SBSP France Office 20

Canary Wharf Finance plc CANWHA 890,205,181 GBP 1997/12 22/10/27 SBSP UK Office NA

Sasco Europe 1998-C1 plc SASC 1998-C1 160,619,594 GBP 1998/04 9/3/23 MBMP UK Mixed NA

Hotel Securitisation (No. 1) plc HOTEL SEC NO 1 73,792,712 GBP 1998/12 30/10/15 SBMP UK Leisure NA

Chene Finance Ltd CHEFIN 228,673,527 EUR 1999/02 14/1/06 SBMP France Mixed NA

La Defense II plc LADEFE 132,022,000 EUR 1999/03 9/10/05 SBSP France Office 36

Morgan Stanley Mortgage Finance (Broadgate) plc BGATE 1 2,320,934,000 GBP 1999/05 5/4/38 SBSP UK Office NA

European Loan Conduit 1 EURO 1 255,590,495 GBP 1999/08 27/1/08 SBMP UK Mixed 55

Deutsche Hypothekenbank AG Hannover Berlin DHB 1 247,000,000 EUR 1999/11 27/5/40 SYN Germany Mixed 32

Paternoster Securitisation plc PATER 1 169,583,265 GBP 1999/11 20/2/09 MBMP UK Mixed 50

European Loan Conduit 2 EURO 2X 574,313,232 GBP 1999/12 22/10/08 MBMP UK Office 55

Owengate Keele plc OWEN 1 115,557,940 GBP 2000/01 31/1/30 SBMP UK Other NA

Trafford Centre Finance Ltd TRFRD 1 979,904,000 GBP 2000/02 28/7/33 SBSP UK Retail 51

Europa Ltd 1 EURL 1 1,345,000,000 EUR 2000/03 15/12/36 SYN Europe Mixed 20

Highbury Finance BV HIGHB 7.017 549,515,450 GBP 2000/03 20/3/23 CTL UK Retail NA

Peverel Funding Ltd PEVERL 168,240,200 GBP 2000/03 1/12/34 SBMP UK Residential NA

Canary Wharf Finance II plc CANWA II 6,348,038,800 GBP 2000/05 22/10/37 SBSP UK Office NA

European Loan Conduit 3 EURO 3X 402,237,980 GBP 2000/06 29/7/09 MBMP UK Mixed 40

Dragon Finance BV DRAGN 1 383,031,110 GBP 2000/08 13/7/23 CTL UK Retail NA

European Loan Conduit 4 EURO 4X 768,181,068 GBP 2000/09 1/11/07 SBMP UK Retail 40

Monument Securitisation 1 Plc MONU 1 632,088,416 GBP 2000/09 5/11/12 MBMP UK Mixed 37

Europa Ltd 2 EURL 2 1,531,000,000 EUR 2001/03 15/6/27 SYN Europe Mixed 32

Silver No. 1 plc SILVER 1 418,796,200 GBP 2001/03 15/3/27 MBMP UK Healthcare 50


Pan-European Industrial Properties ISA 1 PROLO 1 213,750,000 EUR 2001/04 15/4/11 SBMP France Industrial 35

Heritage Mortgage Securities Plc HERIT 1 270,874,329 GBP 2001/06 8/5/10 MBMP UK Mixed 40

Werretown Supermarkets Securitisations PLC WERRE 1,063,410,944 GBP 2001/06 4/10/25 CTL UK Retail NA


Cofinimmo Lease Finance S.A. COFINIMMO 60,750,000 EUR 2001/08 1/7/27 CTL Belgium Office NA

Eurohypo 2001-1 CMBS EUROHYPO 2001-1 351,575,823 GBP 2001/08 25/6/22 SYN UK Mixed 37.5

European Loan Conduit 7 EURO 7X 550,378,500 GBP 2001/08 30/7/06 SBMP UK Mixed 30


Meadowhall CMR Finance PLC MEADW 1,405,687,500 GBP 2001/11 12/1/32 SBSP UK Retail NA

