Guide To European CMBS

Guide to
European CMBS
BARCAP_RESEARCH_TAG_FONDMI2NBUR7SWED
Author
Hans Vrensen, CFA +44 (0) 20 773 3502 hans.vrensen@barcap.com
The author would like to thank Mark Nichol, who assisted in the production of this report.
Table of contents
Introduction Securitisation process Market overview
CMBS conduits Structural market trends Investor base CMBS allocation CMBS is preferred asset class Secondary market liquidity
3 4 8
10 12 13 14 15 15
Collateral characteristics Deal structures Performance and monitoring

Historical performance Monitoring and expected performance
17 22 25
25 27
Credit analysis
Need for qualitative analysis Assessment of borrower and tenant credit quality Example of credit analysis Analytical packages Rating agency analysis
31
32 33 35 39 40
Pricing and relative value

Relative value Approach and results overview
42
44 45
Appendices
European CMBS Issuance since 1997 List of published Barclays Capital CMBS research Glossary
47
47 50 51
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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: Moodys 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 41: European CMBS issue spreads (bp) 1995-2005 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
2 Securitisation Research Barclays Capital
Introduction
Intro to European CMBS 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 bonds 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.
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
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Securitisation process
Main parties include borrower, lender, arranger, issuer and investor 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. Three phases in securitisation process: 1) origination; 2) structuring & issuance; 3) holding & trading
Figure 1: CMBS securitisation process

Origination Phase Lender Structuring & Issuance Phase Arranger Rating Agencies AAA/Aaa Pool of Commercial Mortgages Issuer SPV AA/Aa2 A/A2 BBB/Baa2 Placement Agent Investors Holding & Trading Phase Trustee
Borrowers
Servicer
Tenants
Source: Barclays Capital.
Liquidity Provider
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
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

Liquidity Provider I&P on Loans and Security on Props Borrowers Rents Tenants
Loan Pool and I&P on Loans Issuer SPV Purchase amount
I&P on Notes and Security Package Investors Note Proceeds
Lender/ Servicer Loan amount
The process can be highlighted by following cash flows and security provided
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.
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Issuer has assets and liabilities
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.
Liabilities are differently rated CMBS notes
More highly rated CMBS notes will reduce the issuers costs
Figure 3: CMBS issuer position

Assets Liabilities AAA/Aaa Pool of Commercial Mortgages Issuer SPV AA/Aa2 I&P A/A2 BBB/Baa2 Highest/First Risk/Loss Lowest/Last
I&P
Liquidity Provider
Rating Agencies
Security package and procedures can differ per deal and jurisdiction
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 creditorfriendly 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 borrowers shares and pledge over the borrowers 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.
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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.
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Market overview
Issuance reached a new record high of 40.7bn in 2005, double that of 2004 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 2004s 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)

45 40 35 30 25 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 10 0 50 40 30 20 Issuance (LHS) Transactions (RHS) 70 60
CMBSs relatively low market share of the commercial mortgage market leaves room for further growth
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

1999 0% 2000 10% 2001 5% 2002 11% 2005 52% 2003 6%
2004 16%
Source: Barclays Capital. 8 Securitisation Research Barclays Capital
74% of current outstanding CMBS was issued in the last three years
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

45 40 35 30 25 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Other Sub BBB BBB A AA AAA
AAA-rated issuance was 74% in 2005, above the historical average
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 eurodenominated 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 eurodenominated spreads during 2005, which we will discuss later in this report.
Issuance by currency: euro-denominated issuance was only 29%
Figure 7: Annual European CMBS issuance by currency

45 40 35 30 25 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Other USD EUR GBP
Only 600mn in fixed rate issuance in 2005
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.
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Figure 8: Annual European CMBS issuance by interest rate type

45 40 35 30 25 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Other FIXED FLOATING
AAA-spreads moderately higher for longer maturities in 2005
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)

60 50 40 30 20 10 0 0 1 2 3 4 5 6 Weighted Average Life 7 8 9 10 11
CMBS conduits
Conduits accounted for 59% of issuance in 2005, but many still have only one borrower 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.
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Figure 10: 2005 European CMBS issuance by issuer type

Taps & Refis 14% Repeat Issuers 8%
New Issuers 19%
Conduit Deals 59%
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
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 1 2 3 4 5 6 7 8 9 10 Conduit name Opera Finance DECO ECLIPSE Titan (Cornerstone) Windermere Real Estate Capital Talisman EPIC ELoC Taurus Seven Others Total Source: Barclays Capital. Sponsor Eurohypo Deutsche Bank Barclays Capital CSFB/GMAC Lehman Brothers Rothschild ABN-AMRO Royal Bank of Scotland Morgan Stanley Merrill Lynch No. of deals 6 4 4 3 2 2 2 2 2 2 7 36 Euro issuance 4.7bn 2.5 bn 2.3bn 1.8bn 1.7bn 1.7bn 1.3bn 1.2bn 1.1bn 0.9bn 4.9bn 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.
Barclays Capital Securitisation Research 11
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: Cash flow models available on more deals and expected to become more widely available 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.
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
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 respondents 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.
Our 50 survey respondents are representative of the European ABS investment universe
Figure 12: Investor survey respondents by investor type

Others 4% Structured Vehicles 25%
Fund Managers 39%
Banks 32%
Traditional bank investors no longer largest ABS investor category
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.
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CMBS allocation
Unsurprisingly, our respondents sector allocation broadly matched the European ABS universe 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

Other 18%
WBS 4% CMBS 11% RMBS 52%
Consumer ABS 15%

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CMBS is preferred asset class

What ABS sectors would investors like to see more supply of? 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

30% 26% 25% 20% 15% 10% 5% 0% CDO/CLO Cons ABS Esoterics Student Loans
15
23%
13%
11% 9% 6% 6% 4%
2%
RMBS
CMBS
WBS
SME
CMBS and RMBS are most preferred ABS sectors
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

84% of respondents are buy-and-hold investors, with on average 12% of assets acquired in the secondary market 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.
Secondary trading estimated at 73bn
Despite being mostly buy-and-hold, investors think liquidity is important

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Home Equity
Perhaps some investors have been unable to trade effectively due to lack of data
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.
Broadening of investor base might bring more active traders into the sector
Figure 15: Survey respondents ranking of secondary liquidity (on scale from 1=not important and10=most important)
40% 35% 30% 25% 20% 15% 10% 5% 0% 1-2
36% 31%
13% 8%
13%
3-4
5-6
7-8
9-10
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Collateral characteristics
Continued dominance of the UK with 73% of issuance, but Germany increased to 10% 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)
Sweden Spain 3% Italy 3% Germany 2% France 7% The Netherlands 5% UK 71% 3% Other 6%
Sweden Spain 1% Other Italy 2% 3% 3% Germany 10% France 2% The Netherlands 6%
UK 73%
We highlight differences in Europe in enforcement procedures, leases and planning regimes
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. Moodys 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.
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17
Figure 17: Moodys tiering for selected European countries

