This presale report is based on information as of Nov. 20, 2003. The credit ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final credit ratings that differ from the preliminary credit ratings. Please call one of Standard & Poor's Ratings Desks for the final ratings when assigned: London (44) 20-7847-7400, Paris (33) 1-4420-6705, Frankfurt (49) 69-33-999-223, Stockholm (46) 8-440-5916, or Moscow (7) 095-783-4017.
Class
Prelim. rating*
Prelim. amount (Mil. €)
Recommended credit support (%)
Margin
Optional call date
Legal final maturity
A+
AAA
0.25
18.7
EURIBOR plus a spread to be determined
March 22, 2009
March 22, 2056
A
AAA
118.00
11.0
EURIBOR plus a spread to be determined
March 22, 2009
March 22, 2056
B
AA
56.50
7.3
EURIBOR plus a spread to be determined
March 22, 2009
March 22, 2056
C
A
43.00
4.5
EURIBOR plus a spread to be determined
March 22, 2009
March 22, 2056
D
BBB
29.10
2.6
EURIBOR plus a spread to be determined
March 22, 2009
March 22, 2056
E
BB
18.30
1.4
EURIBOR plus a spread to be determined
March 22, 2009
March 22, 2056
F
N.R.
21.40
N/A
EURIBOR plus a spread to be determined
March 22, 2009
March 22, 2056
*The credit rating on each class of securities is preliminary as of Nov. 20, 2003 and is subject to change at any time. Final credit ratings are expected to be assigned on the closing date subject to a satisfactory review of the transaction documents and legal opinion, and completion of a corporate overview. Standard & Poor's ratings address the timely payment of interest and ultimate principal. N.R.-Not rated. N/A-Not applicable.
Transaction Profile
Expected closing date
December 2003
Originators
Aareal Bank AG, Aareal Hyp AG (by acquisition), DEPFA Deutsche Pfandbriefbank AG
Arranger
Aareal Bank AG
Lead Manager
Morgan Stanley
Sellers
Aareal Bank AG, Aareal Hyp AG, DEPFA Deutsche Pfandbriefbank AG
Mortgage servicer
Aareal Bank AG and its banking or servicing subsidiaries
Company administrator
Deutsche International Corporate Services (Ireland) Ltd.
Kreditanstalt für Wiederaufbau as certificate provider
AAA/Stable/A-1+
Transaction Key Features
Collateral
KfW Schuldscheine
Principal outstanding (€)
1,533,675,934
Number of loans
9,017
Country of origination
Germany
Concentration
Western Germany (%)
49.50
Eastern Germany (%)
32.61
Berlin (%)
17.63
Unspecified (Germany) (%)
0.26
Weighted-average LTV ratio* (%)
71.45
Average loan size balance (€)
170,087
Weighted-average seasoning (years)
8.4
Weighted-average asset life remaining (years)
20.6
Weighted-average mortgage interest rate (%)
5.76
Mortgage priority
First lien (%)
76.58
Second lien (%)
23.42
Maximum LTV ratio* (%)
130
*All references to value refer to the conservative Beleihungswert, not the market value
Strengths, Concerns, and Mitigating Factors
Strengths
The originators and servicers have strong underwriting and servicing guidelines.
The transaction parties are experienced.
Allocable losses are restricted to principal losses.
Distinct classes of certificates of indebtedness ("Schuldscheine"), issued by Kreditanstalt für Wiederaufbau (KfW; AAA/Stable/A-1+), secure each class of notes and KfW undertakes to pay certain issuer related expenses.
Concerns
New asset types for KfW-sponsored transactions (granular commercial real estate loans) have been included in the reference pool.
Some loans have an LTV ratio above 100%.
There is some uncertainty regarding the current environment in Germany for the borrowers/tenants of the commercial properties included in the transaction.
Mitigating Factors
A conservative approach to setting the credit enhancement requirement has been used to cover the new asset types.
High LTV ratios are taken into account by the model used to calculate the credit enhancement.
The security provided by the commercial properties takes into account the environment the likely borrowers/tenants are operating in.
The granularity of the reference pool further mitigates the risk the economic environment poses for individual borrowers/tenants.
Transaction Summary
Process Home 2003 PLC is the first KfW-sponsored transaction that transfers the credit risk of granular CMBS pools to investors. A granular CMBS pool consists of mortgages secured by small commercial and multifamily buildings.
This transaction follows the same underlying idea as two other KfW-sponsored platforms to achieve the synthetic transfer of credit risk from commercial banks' balance sheets, Promise (for CLOs) and Provide (for RMBS).
The mechanics of Process Home 2003 are similar to those of the existing platforms, but have been adjusted where necessary to take into account the particular aspects of this new type of reference obligation.
KfW is sponsoring this pilot transaction to promote its commercial mortgage lending, including for residential use, to German Mittelstand entities (SMEs, or small and midsized entities).
Unique Features
The originators are the first banks to use a KfW-sponsored structure to transfer the credit risk of mainly granular CMBS pools to investors. The reference pool consists of loans originated by Aareal Bank AG, Aareal Hyp AG (by way of acquisition), and DEPFA Deutsche Pfandbriefbank AG (DEPFA). The loans fall into three groups, each secured by a different type of property, namely: residential properties, commercial properties, and multifamily houses. Aareal Bank has been fairly active in transferring credit risk by means of synthetic securitization transactions.