Amethyst Finance PLC AMETH 1 529,235,900 GBP 2001/12 12/12/26 CTL UK Retail NA

Dutch Dream 2001-1 DUTDR 2001-1 198,850,000 EUR 2001/12 18/4/20 SYN Netherlands Mixed 45

Telereal Securitisation plc TELSEC 4,365,354,000 GBP 2001/12 10/12/33 CTL UK Telecom 40

Windermere CMBS Plc WINDM 1X 752,757,300 GBP 2001/12 20/10/08 MBMP UK Office 48

France Industrial Properties SA FIP 1 144,000,000 EUR 2002/03 15/4/12 SBMP France Industrial 38

European Loan Conduit 9 EURO 9 458,000,000 EUR 2002/05 2/11/11 CTL France Office NA

Monument Securitisation 2 Plc MONU 2 680,253,000 GBP 2002/05 17/9/13 MBMP UK Mixed 30


AyT 7 Promociones Inmobiliarias I FTA AYT 7 319,800,000 EUR 2002/06 16/6/35 MBMP Spain Residential 30

Dolerite Funding PLC DOLER 1 765,018,875 USD 2002/06 20/8/32 MBMP UK Mixed 28

Hoteloc Plc HELOC 1X 827,221,487 GBP 2002/07 10/5/07 SYN UK Leisure 43

Vesteda Residential Funding BV VEST I 1,600,000,000 EUR 2002/07 20/7/17 SBMP Netherlands Residential 23

European Loan Conduit 10 EURO 10 341,451,000 EUR 2002/08 15/1/10 SBMP France Mixed 32

Nymphenburg 2002-1 Ltd NYMPH 2002-1 2,170,450,000 EUR 2002/08 9/2/25 SYN UK Office 32

Duke Ltd DUKEL 02 814,350,000 EUR 2002/09 23/8/27 SYN Netherlands Mixed 13


Imser Securitisation Srl IMSER 1 1,163,960,000 EUR 2002/10 18/9/25 SBMP Italy Mixed 43

Aareal Bank AG 1 (Global Commercial One) GCO 1 338,250,000 EUR 2002/12 28/2/35 SYN UK Mixed 50

Bamburgh Finance Plc BAMBU 1 326,080,689 GBP 2002/12 1/5/38 MBMP UK Mixed 45

Geco Ltd GECO 2002 594,250,000 EUR 2002/12 20/9/54 SYN Germany Mixed 15

Wuerttembergische Hypothekenbank AG EU-1 WUERT EU-1 374,200,000 EUR 2002/12 18/11/26 SYN UK Mixed 26

European Loan Conduit 12 EURO 12 339,999,000 EUR 2003/02 14/8/13 SBSP UK Office 45




Currency of Senior

Class Issue date

Legal Maturity of



Property Type



Real Estate Capital Plc REC 1 279,357,734 GBP 2003/04 25/1/12 MBMP UK Retail 43

Eiger Trust EIGER 1X 699,170,000 EUR 2003/05 15/11/10 CTL Switzerland Telecom 38

European Loan Conduit 14 EURO 14X 433,298,850 GBP 2003/05 25/10/11 SBMP UK Industrial 45

Lombard Securities Plc LOMB 1 812,323,495 GBP 2003/05 31/12/17 MBMP UK Mixed 40

Deco Series 2003-CIT plc DECO 2003-CITX 350,652,400 GBP 2003/06 27/4/12 SBMP UK Retail 47

First Real Estate SA FREAL 1 243,602,000 EUR 2003/07 24/7/11 SBMP Italy Mixed NA

Juturna (European Loan Conduit No 16) plc BBC 1,174,108,752 GBP 2003/07 10/8/33 CTL UK Other NA

Bramante Plc BRAMA 1 214,600,000 EUR 2003/09 31/7/08 SYN Italy Office 40


Europa Ltd 3 EURL 3 322,150,000 EUR 2003/10 30/6/51 SYN Europe Mixed 46

Polish Retail Properties Finance PLC PRPF 1 74,000,000 EUR 2003/10 28/11/10 SBMP Poland Retail NA

Windermere II CMBS Plc WINDM IIX 441,991,405 GBP 2003/10 20/10/12 MBMP UK Mixed 44

