DBRS Confirms Ratings on DECO 8 and 11 Potential Interest Rate Swaps

DBRS Ratings Limited (DBRS) has today confirmed the following ratings on the ultimate payment of any potential interest rate swap (IRS) termination amounts that may be owed by the commercial mortgage-backed securities (CMBS) trusts to Deutsche Bank AG (Deutsche Bank or the Swap Counterparty) in the event of a failure to pay default where the trust is the defaulting party.

-- Deco 8, Swap ref 1475920L (initial GBP 71.6 million notional) rated “A”
-- Deco 8, Swap ref 1406167L (initial GBP 208.6 million notional) rated “A”
-- Deco 8, Swap ref 3483394L (initial GBP 220.7 million notional) rated “A”
-- Deco 11, Swap ref 1696864L (initial GBP 179.3 million notional) rated “A”
-- Deco 11, Swap ref 1696929L (initial GBP 52 million notional) rated “A”

The IRSs in the CMBS trusts are loan-level swaps that provide for a fixed-rate payment to Deutsche Bank in exchange for a floating-rate (LIBOR) payment by Deutsche Bank to the trusts. The swaps were intended to protect the individual loans and the capital structure in the CMBS trusts against rises in interest rates. Currently, LIBOR rates have fallen since transaction issuance. If these swap contracts were to terminate today, there would be termination payments owed to the Swap Counterparty. As part of its rating analysis, DBRS considers the adequacy of the collateral backing the CMBS trusts to cover the swap termination payments, the performance of the collateral and the quality of the legal and financial structure. When rating swap termination payments, DBRS is assessing the ability of the trust to make the swap termination payments to the counterparty by the legal final maturity date of the transaction.

DBRS uses its CMBS model to assess the recoverability of the value of the swap termination fee to determine if there is sufficient coverage to make these termination payments by the legal final maturity of the CMBS trusts. In these transactions, the swap termination payments owed to the Swap Counterparty are senior in the payment priority to the certificateholders, if the trust is the defaulting party, and are also potentially covered by each trust’s respective Liquidity Facility. To calculate the swap termination payments, DBRS first derives the net swap cash flow for each period by comparing (1) the fixed stream of payments from the trust to the swap counterparty against (2) the LIBOR payments that the counterparty would expect to pay to the trust. Next, DBRS aggregates the net swap cash flow for all future periods to derive the total potential swap termination payments. In these transactions, there is a penalty rate assessed for any unpaid swap termination payments. DBRS uses its unified interest rate model to stress such penalty rate. A rating is only assigned when, under such rating scenario, there is sufficient coverage of collateral to ultimately pay the swap termination payments should the trusts default on swap payment obligations on any distribution date. The rating does not address (1) the likelihood that a swap termination event occurs on or before the swap termination date, (2) the payment of any swap termination payment owed by Deutsche Bank to the trust and (3) termination payments owed by the trusts to Deutsche Bank if it is the defaulting party.

Notes:
All figures are in pounds unless otherwise noted.

The principal methodology applicable is European CMBS Surveillance, which can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include the Deutsche Bank, the most recent transaction investor report, the most recent transaction remittance report and the CREFC e-IRP.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This is the second rating action since the Initial Rating Date on June 30, 2014.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

A decrease of 10% and 20% in the DBRS Net Cash Flow (NCF), derived by looking at comparable properties, market rents, market occupancies in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to a downgrade in the transaction as noted below for each class respectively:

Potential Interest Rate Swap Termination Payment - Swap ref 1696864L Sensitivity:
• 10% decline in DBRS NCF, expected rating of A (sf)
• 20% decline in DBRS NCF, expected rating of A (sf)

Potential Interest Rate Swap Termination Payment - Swap ref 1696929L Sensitivity:
• 10% decline in DBRS NCF, expected rating of A (sf)
• 20% decline in DBRS NCF, expected rating of A (sf)

Potential Interest Rate Swap Termination Payment - Swap ref 1475920L Sensitivity:
• 10% decline in DBRS NCF, expected rating of A (sf)
• 20% decline in DBRS NCF, expected rating of A (sf)

Potential Interest Rate Swap Termination Payment - Swap ref 1406167L Sensitivity:
• 10% decline in DBRS NCF, expected rating of A (sf)
• 20% decline in DBRS NCF, expected rating of A (sf)

Potential Interest Rate Swap Termination Payment - Swap ref 3483394L Sensitivity:
• 10% decline in DBRS NCF, expected rating of A (sf)
• 20% decline in DBRS NCF, expected rating of A (sf)

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Initial Lead Analyst: Erin Stafford
Initial Rating Date: 30 June 2014
Initial Rating Committee Chair: Mary Jane Potthoff

Lead Surveillance Analyst: Scott Goedken
Rating Committee Chair: Erin Stafford

DBRS, Inc.
333 West Wacker Drive, Suite 1800
Chicago, IL 60606
USA

The applicable methodologies are European CMBS Rating Methodology, European CMBS Surveillance, Legal Criteria for European Structured Finance Transactions and Unified Interest Rate Model for European Securitisations, which can be found on our website under Methodologies.

The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

This rating is endorsed by DBRS Rating Limited for use in the European Union.

DBRS’s rating definitions and the terms of use of such ratings are available at www.dbrs.com.