OREANDA-NEWS. March 16, 2015. Fitch Ratings has upgraded DECO 7 - Pan Europe 2 plc's (DECO 7) class B notes and affirmed the others as follows:

EUR37.3m class B (XS0244895073) upgraded to 'Asf' from 'BBBsf'; Outlook Stable
EUR54.0m class C (XS0244895586) affirmed at 'BBsf'; Outlook revised to Positive from Stable
EUR17.6m class D (XS0244896048) affirmed at 'Bsf'; Outlook revised to Stable from Negative
EUR35.8m class E (XS0244896394) affirmed at 'CCsf'; Recovery Estimate (RE) 20%
EUR19.4m class F (XS0246471881) affirmed at 'Csf'; RE 0%
EUR16.4m class G (XS0246474042) affirmed at 'Csf'; RE 0%
EUR35.6m class H (XS0246475445) affirmed at 'Dsf'; RE 0%

The transaction is the securitisation of 10 commercial real estate loans originated by Deutsche Bank AG between August 2005 and February 2006. Of the ten exposures, three loans remain, with one (Procom) expected to be repaid in full. One (Karstadt Kompakt) is currently specially serviced by Hatfield Philips International Ltd.

KEY RATING DRIVERS
The ratings reflect the positive performance of the World Fashion loan along with the sequential allocation of principal from loan repayments on the notes. The upgrade of the class B notes is driven by the high expected recoveries from the best performing loan in the pool. Despite multiple loan extensions, the short-term nature of the underlying leases and the recent lower valuation, the asset has displayed robust performance with increasing rents and relatively stable occupancy. The condition and income potential of the properties backing the Karstadt loan leads to low expected recoveries on that loan. However, this is offset by the expected full repayment of the Procom loan, driving the revision of the Outlooks to Positive and Stable for the class C and D notes, respectively.

The Karstadt Kompakt loan (57.6% of the pool) is secured by a portfolio of 14 vacant retail properties in secondary locations across western Germany, previously let to the department store chain, Hertie Gmbh, which became insolvent in July 2008. As the properties are vacant, the repayment of liquidity drawings and liquidation fees is being funded from sales proceeds as the properties are disposed of. Since Fitch's last rating action, seven properties have been sold at an average discount of 9% against their 2011 market value. The disposal activity therefore resulted in a loan-to-value ratio (LTV) increase, to 355% from 202.7%. Fitch expects lower recoveries from the remaining properties than their reported aggregate market value (EUR30m).

The World Fashion Centre loan (42.4% of the pool) is secured by two adjoining office properties on the outskirts of Amsterdam used mainly as showrooms for fashion industry companies. Since Fitch's last rating action, the LTV (based on a 2014 valuation) has increased to 75.4% from 58.3%, despite ongoing cash sweeps. In addition, the vacancy rate has remained relatively consistent with its long-term trend (26,15%). Should the loan be transferred to special servicing at its extended loan maturity in October 2015, Fitch believes that the robust performance of the collateral could lead to solid recoveries

Since the last rating action the Tiago and Schmeing loans have repaid in full. The sequential allocation of principal led to the full repayment of the class A2 notes. In addition, the special servicer achieved the sale of the last properties backing the Procom loan with the gross proceeds expected to be greater than the outstanding loan amount Fitch expects the loan to repay in full.

Fitch estimates 'B' recoveries of EUR 116m.

RATING SENSITIVITIES
The recoveries amount is heavily affected by the outcome of the disposal process regarding the Karstadt Kompakt loan. If the 14 remaining properties are not sold in line with the long-term average premium over their 2011 valuation, further losses should be expected leading potentially to further downgrade.

Updated surveillance data can be found at:
https://www.fitchratings.com/creditdesk/sectors/perf_analytics/esf/deal_summ/download_file.cfm?deal_id=87147560