DECO Series 2003 DECO 2003-CENX 549,380,500 EUR 2003/11 27/10/10 SBSP Germany Retail 40

European Loan Conduit 17 EURO 17X 302,900,300 EUR 2003/11 18/2/13 MBMP France Office 38

Opera Finance Plc OPERA 1 520,088,213 GBP 2003/11 5/2/18 MBMP UK Mixed 50

Paris Residential Funding PLC PARES 1X 964,130,000 EUR 2003/11 25/7/11 SBMP France Residential 38

Premiertel PLC PREMI 412,080,839 GBP 2003/11 8/5/32 CTL UK Telecom NA

Aareal Bank AG 2 (Global Commercial Two) GCO 2 382,250,000 EUR 2003/12 26/11/43 SYN Sweden Mixed 50

Coeur Defense FCC COEUR 1 820,000,000 EUR 2003/12 15/4/13 SBSP France Office 44

Nightingale Funding PLC NIGHT 1 343,344,000 GBP 2003/12 12/10/35 MBMP UK Healthcare 52

Stellae I BV STEL I 108,500,000 EUR 2003/12 15/10/29 CTL Netherlands Office 16

European Property Capital EPC 1 355,450,000 EUR 2004/02 24/12/13 CTL France Telecom 30

La Defense PLC III LADF III 635,000,000 EUR 2004/02 9/4/14 SBSP France Office 27

Business Mortgage Finance Plc BUMF 1 197,941,750 GBP 2004/03 20/7/36 MBMP UK Mixed 38

White Tower 2004-1 PLC WTOW 2004-1 306,504,000 GBP 2004/03 20/1/13 MBMP UK Office 28

Windermere III CMBS Plc WINDM IIIX 460,150,000 EUR 2004/03 26/11/12 SBMP Sweden Office 26

AyT Promociones Inmobiliarias II FTA AYTPI II 475,400,000 EUR 2004/04 12/10/40 MBMP Spain Residential 26

Delamare Finance plc DELMAR 956,023,750 GBP 2004/04 19/2/29 CTL UK Retail NA

Midgaard Finance Ltd MIDGA 1 775,000,000 EUR 2004/04 23/4/29 CTL Sweden Office NA

Real Estate Capital No2 plc REC 2 548,579,175 GBP 2004/05 25/7/15 MBMP UK Retail 22

Sandwell Commercial Finance PLC SANDW 1 375,000,000 GBP 2004/05 11/5/39 MBMP UK Mixed 22

Castanea plc CASTA 1 314,750,000 EUR 2004/06 25/1/19 SYN Europe Mixed 38

European Loan Conduit 18 EURO 18X 419,350,000 EUR 2004/06 15/11/15 MBMP France Mixed 24

Girasole Finance Srl GSOLE 1 80,800,000 EUR 2004/07 20/10/44 MBMP Italy Other 12

Marlin (EMC II) BV MARL 1 614,000,000 EUR 2004/07 23/12/12 SBMP Europe Office 22

Pacific Quay Finance PLC BBCPA 193,810,375 GBP 2004/07 25/7/34 CTL UK Other NA


European Loan Conduit 20 EURO 20 340,200,000 EUR 2004/08 21/7/13 SYN Italy Office 23

GepraLazio GEPRA 1 150,000,000 EUR 2004/08 20/9/10 MBMP Italy Residential 30

Opera Finance (Lakeside) OPERA LAKE 824,890,000 GBP 2004/08 31/7/13 SBSP UK Retail 25

EPIC (Caspar) PLC EPIC CASP 782,845,865 GBP 2004/09 29/10/14 SBMP UK Mixed 22

Aareal Bank AG 3 (Global Commercial Three) GCO 3 272,250,000 EUR 2004/10 29/1/30 SYN UK Mixed 36

EPIC OPERA PLC EPOP ARLI 434,040,000 GBP 2004/10 28/10/13 SBMP UK Office 23

Picts plc PICTS 221,860,951 GBP 2004/10 20/1/39 CTL UK Office NA

Self-Storage Securitisation BV SELFS 1 325,000,000 EUR 2004/10 1/10/14 SBMP UK Other NA