Key Performance Indicators
As in all other KfW-sponsored securitization transactions, the Process Home 2003 transaction relies on the 'AAA' rating on the KfW Schuldscheine that are being used as collateral for the notes. The Schuldscheine are senior unsecured obligations of KfW. Consequently, the ratings on the notes are weak-linked to the rating on KfW (AAA/Stable/A-1+). In addition, the performance of the notes is credit linked to the reference portfolio of the transaction. As this transaction is synthetic, much of the performance is driven by the exact terms of the default definitions. In this transaction, the default definition includes only principal ultimately lost on a loan.
As a result, this transaction's performance will not necessarily be directly comparable with that of similar future transactions. This is something always to be considered when comparing the performance data on synthetic transactions. Standard & Poor's will monitor the performance of the reference pool of Process Home 2003 and will make available summaries of its findings on RatingsDirect, its Web-based credit analysis system, at www.ratingsdirect.com.
Loss Allocation
All investors run the risk at various rating levels that the nominal amount of their claims will be written down as a result of loss allocation on the underlying reference pool. Losses that can be allocated to the notes and the senior swap investors include two net loss components: (i) realized losses throughout the life and at the end of the transaction, and (ii), under certain circumstances, appraised losses at the end of the transaction.
Credit events and foreclosures must take place according to certain standards to result in a realized loss. Credit events are failure by the borrower to pay and bankruptcy of the borrower. Realized losses comprise the lost principal and will be allocated to investors in the reverse order of seniority of the notes. The trustee will verify individually each realized loss to ensure the eligibility criteria and servicing standards have been complied with.
Transaction Structure
The structure of the transaction is shown in the following chart.
Reference Pool Description
The reference pool consists of mortgage loans made to individuals and corporate entities for property related financing. The loans have been underwritten in the normal course of business of the originators, Aareal Bank, Aareal Hyp (by acquisition), and DEPFA. The collateral securing these loans is located throughout Germany (see charts below) and is used either by the borrowers themselves or rented out.
In particular, the multifamily houses are generally rental properties and have been analyzed as such in Standard & Poor's credit analysis. During its extensive analysis, Standard & Poor's was satisfied with the way the originators underwrite loans, and also inspected sample properties that are included as security in the reference pool. This is likely to be the most significant difference to an RMBS transaction under KfW's Provide program: in addition to a corporate overview on the origination process, it was deemed necessary to acquire a sense of the quality of the loan securities in a manner not dissimilar to a CMBS site visit.
Credit Structure
The credit structure of Process Home 2003 is fairly similar to those of the Provide and Promise structures. KfW enters into credit default swaps with all three originators, thus accepting the risk of principal losses in the reference portfolio. In addition, this risk is transferred away from KfW to other parties by entering into a swap and by issuing the credit-linked Schuldscheine. The swap is with the super senior swap counterparty, and it ranks pari passu with the class A+ notes in terms of loss allocation. The Schuldscheine transfer the remaining credit risk to the SPE and, via the priority of payments, to the classes of notes issued by the SPE.
The principal proceeds from the notes are used to purchase KfW Schuldscheine, which are direct, unsubordinated obligations of KfW, and are rated 'AAA'. The Schuldscheine have the same payment aspects as the notes issued by the SPE. The credit risk of these notes, however, is that of the reference pool transferred via the Schuldscheine described above. Repayment of the notes consequently depends on the performance of the reference pool. Losses that are allocated to the notes will lead to KfW reimbursing the relevant originator for the principal loss incurred and then receiving allocating the loss in a similar amount to the Schuldscheine. The principal balance of the most junior notes then outstanding will then be reduced by this amount, resulting in a loss to the noteholder. Initially, the unrated class F notes will be allocated such losses.
Any principal repayments of the borrowers will lead to a similar amount of KfW certificates being redeemed and the redemption proceeds being made available to the SPE to repay the most senior notes then outstanding. In the case of the class A+ notes, this principal reduction will be in an amount equal to the class A+ notes' share in the combined amounts of the super senior swap notional amount and the class A+ notes' principal balance.
Analysis
As a result of the small size of the individual properties and obligations, a traditional CMBS analysis was deemed to be inappropriate. Instead, Standard & Poor's modified its approach to rating German RMBS transactions individually for this transaction to take into account the increased difficulty of foreclosing on commercial or multifamily properties compared with residential properties. As a result, a modified weighted-average foreclosure frequency (WAFF) and weighted-average loss severity (WALS) analysis was used for the Process Home transaction. While the parameters used are similar to those used in traditional RMBS transactions, the assumptions are considerably more conservative in this analysis. Particular attention has been paid to the issues of concentration of individual borrowers and LTV ratio.
The concentration of individual borrowers is covered by the conservative assumptions regarding the resale value that needs to be achieved to ensure that the transaction is still performing. In the same way, the high LTV ratio of some loans is being covered by the suitably conservative assumptions for the recovery values under such loans.