Tier A B C D Source: Moodys Investors Service. Countries UK and Netherlands Germany, Ireland, Switzerland and Sweden France, Belgium and Spain Italy, Greece and Portugal
The UK and the Netherlands are the most creditor-friendly countries in Europe
The tiers are denominated by the letters A to D, with Tier A comprising locations that offer what Moodys 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 Formal Stay Period Management retained Limited restructuring Creditors can initiate proceedings Priority upon Liquidation Ability to act unilaterally Ability to enforce security Ability to control process Ability to ignore other creditors Source: Moodys Investors Service. Limited No No Yes Yes Yes Yes Yes Yes Germany Yes Yes Yes Yes Yes Yes Yes No Yes France Yes Yes No Yes No No No No No Italy Yes Yes No Yes No No Yes No No
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.
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Barclays Capital
Figure 19: Overview of lease structures in key European countries

Rent payable every Typical lease length Statutory right to renew the lease Yes Frequency of rent reviews Frequency and basis of indexation of rent Annual (but indexation rare) Triggered by changes in cost of living index Lease disposal Early termination rights Via break clause only Via break clause only Rents Exclusions Letting Agent's fees (as % of first years rent) 10% Local tax (as % of annual rent) VAT (as % of annual rent) Restriction on ownership of property by foreigners No
UK
Quarter
10-15 years
5 years (upwards only) Rare
Service charge, utilities Service charge, parking, VAT
Property tax (variable) Property tax (variable), typically included in service charge Property tax (depends on location and type of premises) + additional tax in le de France (depends on class of premises) None
17.5% (where landlord opts to tax) 16% (where parties opt to tax)
Germany
Month
5+5 years
No
20-25%
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)
Via break clause only
Service charge, utilities, parking, on site corporate restaurant
15-30%
20%
No
Italy
Quarter
6+6 years
Right to renew after first term, but not subsequently, if given the correct notice by landlord No
None
Annual (75% of index)
Service charge, utilities
10-15%
20% (where landlord is liable for VAT)
No
Spain
Month
3-5 years
3-5 years
Annual
Service charge, utilities, property tax
8.5-10% (typically paid by landlord)
Property tax (landlord obligation but typically passed onto tenant) Property tax (depends on location)
16%
No
Netherlands
Quarter
5-10 years (trend towards shorter period)
No (office & industrial) Yes (shops)
None
Annual
Service charge, VAT, fitting out
14-16%
19% (where parties opt to tax)
No
Source: DTZ Research.
Figure 20: Overview of planning environment in key European countries

UK
Principle legislation/ code The Planning and Compulsory Purchase Act 2004 received Royal Assent in Spring 2004 and came into force in September 2004.
Germany
Building regulations are set by the individual (state) and lay down technical requirements of the building and the building site.
France
The comprehensive code of French planning law is set out in the Code de lUrbanisme. National town planning regulations (Rglement National dUrbanisme RNU) affect construction siting and servicing, The Construction and housing codes (Codes de la Construction et de lHabitation) are essentially national technical building regulations. 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. 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 dmolir) 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 dOccupation du Sol POS).
Italy
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.
Spain
The planning framework comprises the Law on Land Regime and Valuations 1998 (Ley sobre Rgimen de Suelo y Valoraciones 6/1998) and the regional Development Acts (Leyes Urbanisticas) all autonomous regions now have a degree of law-making power.
Netherlands
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 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. 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 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). 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 (Bundeslnder) 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. 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.
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). 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).
The planning department of the municipality takes responsibility for regulating land use and granting planning licences (licencia urbanistica).
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. 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.
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 ordenarin urbana PGOU) or, more generally, be in respect of pre-defined developable land. 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.
Planning application process
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.
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.
Retail increased to 34% and residential to 13% of issuance
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)
Healthcare Mixed 1% Leisure 2% Residential 3% 6% Telecom 8% Industrial 6% Other 5% Office 46% Industrial 6% Other 6% Residential 13% Leisure Mixed 0% Healthcare 3% 1%
Office 37%
Retail 23%
Retail 34%
Despite many singleborrower conduit deals, there has been an increase in more granular deals
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

1,000 Loans (LHS) Properties (RHS) 100,000
100 1,000
100 10 10
1 Jan 97
1 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05
Expecting more granular CMBS in Europe
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.
Barclays Capital
No. Properties per Deal
10,000
No. Loans per Deal
Deal structures
There is no uniform deal structure in European CMBS 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 Sainsburys, 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). Share of multiborrowers has increased to 42%, but singleborrowers are still at 54% 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.
There are five different deal types in European CMBS; SBSP, SBMP, MBMP, SYN and CTL
Figure 23: 2005 European CMBS issuance by transaction type

45 40 35 30 25 20 15 10 5 0 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:
22
Barclays Capital
Priority of paydown release premiums. A/B note structure. Liquidity. Servicing. Some standardisation within conduit programmes 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 prorata 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
Paydowns moving away from straight sequential
Single tranche Sequential Modified pro-rata pro rata sequential switching conditionally to pro rata Reverse sequential 0% 10% 5% 13% 8% 23% Single tranche Sequential Modified pro-rata pro-rata Seq switching to pro rata Reverse sequential n/a 0% 3% 5% 18%
26% 49%
Source: Moodys Investors Service, Barclays Capital.
40%
... A/B notes becoming better understood and accepted
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
Barclays Capital
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

2003 2.8% 17.7% 26.2% 22.7% 2004 2.3% 2005 4.1%
71.0% 80.0% Loans without B notes Representation of senior notes in loans Representation of junior notes in loans
73.2%
Liquidity sizing and amortisation differ between deals
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.
Possible conflicts of interest make servicer independence important
However, continuing structural complexity justifies spread premium
24
Barclays Capital
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. Historical CMBS upgrade-to-downgrade ratio is 1.90:1 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 CMBS 1999-2004 From (down)/To (across) AAA AA A BBB Sub BBB CMBS 2005 From (down)/To (across) AAA AA A BBB Sub BBB AAA 100.00% 12.94% 1.96% 1.19% 2.44% 87.06% 8.82% 89.22% 4.76% 2.44% 96.59% 2.44% 1.19% 92.68% AA A BBB Sub BBB No of Ratings 210 85 102 84 41 522 Source: Bloomberg, rating agencies, Barclays Capital. AAA 100.00% 4.33% 0.77% 0.62% 0.66% 95.36% 2.30% 0.93% 0.31% 92.60% 1.24% 4.34% 96.59% 1.32% 0.62% 98.03% AA A BBB Sub BBB No of Ratings 727 323 392 323 152 1917 AAA 99.80% 3.19% 0.77% 0.35% 0.12% AA 0.18% 95.76% 2.80% 0.35% 1.00% 94.74% 2.27% 0.12% A BBB 0.02% 0.05% 1.45% 95.75% 2.77% 0.23% 1.29% 97.00% Sub BBB No of Ratings 6529 2195 4279 3177 866 17046
Barclays Capital
25
Four main drivers of rating changes: Except for A rated bonds, CMBS experienced better rating transition compared to the overall ABS average
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:
Prepayment benefits senior notes with sequential paydown
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.
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
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.
26
Barclays Capital
Our estimated loss rate was 0.05% for UK commercial mortgages in 2004, better than auto ABS, but worse than RMBS
Barclays Capitals 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.
Expecting loss rate statistics for CMBS loans to become available from rating agencies
Figure 27: European CMBS loan delinquencies (left) and estimated UK commercial mortgage loss rates (right)
0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 excl NPL excl NPL & New Deals
0.06%
0.05%
0.04%
0.03%
0.02%
0.01%
0.00% 2000 2001 2002 2003 2004
Source: De Montfort University, Standard & Poors, Barclays Capital.
Monitoring and expected performance