Windermere IV CMBS Plc WINDM IVX 609,970,120 GBP 2004/10 20/1/13 MBMP UK Office 21

Business Mortgage Finance 2 plc BUMF 2 214,650,000 GBP 2004/11 15/2/37 MBMP UK Mixed 29

Epic (Premier) S.A. EPICSA 695,752,780 GBP 2004/11 7/7/34 CTL UK Office NA

Hallam Finance Plc HALLM 1 265,000,000 EUR 2004/11 15/10/14 SBMP Germany Residential 22

Land Securities Capital Markets Plc LAND 3,680,340,835 GBP 2004/11 31/7/32 SBMP UK Mixed NA

Titan Europe 2004-1 Plc TITN 2004-1 282,093,072 GBP 2004/11 23/7/13 MBMP Ireland Office 20

KFN Office Finance BV KFNOF 1 450,000,000 EUR 2004/12 17/12/16 SBMP Netherlands Office 21

Quick Star PLC QSTAR 1 281,102,340 GBP 2004/12 15/7/11 SBMP UK Office 20

Titan Europe 2004-2X TITN 2004-2X 267,969,441 EUR 2004/12 23/1/14 MBMP Germany Mixed 19

Opera Finance (MetroCentre) Plc OPERA METC 865,500,000 GBP 2005/01 2/2/17 SBSP UK Retail 20

Epic Unite EPIC UNITE 365,324,603 GBP 2005/02 30/1/14 SBMP UK Other 19

Pan-European Industrial Properties SA 4 PROLO 4 389,000,000 EUR 2005/02 5/5/13 SBMP Europe Industrial 14

Taurus CMBS 1 Plc TAURS 1 370,628,265 GBP 2005/02 27/7/13 MBMP UK Mixed 17

Aquila Eclipse 2005-1 Plc ECLIP 2005-1 631,407,385 GBP 2005/03 25/10/16 MBMP UK Mixed 14

Broadgate Financing plc BLNDLN 3,029,728,000 GBP 2005/03 5/7/33 SBSP UK Office 16

F&C Commercial Property Finance Ltd FCCP 331,729,000 GBP 2005/03 30/6/17 SBMP UK Mixed NA

Real Estate Capital No3 plc RECF 3 218,303,750 GBP 2005/03 15/7/16 MBMP UK Mixed 20

Redevco Original Commercial Securitisation REDEV 1 467,220,000 GBP 2005/03 15/4/15 SBMP UK Retail 14

White City BBCWC 525,055,635 GBP 2005/03 17/4/35 CTL UK Other NA

Opera Finance (CSC3) Plc OPERA CSC3 1,043,416,000 GBP 2005/04 25/4/17 SBMP UK Retail 23




Currency of Senior

Class Issue date

Legal Maturity of



Property Type


Opera Finance (Fosse) Plc OPERA FP 345,121,000 GBP 2005/04 20/4/14 SBSP UK Retail 18

Opera Finance (Scot) Plc OPERA SCOT 628,961,000 GBP 2005/04 31/7/14 SBMP UK Retail 17

The Mall Funding Plc MALLF 1 1,556,504,000 GBP 2005/04 22/4/14 SBMP UK Retail 18

White Tower 2005-1 PLC WTOW 2005-1 814,872,740 GBP 2005/04 29/4/14 MBMP UK Office 20

Windermere V WINDM VX 641,645,000 EUR 2005/04 20/2/15 SBMP Italy Office 16

AKERO Multifamily Housing Ltd AKERO 1 278,000,000 EUR 2005/05 27/5/15 SBMP Sweden Residential 17

Forest Finance Plc FORES 1 250,000,000 EUR 2005/05 12/5/18 SBMP Austria Mixed 24

Opera Finance (Uni-Invest) Plc OPERA UNI 1,008,900,000 EUR 2005/05 15/2/12 SBMP Netherlands Office 23

Talisman Finance Plc TMAN 1 554,300,000 EUR 2005/05 21/1/14 MBMP Germany Mixed 25

