DBRS Confirms the Rating of Two Swaps Related to European CMBS DECO 11 – UK CONDUIT 3 P.L.C.

DBRS Ratings Limited (DBRS) has today confirmed the ratings of two potential interest rate swap (IRS) termination amounts that may be owed by the commercial mortgage-backed securities (CMBS) issuer to Deutsche Bank AG (Deutsche Bank or the Swap Counterparty) in relation to the DECO 11 – UK CONDUIT 3 P.L.C. (the Transaction or Deco 11) as follows:

-- Deco 11, Swap ref 1696864L (initial GBP 179.3 million notional, referencing Mapeley Gamma loan) rated A (sf)
-- Deco 11, Swap ref 1696929L (initial GBP 52.0 million notional, referencing Mapeley Gamma loan) rated A (sf)

All trends are Stable.

The rating confirmations reflect the relatively low risk of swap payment defaults on and before the expiration of the swap contracts. The two DBRS-rated swaps are referencing the Mapeley Gamma loan, which is the largest loan in the Deco 11 pool, and which is in special servicing following a covenant breach in October 2012. Per the April 2016 Interest Payment Day (IPD) report, the net cash flow (NCF) of the loan is GBP 12.2 million compared with the remaining mark-to-market of the two swaps, which stand at GBP 6.8 million in total as of 20 June 2016. The loan will mature in January 2017 when the swaps will expire as well.

The Transaction has suffered a loss of GBP 8.3 million as a result of the work-out of three specially serviced loans; two other loans have been worked out without loss. The losses have been distributed to classes E and F. Four loans in Deco 11 are still in special servicing, and all suffer from very high loan-to-value (LTV) ratios (over 100%). The special servicer has approximately 11 years to work out the loans, as the legal maturity of the Transaction is in 2027.

The Mapeley Gamma loan comprises 24 U.K. properties, most of which are offices that are located in prime or secondary locations in regional and provincial towns. As of July 2015, the market value of the property portfolio securing the loan is GBP 136.0 million, which represents an LTV of 159%. DBRS has noted, however, that the reserve of the loan, which is secured by a cash sweep, is about GBP 2.0 million as of the April 2016 IPD. Together with the loan’s NCF of GBP 12.2 million and the senior ranking of the swap payments, DBRS believes that the loan’s ability to meet its swap payment obligations is very strong.

DBRS has also noticed that the special servicer of the Mapeley Gamma loan has been changed to Solutus Advisors Ltd. following a noteholders’ meeting earlier this year.

The IRSs in the CMBS are issuer-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 issuer. The swaps were intended to protect the individual loans and the capital structure in the CMBS against rises in interest rates. As part of its rating analysis, DBRS considers the adequacy of the collateral backing the respective loan and the CMBS 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 securities to make the swap termination payments to the counterparty by the legal final maturity date of the transaction. DBRS also takes into account the position of the swap payment in the pre- and post-enforcement priorities of payment. DBRS uses its European CMBS model to assess the recoverability of the value of the swap termination fees to determine if there is sufficient coverage to make these termination payments by the legal final maturity of the CMBS. 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 notes to the swap counterparty against (2) the LIBOR payments that the counterparty would expect to pay to the notes. Next, DBRS aggregates the net swap cash flow for all future periods to derive the total potential swap termination payments. 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 notes 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 bond and (3) termination payments owed by the bond to Deutsche Bank if it is the defaulting party.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology applicable is: European CMBS Surveillance Methodology.

Other methodologies used are the European CMBS Rating Methodology, Legal Criteria for European Structured Finance Transactions, Derivative Criteria for European Structured Finance Transactions and Unified Interest Rate Model, which can be found on www.dbrs.com.

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

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

The sources of information used for this rating include Deutsche Bank AG, London Branch, Situs Asset Management Limited and Solutus Advisors Limited. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

The last rating action on this transaction took place on 1 July 2015 when DBRS confirmed the ratings of all swaps at A (sf).

The lead responsibilities for this transaction have been transferred to Rick Shi.

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.

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

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios for the Fairhold loan only, as compared to the parameters used to determine the rating (the Base Case):

Swap ref 1696864L Sensitivity:
-- 10% decrease in DBRS NCF: A (sf)
-- 20% decrease in DBRS NCF: A (sf)

Swap ref 1696929L Sensitivity:
-- 10% decrease in DBRS NCF: A (sf)
-- 20% decrease in DBRS NCF: A (sf)

DBRS’s outlooks and ratings are monitored.

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

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

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

Lead Surveillance Analyst: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Mary Jane Potthoff, Managing Director

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor
London EC3M 3BY
United Kingdom

The rating methodologies used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies:
-- European CMBS Surveillance
-- European CMBS Rating Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at http://www.dbrs.com/research/278375.