We use four fundamental levels of analysis to project future 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.
Barclays Capital
27
CMBS market
Prepayments in CMBS differ per deal type, but have increased to around 17% over the last few years 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.
But prepayments are expected to stabilise
Commercial mortgage lending market

CMBS-funded lenders are affected by developments in the competitive 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%. 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 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.
28
Barclays Capital
Commercial property investment market

Analysis of investment market is key for LTV credit risk 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. Initial yields expected to remain stable, resulting in stable LTVs 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

Analysis of letting market Hanging Text relevant for long-term DSCR credit risk 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.
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. Overall, our monitoring implies a favourable environment for European CMBS for the foreseeable future 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.
30
Barclays Capital
Credit analysis
We highlight key criteria for each European CMBS transaction type Key criteria for credit tenant leases are tenant quality and lease profile 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 Pool Diversity DSCR LTV Borrower Quality Property Quality Tenant Quality Lease Quality & Profile Source: Barclays Capital. Yes Yes Yes Yes Yes Yes Yes Yes Credit Tenant Lease Single-Borrower Single-Property Single-Borrower Multi-Property Depends Yes Yes Yes Yes Depends Multi-Borrower Multi-Property Yes Yes Yes Depends Depends Synthetic CMBS Yes Yes Yes
Key criteria for synthetics and other multi-borrower multiproperty deals are DSCR and LTV
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.
Required focus with single borrower transactions depends on number of properties
The single borrower deal types require a broad focus on most criteria, except for multiproperty 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.
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Based on the above, we can identify six different analytical levels in CMBS credit analysis.
Figure 29: Levels of CMBS analysis
CMBS
Pool Diversity
Loan LTV & DSCR
Borrower Bankruptcy remote?
Property Ability to attract tenants
Tenants/Leases Credit Quality & Over/Underrented
Need for qualitative analysis

DSCR and LTV are ratios to measure probability of default and severity of loss, respectively 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. LTVs for MBMP and other CMBS transaction types vary widely and analysis of qualitative factors is needed 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.
Securitisation Research Barclays Capital
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Figure 30: BBB LTV for European CMBS by transaction type

0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 Jan 00 BBB LTV SYN BBB LTV MBMP BBB LTV SBMP BBB LTV SBSP
Jul 00
Feb 01
Aug 01
Mar 02
Sep 02
Apr 03
Nov 03
May 04
Dec 04
No clear patterns between different transaction types for DSCR either
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

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan 00 BBB DSCR SBSP BBB DSCR SBMP BBB DSCR MBMP BBB DSCR SYN
Jul 00
Feb 01
Aug 01
Mar 02
Sep 02
Apr 03
Nov 03
May 04
Dec 04
Assessment of borrower and tenant credit quality

Most tenants and/or borrowers are not rated by the three major rating agencies 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 Moodys, Fitch and S&P is typically limited to companies with public debt. Additional rating services, such as those provided by Moodys KMV and Moodys RiskCalc, do cover additional companies without public debt. However, these services require either a stock market listing or significant data entry of a companys financial data, which still pose practical limits to coverage.
Barclays Capital
New IRIS service makes assessment of tenant quality possible with Experians Commercial Delphi credit score
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 Experians 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 portfolios 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).
Experian able to provide Delphi scores for 95% of IPD universe tenants
69% of passing rents with tenants in low and negligible risk bands
Figure 32: Risk profile by tenant Delphi score bands as a percentage of rent passing
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jun 04 Aug 04 Oct 04 Dec 04 Feb 05 High % Low Medium % Negligible % Medium High % Low % Unmatched & Ineligible %
Source: IPD Rental Information Services (IRIS), Experian and Barclays Capital.
1.72% tenant default for March 2005 similar to a Ba2 default probability
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 Moodys. 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.
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Delphi score could provide an additional objective risk measure for borrower and/or tenant risks in CMBS
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. Comparison is difficult due to different deal types 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, multiproperty 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. 2. 3. 4. On loan, property and tenant levels, we note possible trade-off between diversification and quality CMBS structure Complexity and supports. Loan pool DSCR/ICR and LTV fundamentals and borrower quality & strategy. Property quality and value stability. Tenant quality and cash flow stability.
Comparing deals by scoring each on four fundamental levels
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.
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Figure 33: Overview of score motivations for German and Austrian CMBS
Deal name Structural complexity & supports DSCR/LTV and borrower quality & strategy Property quality Just below average, with 10% vacancy, anchor tenant vacating and borrowers with repositioning and/or disposal strategies 88% Vienna concentration, 22% City Tower with three 100% pre-let development properties Well diversified across Germany, but 24% vacancy in the portfolio as borrower is seeking to re-let DB vacated space 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 nonSPV borrower and disposal strategy
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 1.95 & 80.5%, Fortress is US fund manager, amortisation tied to letting, LTV and ICR targets with cash sweep trigger
Above average with 40% AAA-rated tenants Above average with 68% of rent from Deutsche Bank (AA-), but options to vacate Above average with 62% of rent from Deutsche Telekom (BBB+)
Valesco Funding
50/50 pro-ratasequential with triggers back to sequential
Titan 2005-1
Sequential scheduled amortisation and repurchase obligation, Class X strips out excess spread Typical synthetic, with tightly defined losses and additional risk of KfW collateral rating changes
1.70 & 75%, B-note on largest loan (65%)
Assumed average
ProscoreVR 2005-1
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 Forest Finance Proscore-VR 2005-1 Titan 2005-1 Valesco Funding Talisman 1 Source: Barclays Capital. 6 7 7 7 7 DSCR/LTV 7 7 6 5 6 Property Quality 6 7 5 4 4 Tenant Quality 7 5 6 7 5 Overall 26 26 24 23 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. 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 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.
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Figure 35: Comparison of recent German & Austrian CMBS transactions