AyT Promociones Inmobiliarias III FTA AYTPI III 300,700,000 EUR 2005/06 15/12/46 MBMP Spain Residential 22

Ayt Promociones Inmobiliarias IV FTA AYTPI IV 429,700,000 EUR 2005/06 15/4/40 MBMP Spain Residential 22

BBVA 3 Hipotecario Fondo de Titulizacion de Activos BBVAH 3 1,450,000,000 EUR 2005/06 21/11/38 MBMP Spain Mixed 17

Campidoglio Finance S.R.L CAMPI 1 121,000,000 EUR 2005/06 26/7/11 SBMP Italy Residential 17

Deco Series 2005-C1X plc DECO 2005-C1X 349,316,607 GBP 2005/06 27/7/17 MBMP UK Mixed 23

Titan Europe 2005-1X TITN 2005-1X 348,803,075 EUR 2005/06 23/4/14 MBMP Germany Office 24

Valesco Funding VALES 1 246,550,000 EUR 2005/06 27/4/15 SBMP Germany Mixed 25

Business Mortgage Finance 3 plc BUMF 3 364,132,800 GBP 2005/07 15/11/38 MBMP UK Mixed 27

Dolerite Funding No 2 PLC DOLER 2 884,760,000 GBP 2005/07 20/5/37 MBMP UK Mixed 18

European Prime Real Estate 1 Plc EPRE 1-X 501,362,709 GBP 2005/07 22/4/14 MBMP UK Mixed 24

Fleet Street Finance One plc FLTST 1 948,660,750 GBP 2005/07 20/7/14 MBMP UK Mixed 30

Proscore-VR 2005-1 Plc PROVR 2005-1 168,700,000 EUR 2005/07 5/2/48 SYN Germany Mixed 26

URSUS EPC URSUS 1-X 215,142,326 GBP 2005/07 22/7/12 MBMP UK Mixed 29

Vesteda Residential Funding BV VEST 2 1,300,000,000 EUR 2005/07 20/7/17 SBMP Netherlands Residential 23

Bellatrix (Eclipse 2005-2) ECLIP 2005-2 569,275,740 GBP 2005/08 25/1/17 MBMP UK Office 24

Deco Series 2005-Pan Europe 1plc DECO 2005-E1X 897,015,000 EUR 2005/08 27/7/14 MBMP Germany Retail 17

Cornerstone Titan 2005-1 TITN 2005-CT1X 873,204,589 GBP 2005/09 28/7/14 MBMP UK Office 23

Deco Series 2005-UK1 plc DECO 2005-UK1X 418,805,660 GBP 2005/09 27/10/14 SBMP UK Office NA

REC Retail Parks Ltd. RECR IV 1,487,520,000 GBP 2005/09 20/10/14 SBMP UK Retail 25

Sandwell Commercial Finance 2 PLC SANDW 2 519,575,000 GBP 2005/09 30/9/37 MBMP UK Mixed 20

FCC Proudreed PLC PROUD 1 397,400,000 EUR 2005/10 18/8/17 SBMP France Industrial 23

LCP Proudreed PLC PROUL 1 470,474,200 GBP 2005/10 25/8/16 SBMP UK Mixed 26

Victoria Funding EMC-III EMC 3 382,980,600 GBP 2005/10 30/4/14 MBMP UK Office 20

Windermere VI WINDM VI-X 1,011,502,800 GBP 2005/10 27/10/14 MBMP UK Mixed 14

Deco 6 UK Large Loan 2 DECO 6-UK2X 1,618,729,790 GBP 200 5/11 27/7/17 MBMP UK Mixed 20

European Loan Conduit 21 EURO 21 326,800,000 EUR 2005/11 15/8/15 MBMP France Office 20

Immeo Residential Finance IMMEO 1 1,545,500,000 EUR 2005/11 15/3/13 SBMP Germany Residential 17

London & Regional Debt Securitisation 1 LORDS 1 344,508,200 GBP 2005/11 15/10/14 SBMP UK Office 21

Opera Finance (MEPC) OPERA MEPC 691,370,000 GBP 2005/11 20/7/14 SBMP UK Mixed 24

Prominent CMBS Funding Plc PROMI 1 1,461,260,000 EUR 2005/11 20/12/32 MBMP UK Mixed 23

Taurus CMBS 2 Plc TAURS 2 403,900,000 EUR 2005/11 5/7/19 MBMP Italy Office 27

Centaurus (Eclipse 2005-3) plc ECLIP 2005-3 651,586,000 EUR 2005/12 10/10/15 MBMP Germany Residential 18

Cornerstone TITAN 2005-2 plc TITN 2005-CT2X 587,462,152 GBP 2005/12 23/10/12 MBMP UK Office 26

Draco (Eclipse 2005-4) plc ECLIP 2005-4 419,972,079 GBP 2005/12 25/10/17 MBMP UK Office 26

Epic (Ayton) EPICP AYTN 792,939,891 GBP 2005/12 28/7/16 SYN UK Mixed 24

European Property Capital 3 EPC 3 406,712,000 EUR 2005/12 22/5/15 MBMP Europe Mixed 24

ING (UK) Listed Real Estate Issuer PLC INGUK 1 296,140,000 GBP 2005/12 30/1/15 SBMP UK Mixed 25

Perseus (European Loan Conduit No. 22) plc EURO 22X 760,229,156 GBP 2005/12 25/7/14 MBMP UK Mixed 18

Tahiti Finance Plc TAHIT 1 794,956,500 GBP 2005/12 24/5/15 SBMP UK Leisure 36

Talisman-2 (Priory) Finance PLC TMAN 2 552,637,500 GBP 2005/12 23/12/15 SBMP UK Healthcare 35

Opera Finance (CMH) OPERA CMH 375,000,000 EUR 2006/01 15/1/15 SBMP Ireland Office 19

BL Superstore Finance BLSF 292,173,600 GBP 2006/02 4/10/25 SBMP UK Office NA

MESDAG (Berlin) B.V. MESDG 1 154,550,000 EUR 2006/02 25/7/16 SBMP Germany Retail 21

UK Balanced Property Finance Limited UKBPF 2006-1 174,432,000 GBP 2006/02 7/4/17 SBMP UK Retail 27

Vanwall Finance plc VWALL 1 523,367,529 GBP 2006/02 12/4/16 SBMP UK Mixed 28




List of published Barclays Capital CMBS research 1) Expanding research coverage to include European CMBS – 01 Apr 05

2) Canary Wharf Finance II – The Next Restructuring – 29 Apr 05

3) This month’s opera season – 1 May 05

4) Do Lease Structures impact property cash flow stability? – 6 May 05

5) Analytical Framework for European CMBS – 20 May 05

6) Meadowhall - Refinancing Candidate – 24 May 05

7) European CMBS Updated Market Overview – 26 May 05

8) Commercial Property Lending Update – 9 Jun 05

9) Trafford Centre Tap Updated – 10 Jun 05

10) Borrower Quality in European CMBS – 20 Jun 05

11) CMBS Analytics Software: Good to have a choice – 29 Jun 05

12) Granularity in European CMBS – 11 Jul 05

13) Recent Flurry of German and Austrian CMBS – 12 Jul 05

14) Next round of UK multi-borrower multi-property CMBS – 29 Jul 05

15) Prepayment trends in European CMBS – 5 Aug 05

16) Update on European property markets – 11 Aug 05

17) Relative Value in CTL CMBS – 23 Aug 05

18) Relative Value in Fixed Rate CMBS – 2 Sep 05

19) German Residential Property Market Update – 26 Sep 05

20) Regional Differences in Germany – 26 Sep 05

21) Pan-European Industrial PROLO Update: The older the better – 30 Sep 05

22) Business Mortgage Finance Performance Update – 28 Oct 05

23) IMMEO – Largest German Multi-family MBS: Tight to recent deals – 4 Nov 05

24) UK multi-borrower multi-property CMBS – 8 Nov 05

25) B-notes in the European CMBS Market: More growth expected – 18 Nov 05

26) IO Classes in European CMBS: The trade-off between efficiency and complexity – 24 Nov 05

27) European ABS investor survey results - Investors want issuance growth & trading – 12 Dec 05

28) Rating transitions for European ABS – 12 Dec 05

29) Asset-backed CDS in Europe: Next step for European ABS market – 19 Dec 05

30) European CMBS: Coming into its own – 05 Jan 06

31) Europa One, Two and Three (EURL) Performance Update – 27 Jan 06

32) Opera Finance – UK shopping centre deals Performance Updated – 28 Feb 06



































Glossary Support for the credit strength of senior classes of notes derived from having junior notes and equity, which absorb losses before the senior class is affected.