Talisman-1 Finance plc Type of Transaction Pricing Date Size (EUR mn) No. Loans No. Properties/Tenants Day 1/Maturity WA LTV (%) Day 1 WA DSCR (%) WA remaining loan/lease life Largest loan concentration Largest geo. concentration Largest sector concentrations Current Net Rent/Net ERV Originator/Sponsor Servicer/Lead Manager MBMP 20 May 05 554.3 4 112/approx. 7,250 72.7%/65.9% ICR 236% 5.5/5.3 years 35%/70% (top 2) Greater Berlin 39% Retail 54%/Residential 37% 39.6/46.9 ABN AMRO Bank Hatfield Philips/ABN Amro Forest Funding plc SBMP 25 May 05 250 ASSET OVERVIEW 1 54/850+ 60.4%/50.8% 150% 10/9.4 years 100% Vienna 88% Office 52%/Residential 20% 20.6/NA Immofinanz, Austrias largest listed property co. NA/BNP Paribas LIABILITY OVERVIEW AAA Subordination (%) AAA/BBB Pricing (bps) Ratings (FIT/MDY/S&P) Most junior rated tranche Priority of pre- and balloon payments 24.5% 25/85 FIT/MDY/S&P BB/NR/BB Scheduled principal and interest both paid sequentially, but modified pro rata prepayments with certain sequential triggers 27/4.9%/NA May-09/Jan-14 No pre-funded reserves, 24.0% 24/45 (A-rated retained) FIT/S&P A/A Amortisation is soft and can be deferred, with possible reverse sequential prepayments 12.5/5%/NA Jun-14/May-18 Borrower has 14 employees, non-registered mortgages, 40% AAA-rated tenants 59.4% 25/85 (BBB/A) FIT/S&P NR/BBB 50/50 pro rata-sequential, with two sequential triggers, loan level amortisation tied to letting and LTV targets 16.5/6.7%/NA Oct-11/May-15 68% of rent from Deutsche Bank (AA-) with 24% vacancy across pool 31.0% 24/80 (Baa2/BBB+/BBB+) FIT/MDY/S&P BB/Ba2/BB Scheduled repayments are sequential. Prepays and final repays are paid 50% sequential and 50% pro rata 28/8%/NA Dec-10/Jun-14 Largest loan (65%) has Deutsche Telekom (A-) as main tenant 14.7% 26/105 MDY/S&P Ba2/BB Sequential amortisation of Credit-linked Notes, ranking pari passu and pro-rata with CDS. Losses allocated in reverse sequential order None Nov-10/Feb-48 Partially funded synthetic CMBS with KfW collateral, and no ICR data on 71% of pool 1 109/NA 85.8%/75% ICR 198% 7.10/NA years 100% North Rhine-Westphalia 37% Office 50%/Bank Halls 31% 21.7/23.4 Hypo Real Estate/Eurocastle Investment (Fortress) Hypo Real Estate/ Lehman Brothers 6 20/NA 75.8%/73.6% 170% 5.4/NA years 65%/85% (top 3) Berlin 41%/ NRW 30% Office 71%/Residential 26% 32.7/27.0 CSFB Hatfield Philips/ CSFB 3,072 2,605/NA 54.4%/(est.12%) NA 24.6/NA years 0.33%/6% (top 20) Lower Saxony17%/NRW 15% Mixed Use 75%/Retail 10% NA/NA DG-Hypothekenbank DG Hyp & several KGs/ DZ Bank AG Valesco Funding plc SBMP 10 Jun 05 246.5 Titan 2005-1 plc MBMP 29 Jun 05 348.8 Proscore-VR 2005-1 plc SYN 04 Jul 05 734.8
Liq Fac (Amt/%Day1/Floor) AAA WAL/Final Note Maturity Comments
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, multiborrower, multi-property transactions. 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 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. Trepps database of European CMBS transactions includes 40 different transactions, including the ECLIPSE, ELoC, Opera Finance, Titan and Windermere transactions. Intexs 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, Intexs and Trepps combined coverage is 29%, again, an improvement from the 25% as of midyear 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.
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
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Barclays Capital
Rating agency analysis

Rating agency analysis crucial in original tranching and structuring 64% of European CMBS in 2005 was rated by all three rating agencies 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

One 100% 80% 60% 40% 20% 0% 2001 2002 2003 2004 2005 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.
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Barclays Capital
Ratings determined by quantitative, legal and property analyses
Figure 37: CMBS rating process

Legal Analysis Risks Rating Analysis of Mortgage Pool Tranching Feedback & Adjustment AAA/Aaa AA/Aa2 Final Sizing A/A2 BBB/Baa2 Arranger
Quantitative Modelling & Stress Testing
Risks Property Analysis

Liquidity & External Supports
Disagreements between rating agencies are declining only 5% of 2005 issuance had split ratings
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

45 40 35 Issuance ( b) 30 25 20 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 0% 5% 15% 20% Split Rated Equal Rated % Split 25%
10%
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Barclays Capital
Pricing and relative value

Spreads widened in H2 05, due to busy pipeline and doubling of issuance 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

130 120 110 100 90 80 70 60 50 40 30 20 10 0 Jan 05 Feb 05 Apr 05 May 05 Jul 05 Aug 05 Oct 05 Nov 05 Dec 05 AAA pricing BBB pricing Poly. (A pricing) AA pricing Poly. (AAA pricing) Poly. (BBB pricing) A pricing Poly. (AA pricing)
Spreads affected by non-CMBS issues as well
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 years 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.
Since July 2003, AAA spreads have tightened by approximately 45%
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 200220 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.
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Barclays Capital
Figure 40: European CMBS issue spreads (bp) 2003-2005

250 200 150 100 50 0 Nov 03 Nov 04 May 03 May 04 May 05 Sep 03 Sep 04 Mar 04 Mar 05 Mar 03 Nov 05 Dec 05 Sep 05 Jun 05 Jan 04 Jan 05 Jan 03 Jul 03 Jul 04 Jul 05 Jun 04 Dec 04 AAA A BBB Poly. (BBB) Poly. (A) Poly. (AAA)
Spreads prior to 2003 not that relevant any more
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.
Figure 41: European CMBS issue spreads (bp) 1995-2005

160 140 120 100 80 60 40 20 0 Jun 96 Jun 97 Jun 98 Jun 99 Jun 00 Jun 01 Jun 02 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Jun 03 Dec 03 AAA A Poly. (A) Poly. (AAA)
Euro-denominated and granular deals price tighter and unusual collateral forces wider pricing
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.
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Barclays Capital
Relative value
European CMBS offers best relative value among eight different ABS sectors in mid-risk category 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
50 45 40 Spread in bp over Libor 35 30 25 20 15 10 5 0 US Autos US Student Loans (Gov Guaranteed) 2.0 2.5 3.0 Europe RMBS Europe Cards Europe Autos US Cards Europe CMBS US HEL Europe Pubs
3.5 4.0 4.5 5.0 5.5 6.0 Average of ranked risk indicators (lower is better)
6.5
7.0
Relative value is as much an art as a science
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 governmentguaranteed nature of the underlying collateral.
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Barclays Capital
Approach and results overview

We use a top-down approach in assessing relative value at the sector level 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 bottomup 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.
Major components: the economy, assets, structures, markets
Figure 43: A schematic representation of the components of ABS

(3) Structure (5) Investors Relative Value Assessment
(1) Economy & Demographics (2) Asset Cash Flow
(4) Market Note
Principal and Interest
Note
Note
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.
Figure 44: Spreads and summary of risk indicators by sector

Indicator CSWA Spread Structural Protection Index CSWA Ratings Implied 3Year Expected Loss (bp) Typical AAA Subordination (%) Delinquencies (%) Loss rates (%) CSWA Downgrade Experience (%) Issuance 2005 ($bn) Source: Barclays Capital. 500 61 87 US HEL 37 16 3 18 6.55 US Cards 6 21 4 14 3.93 5.56 US Autos 7 21 2 11 0.31 0.48 Europe Cards 14 21 4 12 5.05 5.00 0.00 14 Europe Autos 11 18 3 8 0.68 1.00 0.00 8 Europe RMBS 17 22 2 10 0.50 0.00 0.16 182 Europe CMBS 37 13 5 30 0.36 0.03 0.55 45 0.19 5 Europe Pubs 46 20 14
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 CSWA Spread Structural Protection Index CSWA Ratings Implied 3Year Expected Loss (bp) Typical AAA Subordination Delinquencies Loss rates Average risk indicator rank Issuance 2005 CSWA Downgrade Experience 5.00 1 US HEL 37 7 4 2 7 US Cards 6 2 6 3 5 6 4.40 4 US Autos 7 2 2 5 1 3 2.60 3 Europe Cards 14 2 5 4 6 5 4.40 6 1 Europe Autos 11 6 3 7 4 4 4.80 7 1 Europe RMBS 17 1 1 6 3 1 2.40 2 3 Europe CMBS 37 8 7 1 2 2 4.00 5 5 6.50 8 4 Europe Pubs 46 5 8
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.
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Barclays Capital
Appendices
European CMBS Issuance since 1997
Deal Name Northavon Investments PARCS Limited La Defense PLC 1 Canary Wharf Finance plc Sasco Europe 1998-C1 plc Hotel Securitisation (No. 1) plc Chene Finance Ltd La Defense II plc Morgan Stanley Mortgage Finance (Broadgate) plc European Loan Conduit 1 Deutsche Hypothekenbank AG Hannover Berlin Paternoster Securitisation plc European Loan Conduit 2 Owengate Keele plc Trafford Centre Finance Ltd Europa Ltd 1 Highbury Finance BV Peverel Funding Ltd Canary Wharf Finance II plc European Loan Conduit 3 Dragon Finance BV European Loan Conduit 4 Monument Securitisation 1 Plc Europa Ltd 2 Silver No. 1 plc European Loan Conduit 5 Pan-European Industrial Properties ISA 1 Heritage Mortgage Securities Plc Werretown Supermarkets Securitisations PLC European Loan Conduit 6 Cofinimmo Lease Finance S.A. Eurohypo 2001-1 CMBS European Loan Conduit 7 European Loan Conduit 8 Meadowhall CMR Finance PLC Amethyst Finance PLC Dutch Dream 2001-1 Telereal Securitisation plc Windermere CMBS Plc France Industrial Properties SA European Loan Conduit 9 Monument Securitisation 2 Plc Pan-European Industrial Properties ISA 2 AyT 7 Promociones Inmobiliarias I FTA Dolerite Funding PLC Hoteloc Plc Vesteda Residential Funding BV European Loan Conduit 10 Nymphenburg 2002-1 Ltd Duke Ltd European Loan Conduit 11 Imser Securitisation Srl Aareal Bank AG 1 (Global Commercial One) Bamburgh Finance Plc Geco Ltd Wuerttembergische Hypothekenbank AG EU-1 European Loan Conduit 12 Ticker NORTIN PARCS LADF 1 CANWHA SASC 1998-C1 HOTEL SEC NO 1 CHEFIN LADEFE BGATE 1 EURO 1 DHB 1 PATER 1 EURO 2X OWEN 1 TRFRD 1 EURL 1 HIGHB 7.017 PEVERL CANWA II EURO 3X DRAGN 1 EURO 4X MONU 1 EURL 2 SILVER 1 EURO 5X PROLO 1 HERIT 1 WERRE EURO 6X COFINIMMO EUROHYPO 2001-1 EURO 7X EURO 8X MEADW AMETH 1 DUTDR 2001-1 TELSEC WINDM 1X FIP 1 EURO 9 MONU 2 PROLO 2 AYT 7 DOLER 1 HELOC 1X VEST I EURO 10 NYMPH 2002-1 DUKEL 02 EURO 11X IMSER 1 GCO 1 BAMBU 1 GECO 2002 WUERT EU-1 EURO 12 Issuance () 107,669,440 202,582,334 307,947,014 890,205,181 160,619,594 73,792,712 228,673,527 132,022,000 2,320,934,000 255,590,495 247,000,000 169,583,265 574,313,232 115,557,940 979,904,000 1,345,000,000 549,515,450 168,240,200 6,348,038,800 402,237,980 383,031,110 768,181,068 632,088,416 1,531,000,000 418,796,200 837,965,685 213,750,000 270,874,329 1,063,410,944 757,102,910 60,750,000 351,575,823 550,378,500 879,032,823 1,405,687,500 529,235,900 198,850,000 4,365,354,000 752,757,300 144,000,000 458,000,000 680,253,000 356,000,000 319,800,000 765,018,875 827,221,487 1,600,000,000 341,451,000 2,170,450,000 814,350,000 521,605,828 1,163,960,000 338,250,000 326,080,689 594,250,000 374,200,000 339,999,000 Currency of Senior Class GBP GBP FRF GBP GBP GBP EUR EUR GBP GBP EUR GBP GBP GBP GBP EUR GBP GBP GBP GBP GBP GBP GBP EUR GBP GBP EUR GBP GBP GBP EUR GBP GBP GBP GBP GBP EUR GBP GBP EUR EUR GBP EUR EUR USD GBP EUR EUR EUR EUR GBP EUR EUR GBP EUR EUR EUR Issue date 1997/03 1997/04 1997/10 1997/12 1998/04 1998/12 1999/02 1999/03 1999/05 1999/08 1999/11 1999/11 1999/12 2000/01 2000/02 2000/03 2000/03 2000/03 2000/05 2000/06 2000/08 2000/09 2000/09 2001/03 2001/03 2001/04 2001/04 2001/06 2001/06 2001/07 2001/08 2001/08 2001/08 2001/11 2001/11 2001/12 2001/12 2001/12 2001/12 2002/03 2002/05 2002/05 2002/05 2002/06 2002/06 2002/07 2002/07 2002/08 2002/08 2002/09 2002/10 2002/10 2002/12 2002/12 2002/12 2002/12 2003/02 Legal Maturity of Longest Note 5/10/26 30/4/04 14/10/09 22/10/27 9/3/23 30/10/15 14/1/06 9/10/05 5/4/38 27/1/08 27/5/40 20/2/09 22/10/08 31/1/30 28/7/33 15/12/36 20/3/23 1/12/34 22/10/37 29/7/09 13/7/23 1/11/07 5/11/12 15/6/27 15/3/27 25/1/10 15/4/11 8/5/10 4/10/25 27/10/10 1/7/27 25/6/22 30/7/06 25/10/10 12/1/32 12/12/26 18/4/20 10/12/33 20/10/08 15/4/12 2/11/11 17/9/13 5/7/12 16/6/35 20/8/32 10/5/07 20/7/17 15/1/10 9/2/25 23/8/27 25/10/11 18/9/25 28/2/35 1/5/38 20/9/54 18/11/26 14/8/13 Deal Type CTL SBMP SBSP SBSP MBMP SBMP SBMP SBSP SBSP SBMP SYN MBMP MBMP SBMP SBSP SYN CTL SBMP SBSP MBMP CTL SBMP MBMP SYN MBMP MBMP SBMP MBMP CTL MBMP CTL SYN SBMP MBMP SBSP CTL SYN CTL MBMP SBMP CTL MBMP SBMP MBMP MBMP SYN SBMP SBMP SYN SYN MBMP SBMP SYN MBMP SYN SYN SBSP Country of Collateral UK UK France UK UK UK France France UK UK Germany UK UK UK UK Europe UK UK UK UK UK UK UK Europe UK UK France UK UK UK Belgium UK UK UK UK UK Netherlands UK UK France France UK France Spain UK UK Netherlands France UK Netherlands UK Italy UK UK Germany UK UK Property Type Office Office Office Office Mixed Leisure Mixed Office Office Mixed Mixed Mixed Office Other Retail Mixed Retail Residential Office Mixed Retail Retail Mixed Mixed Healthcare Mixed Industrial Mixed Retail Office Office Mixed Mixed Office Retail Retail Mixed Telecom Office Industrial Office Mixed Industrial Residential Mixed Leisure Residential Mixed Office Mixed Mixed Mixed Mixed Mixed Mixed Mixed Office AAA Spread at Issuance NA NA 20 NA NA NA NA 36 NA 55 32 50 55 NA 51 20 NA NA NA 40 NA 40 37 32 50 30 35 40 NA 40 NA 37.5 30 45 NA NA 45 40 48 38 NA 30 32 30 28 43 23 32 32 13 45 43 50 45 15 26 45
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Barclays Capital
Currency of Senior Class EUR GBP EUR GBP GBP GBP EUR GBP EUR GBP EUR EUR GBP EUR EUR GBP EUR GBP EUR EUR GBP EUR EUR EUR GBP GBP EUR EUR GBP EUR GBP GBP EUR EUR EUR EUR GBP GBP EUR EUR GBP GBP EUR GBP GBP EUR GBP GBP GBP EUR GBP GBP EUR GBP EUR GBP GBP EUR GBP GBP GBP GBP GBP GBP GBP GBP Legal Maturity of Longest Note 5/5/13 25/1/12 15/11/10 25/10/11 31/12/17 27/4/12 24/7/11 10/8/33 31/7/08 25/4/12 30/6/51 28/11/10 20/10/12 27/10/10 18/2/13 5/2/18 25/7/11 8/5/32 26/11/43 15/4/13 12/10/35 15/10/29 24/12/13 9/4/14 20/7/36 20/1/13 26/11/12 12/10/40 19/2/29 23/4/29 25/7/15 11/5/39 25/1/19 15/11/15 20/10/44 23/12/12 25/7/34 1/11/29 21/7/13 20/9/10 31/7/13 29/10/14 29/1/30 28/10/13 20/1/39 1/10/14 20/1/13 15/2/37 7/7/34 15/10/14 31/7/32 23/7/13 17/12/16 15/7/11 23/1/14 2/2/17 30/1/14 5/5/13 27/7/13 25/10/16 5/7/33 30/6/17 15/7/16 15/4/15 17/4/35 25/4/17 AAA Spread at Issuance 35 43 38 45 40 47 NA NA 40 45 46 NA 44 40 38 50 38 NA 50 44 52 16 30 27 38 28 26 26 NA NA 22 22 38 24 12 22 NA 23 23 30 25 22 36 23 NA NA 21 29 NA 22 NA 20 21 20 19 20 19 14 17 14 16 NA 20 14 NA 23
Deal Name Pan-European Industrial Properties ISA 3 Real Estate Capital Plc Eiger Trust European Loan Conduit 14 Lombard Securities Plc Deco Series 2003-CIT plc First Real Estate SA Juturna (European Loan Conduit No 16) plc Bramante Plc European Loan Conduit 15 Europa Ltd 3 Polish Retail Properties Finance PLC Windermere II CMBS Plc DECO Series 2003 European Loan Conduit 17 Opera Finance Plc Paris Residential Funding PLC Premiertel PLC Aareal Bank AG 2 (Global Commercial Two) Coeur Defense FCC Nightingale Funding PLC Stellae I BV European Property Capital La Defense PLC III Business Mortgage Finance Plc White Tower 2004-1 PLC Windermere III CMBS Plc AyT Promociones Inmobiliarias II FTA Delamare Finance plc Midgaard Finance Ltd Real Estate Capital No2 plc Sandwell Commercial Finance PLC Castanea plc European Loan Conduit 18 Girasole Finance Srl Marlin (EMC II) BV Pacific Quay Finance PLC European Loan Conduit 19 European Loan Conduit 20 GepraLazio Opera Finance (Lakeside) EPIC (Caspar) PLC Aareal Bank AG 3 (Global Commercial Three) EPIC OPERA PLC Picts plc Self-Storage Securitisation BV Windermere IV CMBS Plc Business Mortgage Finance 2 plc Epic (Premier) S.A. Hallam Finance Plc Land Securities Capital Markets Plc Titan Europe 2004-1 Plc KFN Office Finance BV Quick Star PLC Titan Europe 2004-2X Opera Finance (MetroCentre) Plc Epic Unite Pan-European Industrial Properties SA 4 Taurus CMBS 1 Plc Aquila Eclipse 2005-1 Plc Broadgate Financing plc F&C Commercial Property Finance Ltd Real Estate Capital No3 plc Redevco Original Commercial Securitisation White City Opera Finance (CSC3) Plc