The position of a certain note class in the priority of the payments waterfall compared with other note classes.

The order in which interest and principal are paid to each individual class of notes. This can be sequential (senior first and junior last) or pro rata (all classes based on their pro rata size weighting in entire issue), or modified sequential or pro rata depending on certain performance triggers.

Remaining loan balance at maturity.

Program established for the purpose of originating commercial mortgage loans with the intent of securitising these loans through CMBS issuance

A loan pool that is sold by the originator to the issuer. This contrasts with a synthetic transaction, where the loan pool remains with the originator and losses from the pool are synthetically allocated to the CMBS note classes.

The collateral of one loan is used to support another loan in the event of default on either loan.

Debt-service coverage ratio; calculated by dividing the property’s cash flow by the debt service (interest and principal) on the loan.

A defined event that typically includes non-payment of interest or scheduled principal; can also include other non-financial events, such as DSCR and/or LTV covenants.

Legal process of gaining control over the collateral after an event of default.

Cash flow left over from the payments received on the collateral pool after paying senior expenses, as well as interest and principal on the notes.

Date at which notes are expected to be paid off, taking into account scheduled amortisation and the date at which the notes are required to be paid off, allowing for an appropriate tail period to allow for any enforcement.

Interest-coverage ratio, calculated by dividing the property’s cash flow by the interest on the loan.

Facility providing liquidity in case there is insufficient cash from the loan pool to cover interest and principal on the CMBS notes

Loan-to-value ratio, calculated by dividing the loan amount by the property value.

Service provider dealing with receipt of payment on the loan pool and payment to the note holders, as well as providing periodic reporting.

Average ageing of the loan pool since origination.

Service provider dealing with the workout of a problem loan in case of event of default or other trigger events.

Weighted-average cost of capital, calculated by multiplying the percentage weight of each note class in the capital structure by the spread of each note class.

Credit support/enhancement

Subordination

Priority of payment waterfall

Balloon balance

CMBS conduit

True sale transaction

Cross collateralisation

DSCR

Event of default

Enforcement

Excess spread

Expected and legal final maturity

ICR

Liquidity facility

LTV

Master servicer

Seasoning

Special servicer

WACC

Securitisation Research Analysts

5 The North Colonnade London E14 4BB

Phil AdamsResidential Mortgage-backed Securities +44 (0)20 7773 2229 [email protected]

Maddi Patel Residential Mortgage-backed Securities +44 (0)20 7773 1371 [email protected]

Paul Geertsema Consumer and Other ABS +44 (0)20 7773 2347 [email protected]

Hans Vrensen, CFACommercial Mortgage-backed Securities+44 (0)20 7773 3502 [email protected]

John Keane Whole Business Securitisation+44 (0)20 7773 8748 [email protected]

Anca Badea Analyst +44 (0)20 7773 9874 [email protected]

200 Park Avenue New York NY 10166

Inna Koren Head of US Securitization Research +1 212 412 1080 [email protected]

Joseph AstorinaAuto & Consumer ABS, CDOs +1 212 412 5435 [email protected]

Juliet Jones Credit Card & Consumer ABS +1 212 412 2514 [email protected]

Elena WarshawskyAuto & Consumer ABS, CDOs+1 212 412 3661 [email protected]

Michael Gleeson HEL ABS/Mortgages +1 212 412 5107 [email protected]

Hassan AhmedHEL ABS/Mortgages +1 212 412 5101 [email protected]

Arunava BiswasHEL ABS/Mortgages +1 212 412 1371 [email protected]

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Guide to European CMBS