Ticker PROLO 3 REC 1 EIGER 1X EURO 14X LOMB 1 DECO 2003-CITX FREAL 1 BBC BRAMA 1 EURO 15X EURL 3 PRPF 1 WINDM IIX DECO 2003-CENX EURO 17X OPERA 1 PARES 1X PREMI GCO 2 COEUR 1 NIGHT 1 STEL I EPC 1 LADF III BUMF 1 WTOW 2004-1 WINDM IIIX AYTPI II DELMAR MIDGA 1 REC 2 SANDW 1 CASTA 1 EURO 18X GSOLE 1 MARL 1 BBCPA EURO 19X EURO 20 GEPRA 1 OPERA LAKE EPIC CASP GCO 3 EPOP ARLI PICTS SELFS 1 WINDM IVX BUMF 2 EPICSA HALLM 1 LAND TITN 2004-1 KFNOF 1 QSTAR 1 TITN 2004-2X OPERA METC EPIC UNITE PROLO 4 TAURS 1 ECLIP 2005-1 BLNDLN FCCP RECF 3 REDEV 1 BBCWC OPERA CSC3
Issuance () 190,500,000 279,357,734 699,170,000 433,298,850 812,323,495 350,652,400 243,602,000 1,174,108,752 214,600,000 567,324,906 322,150,000 74,000,000 441,991,405 549,380,500 302,900,300 520,088,213 964,130,000 412,080,839 382,250,000 820,000,000 343,344,000 108,500,000 355,450,000 635,000,000 197,941,750 306,504,000 460,150,000 475,400,000 956,023,750 775,000,000 548,579,175 375,000,000 314,750,000 419,350,000 80,800,000 614,000,000 193,810,375 813,236,850 340,200,000 150,000,000 824,890,000 782,845,865 272,250,000 434,040,000 221,860,951 325,000,000 609,970,120 214,650,000 695,752,780 265,000,000 3,680,340,835 282,093,072 450,000,000 281,102,340 267,969,441 865,500,000 365,324,603 389,000,000 370,628,265 631,407,385 3,029,728,000 331,729,000 218,303,750 467,220,000 525,055,635 1,043,416,000
Issue date 2003/02 2003/04 2003/05 2003/05 2003/05 2003/06 2003/07 2003/07 2003/09 2003/09 2003/10 2003/10 2003/10 2003/11 2003/11 2003/11 2003/11 2003/11 2003/12 2003/12 2003/12 2003/12 2004/02 2004/02 2004/03 2004/03 2004/03 2004/04 2004/04 2004/04 2004/05 2004/05 2004/06 2004/06 2004/07 2004/07 2004/07 2004/08 2004/08 2004/08 2004/08 2004/09 2004/10 2004/10 2004/10 2004/10 2004/10 2004/11 2004/11 2004/11 2004/11 2004/11 2004/12 2004/12 2004/12 2005/01 2005/02 2005/02 2005/02 2005/03 2005/03 2005/03 2005/03 2005/03 2005/03 2005/04
Deal Type SBMP MBMP CTL SBMP MBMP SBMP SBMP CTL SYN MBMP SYN SBMP MBMP SBSP MBMP MBMP SBMP CTL SYN SBSP MBMP CTL CTL SBSP MBMP MBMP SBMP MBMP CTL CTL MBMP MBMP SYN MBMP MBMP SBMP CTL MBMP SYN MBMP SBSP SBMP SYN SBMP CTL SBMP MBMP MBMP CTL SBMP SBMP MBMP SBMP SBMP MBMP SBSP SBMP SBMP MBMP MBMP SBSP SBMP MBMP SBMP CTL SBMP
Country of Collateral France UK Switzerland UK UK UK Italy UK Italy UK Europe Poland UK Germany France UK France UK Sweden France UK Netherlands France France UK UK Sweden Spain UK Sweden UK UK Europe France Italy Europe UK UK Italy Italy UK UK UK UK UK UK UK UK UK Germany UK Ireland Netherlands UK Germany UK UK Europe UK UK UK UK UK UK UK UK
Property Type Industrial Retail Telecom Industrial Mixed Retail Mixed Other Office Office Mixed Retail Mixed Retail Office Mixed Residential Telecom Mixed Office Healthcare Office Telecom Office Mixed Office Office Residential Retail Office Retail Mixed Mixed Mixed Other Office Other Mixed Office Residential Retail Mixed Mixed Office Office Other Office Mixed Office Residential Mixed Office Office Office Mixed Retail Other Industrial Mixed Mixed Office Mixed Mixed Retail Other Retail
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Barclays Capital
Currency of Senior Class GBP GBP GBP GBP EUR EUR EUR EUR EUR EUR EUR EUR EUR GBP EUR EUR GBP GBP GBP GBP EUR GBP EUR GBP EUR GBP GBP GBP GBP EUR GBP GBP GBP GBP EUR EUR GBP GBP EUR EUR EUR GBP GBP GBP EUR GBP GBP GBP GBP EUR GBP EUR GBP GBP Legal Maturity of Longest Note 20/4/14 31/7/14 22/4/14 29/4/14 20/2/15 27/5/15 12/5/18 15/2/12 21/1/14 15/12/46 15/4/40 21/11/38 26/7/11 27/7/17 23/4/14 27/4/15 15/11/38 20/5/37 22/4/14 20/7/14 5/2/48 22/7/12 20/7/17 25/1/17 27/7/14 28/7/14 27/10/14 20/10/14 30/9/37 18/8/17 25/8/16 30/4/14 27/10/14 27/7/17 15/8/15 15/3/13 15/10/14 20/7/14 20/12/32 5/7/19 10/10/15 23/10/12 25/10/17 28/7/16 22/5/15 30/1/15 25/7/14 24/5/15 23/12/15 15/1/15 4/10/25 25/7/16 7/4/17 12/4/16 AAA Spread at Issuance 18 17 18 20 16 17 24 23 25 22 22 17 17 23 24 25 27 18 24 30 26 29 23 24 17 23 NA 25 20 23 26 20 14 20 20 17 21 24 23 27 18 26 26 24 24 25 18 36 35 19 NA 21 27 28
Deal Name Opera Finance (Fosse) Plc Opera Finance (Scot) Plc The Mall Funding Plc White Tower 2005-1 PLC Windermere V AKERO Multifamily Housing Ltd Forest Finance Plc Opera Finance (Uni-Invest) Plc Talisman Finance Plc AyT Promociones Inmobiliarias III FTA Ayt Promociones Inmobiliarias IV FTA BBVA 3 Hipotecario Fondo de Titulizacion de Activos Campidoglio Finance S.R.L Deco Series 2005-C1X plc Titan Europe 2005-1X Valesco Funding Business Mortgage Finance 3 plc Dolerite Funding No 2 PLC European Prime Real Estate 1 Plc Fleet Street Finance One plc Proscore-VR 2005-1 Plc URSUS EPC Vesteda Residential Funding BV Bellatrix (Eclipse 2005-2) Deco Series 2005-Pan Europe 1plc Cornerstone Titan 2005-1 Deco Series 2005-UK1 plc REC Retail Parks Ltd. Sandwell Commercial Finance 2 PLC FCC Proudreed PLC LCP Proudreed PLC Victoria Funding EMC-III Windermere VI Deco 6 UK Large Loan 2 European Loan Conduit 21 Immeo Residential Finance London & Regional Debt Securitisation 1 Opera Finance (MEPC) Prominent CMBS Funding Plc Taurus CMBS 2 Plc Centaurus (Eclipse 2005-3) plc Cornerstone TITAN 2005-2 plc Draco (Eclipse 2005-4) plc Epic (Ayton) European Property Capital 3 ING (UK) Listed Real Estate Issuer PLC Perseus (European Loan Conduit No. 22) plc Tahiti Finance Plc Talisman-2 (Priory) Finance PLC Opera Finance (CMH) BL Superstore Finance MESDAG (Berlin) B.V. UK Balanced Property Finance Limited Vanwall Finance plc
Ticker OPERA FP OPERA SCOT MALLF 1 WTOW 2005-1 WINDM VX AKERO 1 FORES 1 OPERA UNI TMAN 1 AYTPI III AYTPI IV BBVAH 3 CAMPI 1 DECO 2005-C1X TITN 2005-1X VALES 1 BUMF 3 DOLER 2 EPRE 1-X FLTST 1 PROVR 2005-1 URSUS 1-X VEST 2 ECLIP 2005-2 DECO 2005-E1X TITN 2005-CT1X DECO 2005-UK1X RECR IV SANDW 2 PROUD 1 PROUL 1 EMC 3 WINDM VI-X DECO 6-UK2X EURO 21 IMMEO 1 LORDS 1 OPERA MEPC PROMI 1 TAURS 2 ECLIP 2005-3 TITN 2005-CT2X ECLIP 2005-4 EPICP AYTN EPC 3 INGUK 1 EURO 22X TAHIT 1 TMAN 2 OPERA CMH BLSF MESDG 1 UKBPF 2006-1 VWALL 1
Issuance () 345,121,000 628,961,000 1,556,504,000 814,872,740 641,645,000 278,000,000 250,000,000 1,008,900,000 554,300,000 300,700,000 429,700,000 1,450,000,000 121,000,000 349,316,607 348,803,075 246,550,000 364,132,800 884,760,000 501,362,709 948,660,750 168,700,000 215,142,326 1,300,000,000 569,275,740 897,015,000 873,204,589 418,805,660 1,487,520,000 519,575,000 397,400,000 470,474,200 382,980,600 1,011,502,800 1,618,729,790 326,800,000 1,545,500,000 344,508,200 691,370,000 1,461,260,000 403,900,000 651,586,000 587,462,152 419,972,079 792,939,891 406,712,000 296,140,000 760,229,156 794,956,500 552,637,500 375,000,000 292,173,600 154,550,000 174,432,000 523,367,529
Issue date 2005/04 2005/04 2005/04 2005/04 2005/04 2005/05 2005/05 2005/05 2005/05 2005/06 2005/06 2005/06 2005/06 2005/06 2005/06 2005/06 2005/07 2005/07 2005/07 2005/07 2005/07 2005/07 2005/07 2005/08 2005/08 2005/09 2005/09 2005/09 2005/09 2005/10 2005/10 2005/10 2005/10 200 5/11 2005/11 2005/11 2005/11 2005/11 2005/11 2005/11 2005/12 2005/12 2005/12 2005/12 2005/12 2005/12 2005/12 2005/12 2005/12 2006/01 2006/02 2006/02 2006/02 2006/02
Deal Type SBSP SBMP SBMP MBMP SBMP SBMP SBMP SBMP MBMP MBMP MBMP MBMP SBMP MBMP MBMP SBMP MBMP MBMP MBMP MBMP SYN MBMP SBMP MBMP MBMP MBMP SBMP SBMP MBMP SBMP SBMP MBMP MBMP MBMP MBMP SBMP SBMP SBMP MBMP MBMP MBMP MBMP MBMP SYN MBMP SBMP MBMP SBMP SBMP SBMP SBMP SBMP SBMP SBMP
Country of Collateral UK UK UK UK Italy Sweden Austria Netherlands Germany Spain Spain Spain Italy UK Germany Germany UK UK UK UK Germany UK Netherlands UK Germany UK UK UK UK France UK UK UK UK France Germany UK UK UK Italy Germany UK UK UK Europe UK UK UK UK Ireland UK Germany UK UK
Property Type Retail Retail Retail Office Office Residential Mixed Office Mixed Residential Residential Mixed Residential Mixed Office Mixed Mixed Mixed Mixed Mixed Mixed Mixed Residential Office Retail Office Office Retail Mixed Industrial Mixed Office Mixed Mixed Office Residential Office Mixed Mixed Office Residential Office Office Mixed Mixed Mixed Mixed Leisure Healthcare Office Office Retail Retail Mixed
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Barclays Capital
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 months 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
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Barclays Capital
Glossary
Credit support/enhancement Subordination Priority of payment waterfall 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 propertys 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 propertys 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.
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
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Barclays Capital
Securitisation Research Analysts

5 The North Colonnade London E14 4BB
Phil Adams Residential Mortgage-backed Securities +44 (0)20 7773 2229 phil.adams@barcap.com John Keane Whole Business Securitisation +44 (0)20 7773 8748 john.keane@barcap.com Maddi Patel Residential Mortgage-backed Securities +44 (0)20 7773 1371 maddi.patel@barcap.com Anca Badea Analyst +44 (0)20 7773 9874 anca.badea@barcap.com Paul Geertsema Consumer and Other ABS +44 (0)20 7773 2347 paul.geertsema@barcap.com Hans Vrensen, CFA Commercial Mortgage-backed Securities +44 (0)20 7773 3502 hans.vrensen@barcap.com
200 Park Avenue New York NY 10166

Inna Koren Head of US Securitization Research +1 212 412 1080 inna.koren@barcap.com Michael Gleeson HEL ABS/Mortgages +1 212 412 5107 michael.gleeson@barcap.com Joseph Astorina Auto & Consumer ABS, CDOs +1 212 412 5435 joseph.astorina@barcap.com Hassan Ahmed HEL ABS/Mortgages +1 212 412 5101 hassan.ahmed@barcap.com Juliet Jones Credit Card & Consumer ABS +1 212 412 2514 juliet.jones@barcap.com Arunava Biswas HEL ABS/Mortgages +1 212 412 1371 arunava.biswas@barcap.com Elena Warshawsky Auto & Consumer ABS, CDOs +1 212 412 3661 elena.warshawsky@barcap.com
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Guide To European CMBS

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Guide To European CMBS

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Collateral characteristics Deal structures Performance and monitoring

Pricing and relative value

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

Figure 1: CMBS securitisation process

Figure 2: CMBS cash & security flows

Loan Pool and I&P on Loans Issuer SPV Purchase amount

I&P on Notes and Security Package Investors Note Proceeds

Lender/ Servicer Loan amount

Issuer has assets and liabilities

Liabilities are differently rated CMBS notes

Figure 3: CMBS issuer position

Figure 4: European CMBS issuance ( bn)

Source: Barclays Capital.

Figure 5: Current outstanding European CMBS per year of issuance

Figure 6: Annual European CMBS issuance by broad rating category

Source: Barclays Capital.

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

Issuance by currency: euro-denominated issuance was only 29%

Figure 7: Annual European CMBS issuance by currency

Source: Barclays Capital.

Only 600mn in fixed rate issuance in 2005

Figure 8: Annual European CMBS issuance by interest rate type

Source: Barclays Capital.

AAA-spreads moderately higher for longer maturities in 2005

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

Source: Barclays Capital.

Figure 10: 2005 European CMBS issuance by issuer type

New Issuers 19%

Conduit Deals 59%

Source: Barclays Capital.

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

Structural market trends

Industry organisations setting standards in data disclosure

and discussing extent of public disclosure

Figure 12: Investor survey respondents by investor type

Fund Managers 39%

Traditional bank investors no longer largest ABS investor category

Figure 13: Investor survey respondents portfolio allocation by sector

WBS 4% CMBS 11% RMBS 52%

Consumer ABS 15%

CMBS is preferred asset class

Figure 14: Survey respondents ABS sector preferences for 2006

Source: Barclays Capital.

CMBS and RMBS are most preferred ABS sectors

Secondary market liquidity

Secondary trading estimated at 73bn

Despite being mostly buy-and-hold, investors think liquidity is important

Sweden Spain 1% Other Italy 2% 3% 3% Germany 10% France 2% The Netherlands 6%

Source: Barclays Capital.

We highlight differences in Europe in enforcement procedures, leases and planning regimes

Figure 17: Moodys tiering for selected European countries

Figure 18: Position of secured creditor in key European countries

Barclays Capital Securitisation Research 19

Figure 19: Overview of lease structures in key European countries

5 years (upwards only) Rare

Service charge, utilities Service charge, parking, VAT

3/6/9 years or fixed term of 6, 9 or 12 years (offices), 9 years (shops)

Annual by agreement (cost of construction index)

Via break clause only

Service charge, utilities, parking, on site corporate restaurant